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San Diego's Tough Choices

One of the city's nightmares is over; others continue.

BY: | January 2007



San Diego has been engulfed in political turmoil for two years, thanks to a $1.4 billion pension deficit and other budgetary problems caused by a long history of financial mismanagement. The federal Securities and Exchange Commission ended a chapter in the saga when it decided a few weeks ago not to fine the city or hold it liable as an entity for defrauding investors. But that doesn't mean San Diego's legal or financial troubles are over.

Top city officials, including the former mayor and council members, could still be liable for individual transgressions, namely signing off on false financial statements. What's more, the SEC findings-- which will require the city to hire an independent monitor to oversee many of its financial dealings--may have the effect of generating civil fraud cases brought by some investors.

On top of all this, former elected officials and staff face charges brought separately by the U.S. attorney, the district attorney and the city attorney. These cases are at various stages of prosecution, and some of the legal theories involved have come under question from the state Supreme Court. But certainly the legal clouds have not cleared over City Hall.

In the meantime, San Diego has to cope with the financial problems caused by its formerly freewheeling ways. The pension system remains deep in the hole and the infrastructure maintenance backlog is well on its way toward a $1 billion price tag.

Municipal services have not suffered greatly yet, because of the buoyant local economy, but that reprieve won't last much longer. Citizens are about to face a 35 percent increase in their sewer and water rates. And Jerry Sanders, the mayor elected in 2005 after his predecessor was forced out in the wake of the pension scandal, has released a five-year forecast that predicts ballooning deficits in the operating budget well into the next mayoral term.

On the positive side, the city is about to finish up long-awaited audits of its past budget practices. The audits, coupled with the SEC settlement, should allow San Diego to begin borrowing in capital markets again. Recent voter approval of an amendment to force public agencies to compete on price with private companies may save some money, although it's done nothing to lighten the mood among municipal employees. "The financial issues are pretty daunting but not insurmountable," says Scott Peters, president of the city council.

Others are not as optimistic. The city finally came clean about its pension problems because it was forced to by the SEC and prosecutors. It will have to deal with its budget and infrastructure problems in the absence of any similar pressure. "It's hard for me to be sanguine, given the history," says Scott Barnett, head of a local taxpayers watchdog group. "I think things are going to get worse before they get better."


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Alan Greenblatt

Alan Greenblatt is a GOVERNING correspondent.

E-mail: mailbox@governing.com
Twitter: @governing

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