There is a saying goes something like, "Adversity Breeds Opportunity."
This came to mind as I was reading stories in the SDUT, on the website of the Voice of San Diego, as well as a great column from FR friend Vince Vasquez on the up and coming SDRostra website — stories all about the massive budget deficit facing the City of San Diego, and the proposal of Mayor Jerry Sanders to try and address the $190 million shortfall.
First and foremost, let me commend Mayor Sanders for putting forward a package that does not seek 
an increase in taxes. Sanders (pictured), a Republican, understands that in a recession, you simply cannot ask taxpayers to reach deeper into their pockets. While the recession has hit the city’s finances hard (Erik Bruvold, the president of the non-partisan National University System Institute for Policy Research estimates that half of the current deficit can be laid at the feet of the sour economy), it has also hit the pocketbooks of San Diego’s residents hard as well.
That said, a closer look at Sanders’ proposal to balance the city’s books for the next fiscal year calls for over half of the shortfall to be resolved through gimmicks — like we are used to seeing in Sacramento, actually. This is where the politicians look for any possible way to push out to future years current obligations. In the case of the Mayor’s proposed plan, two examples would be "restructuring" millions of dollars in payments on a large legal settlement (pay more later rather than less today) and putting off needed upgrades in city hall’s interior sprinkler system.
The reason why I opened this column with the quote about opportunity is because Mayor Sanders and the City Council have an opportunity here that could make San Diego a national leader in terms of providing a path for cash-starved local governments to really solve their problems.
First and foremost would be to use the budget challenges to really address the core issue of what basic services can and must be provided by city government. Beyond the basics, it’s probably time for San Diego to get out of the business of providing non-essential deliverables. Now is the best time to do this, and to restructure city government to be lean, and wherever possible to contract out city services to the private sector.
The second major opportunity that presents itself is one that neither the federal government (which papers over its financial crisis with an ever-growing massive deficit and the ability to print currency) nor the state government can do — which is to go to a judge and ask for help to reorganize and restructure the city’s pension obligations. I am hesitant to throw out the word "bankruptcy" because that always seems to have the wrong connotation. Plenty of people file for bankruptcy protection who have lots of assets and money — but what they don’t have is the cash-flow necessary to pay obligations when they come up. The reason why this kind of request to a judge is critical is because only through a court order can the massive and, frankly, unsustainable public employee pension obligations of the city be readdressed.
The reality is that the entire system of "defined benefit" retirements should be shifted to a 401k style "defined contribution" plan. Plenty of people are suggesting that new municipal employees be hired with a lesser benefit than the gold-standard available to current city-workers (or platinum if you are in a "public safety" job) — but phasing in new employees with a lesser benefit does nothing to alleviate the city’s unsustainable commitment to retirees and current employees (it is worthy of note that San Diego has moved to more sustainable defined contribution plans for some of its new hires, but should do so with all of them).
The public employee unions are very nervous that cities will start to go down this path — they’ve watched high profile private corporate bankruptcy reorganization plans (like United Airlines) involve "pitching in" from retirement funds — and are very, very nervous (remember — unions only have two functions: (1) getting more salary and better benefits for their members, and (2) increasing the size of their union. That’s it.). This year the unions tried to pass state legislation that would have prohibited local governments from seeking bankruptcy protection without first getting approval from the state. While this bill sailed through the Assembly on a party-line vote, it did not pass the State Senate. Look for the unions to get even more aggressive as panic starts to set in — with an understanding of the public of how "generous" politicians have been with their money.
Before you dismiss my bold suggestion that the City of San Diego seriously consider bankruptcy protection, and the ability to reorganization city contracts and obligations that comes with it, let me direct you to this story on the Voice of San Diego website, which was pointed out to me by the most ardent taxpayer advocate on the City Council, Republican Carl DeMaio. This article points out that the Mayor’s own Fiscal Task Force (which has echoed my call for the need for structural reform rather than gimmicks to meet the city’s fiscal challenge) has also suggested bankruptcy protection as a legitimate option for the city. The idea of substantially modifying unsustainable public pension benefit commitments in bankruptcy court has yet to be tested, to my knowledge, providing current San Diego politicians with an opportunity to be true leaders in taxpayer protection.
While I will be the first one to show empathy for Mayor Sanders and the members of the City Council — it’s much more fun to govern when funds are plentiful — let me say that the current situation provides an unprecedented opportunity to show leadership. Leadership not only for the people of San Diego — but for the nation’s ninth largest city to show fiscally strapped municipalities across America that adversity does, in fact, breed opportunity.
When I spoke with FlashReport’s senior San Diego correspondent and San Diego County Taxpayers Association Board Member Barry Jantz about the financial woes of the city, he said, "The mayor and city council continue to grapple with not only a poor economy, but also the obligations enacted by prior city councils in underfunding the city’s pension system and using the ‘borrowed’ monies to benefit employee salaries."
Jantz went on to conclude, "The test of this council will be the extent they can courageously stand up and deal with reduced revenues and the continued demands of labor."
Indeed, that is the question at hand…
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