Mayor Jerry Sanders, who in reality has no intention of cleaning up the City’s fecal finances, says he opposes a City bankruptcy. Councilmember Carl DeMaio, who does want to deterge the fetid finances (as long as it doesn’t upset his political base), has “incorporated some elements from a traditional bankruptcy proceeding” in his reform package, he allows, but strongly opposes a trip to the courtroom.
Sanders, DeMaio, and others who claim the political process can save the City from itself assert that a bankruptcy would create a “stigma.”
Stigma, schmigma. The mayor, in plumping for the Proposition D tax increase, sent goons out to meetings, warning of massive cuts in police, fire, library, parks, recreation services, and the like unless the increase passed. It was rejected overwhelmingly. Analysts will draw logical conclusions. Sanders created the stigma.
But equally important, doesn’t the “stigma” crowd know San Diego’s history? The City was almost born in bankruptcy. Only state seizure of a young town permitted San Diego to get back on its feet, although it took time. And in subsequent years, multiple private-sector bankruptcies provided refinancing that led to the City’s growth. Shunning court-monitored financial reorganization because of fear of “stigma” is like rejecting lifesaving surgery for fear of having a scar that will be exposed when you’re wearing your bathing suit.
San Diego was incorporated as the state’s third city in 1850. A mere two years later, it was declared bankrupt. It had tried to erect a $5000 jail out of mud, brick, and straw, according to a November 2010 article in the publication Police Chief. The building “melted in the first heavy rain,” says the publication. The City sank another $2000 into the structure. The first and only inmate — a brother of the mayor — dug his way out with a pocketknife.
As a result of this financial disaster, the state repealed the city charter and installed a three-member, state-controlled board of trustees. As mayhem reigned, some trustees resigned. “A grand jury report of April 1852 reported the streets filled with garbage and human waste. Dead animals were lying in the streets, and a foul stench filled the air,” says the magazine.
The New York Times took its first crack at San Diego, calling it “a flea infested cesspool and the most godforsaken rathole on Earth.”
It wouldn’t be until September of 2004 that the Times, noting the City’s very similar financial stench and unwillingness to disclose its pension woes in bond documents, called San Diego “Enron-by-the-Sea.”
In 1887, San Diego replaced the board of trustees with a mayor-council form of government. But along the way, it got a glimpse of its future — and how an intelligently managed leadership in bankruptcy can steer a community straight. One Moses Hazeltine Sherman found his way west from Vermont, intending to teach school. In Arizona, he quickly learned that land speculation was more remunerative. Catherine Mulholland noted in her book William Mulholland and the Rise of Los Angeles that Sherman had wangled a brief appointment as adjutant general of Arizona and thereafter called himself General Sherman, fooling some into thinking he was the Civil War hero General William Tecumseh Sherman.
Mulholland wrote that for all his business acumen, Moses Sherman had a “dark side.” He “practiced a ruthless brand of laissez-faire capitalism and mastered the art of growing rich with other people’s money. He never went to jail and rarely lost a lawsuit, but he skirted both.” (Remind you of anyone, or several ones?)
Sherman was named a trustee of San Diego. He also had a bundle of stock in a budding enterprise named the San Diego & Los Angeles Railroad Company. On his last day as trustee, on May 5, 1870, Sherman and a fellow trustee voted that San Diego would grant 5000 acres of pueblo land to the railroad. (The third trustee smelled a rat and voted against the deal.) Hours before their terms ended, the land was transferred to the railroad, in which Sherman was a director and owner of $10,000 in stock (then a lot of money).
The succeeding trustees of San Diego sued, and the case went all the way to the California Supreme Court. “We do not think this deed can be upheld,” wrote the court in 1872. “The general principle is that no man can serve two masters.”
In following decades, rascal after rascal dominated San Diego’s financial matters. Oh, if only the City had taken each scoundrel to court, as its bankruptcy trustees took Sherman.
“We’ve returned to the era of 1850, in which city officials prove themselves to be unable to responsibly manage the city finances,” says former city attorney Mike Aguirre. By warning that if the tax increase failed the City could not provide essential services, Mayor Sanders made the case for the first test of bankruptcy: financial insolvency.
The biggest problem facing those who would try to reduce pension benefits in state court is that judges are sucking on the government teat too. Jan Goldsmith, current city attorney, is a classic example: citing state law, he keeps arguing that pension benefits are cemented into place and bankruptcy won’t work. But Goldsmith was mayor of Poway, a member of the California State Assembly, and a judge before taking his current position. Mayor Sanders, the former police chief, has a fat pension. Politics as usual can’t deal with insolvency.
The Constitution gives Congress the right to establish bankruptcy laws. “Bankruptcy law is the supreme law of the land,” says longtime San Diego bankruptcy lawyer Don McGrath. “If state law is inconsistent, it will get knocked out.” With the flick of a pen, a bankruptcy judge could get rid of such absurd benefits as the classic double-dipping Deferred Retirement Option Plan, by which employees’ pay is almost doubled in their last five years. Had the City gone into bankruptcy in 2003, as reformer Diann Shipione suggested, a judge could have erased the purchased service credit program that permitted employees to buy five years of fat retirement benefits for a steep discount.
Aguirre says a federal judge from outside San Diego could be brought in for the case, and a popular figure such as former mayor Pete Wilson “could lead the City through the bankruptcy process.” It was clear at least seven years ago that San Diego could not meet its pension obligations, but the political process has failed to deal with the excessive benefits.
“The bankruptcy court can abrogate a contract,” says a noted San Diego attorney. “When you get in front of a state court and an argument is being made that if a law is applied as written there will be terrible consequences, judges routinely say that you have to go across the street to bankruptcy court. The state court is not set up to fix enormous financial problems with lots of stakeholders.”
What about stigma? “The whole city was built on bankruptcy,” says McGrath, noting that the ability to reorganize financially helped spur development of Clairemont, Fairbanks Ranch, Otay Mesa, Linda Vista, Black Mountain Ranch, and dozens of other locations. “Reorganizations work. They shift debt around.” A bankruptcy reorganization is the way to save the City of San Diego.