Internet Explorer 11 is not supported

For optimal browsing, we recommend Chrome, Firefox or Safari browsers.

Paradise Insolvent

For years, people saw San Diego as a model for good government. That's because they weren't looking very closely.

Sunset on the beach in San Diego: Small children reluctantly drag their plastic toys and flip-flops up from the water, while less encumbered adults sip wine and barbecue their suppers. Surfers have a great time scampering away from sea lions and racing dark waves to the shore, and lifeguards spin out along the sand in their dune buggies. The air feels just as soft as the sand. There may not be a more idyllic urban tableau anywhere in America.

And it is not an illusion. Life really can be beautiful in San Diego. Apart from the near-perfect climate and the soft beaches, the economy is booming. The tech sectors have roared back. Unemployment is below 5 percent. City revenues shot up 10 percent last year, purely on growth. The new baseball stadium, while expensive, is paying dividends in the form of major redevelopment. Downtown is vibrant; every vacant lot seems to be filled with construction cranes. As ex-police chief and current mayoral candidate Jerry Sanders puts it, "Everything is going really well right now--except San Diego government."

Unfortunately, that is an exception of huge proportions. The city's pension fund is $1.4 billion short, and the backlog on deferred maintenance for capital assets is nearing $3 billion. Two months ago, the city auditor announced that in 2002, San Diego had overstated the value of its municipal assets by more than $640 million--nearly 10 percent of its holdings. That's a bigger restatement than the one made by Enron, which wrote down $580 million in 2001.

"It's a city that hasn't balanced its budget for 10 years," says Carl DeMaio, head of the Performance Institute, a local think tank, "and has covered it up by robbing its pension fund, its sewer and water authorities and by deferring maintenance." For years, city leaders tried to square an impossible circle, providing ever more generous programs, big building projects and enhanced benefits to the workforce, without raising taxes or fees to pay for them.

The problems aren't just fiscal. In the lobby of City Hall, set up to greet visitors, there's a large map of the city surrounded by smiling pictures of San Diego's top political leaders. Right now, a third of the spaces are blank. Mayor Dick Murphy, reelected last November, is gone, having resigned in July under pressures that grew out of the pension fund scandal. Two city councilmen--including Murphy's temporary replacement in the mayor's office--have been convicted on corruption and extortion charges. The Securities and Exchange Commission, the federal prosecutor's office and the city attorney are all running investigations that may produce still more public embarrassment.

The situation in San Diego may turn out to have implications far beyond the borders of the city. Carl DeMaio thinks it could do for the public sector what Enron did for private companies, creating a body of case law, new rules and, perhaps, congressionally mandated disclosure and accounting requirements along the lines of the federal Sarbanes- Oxley law. (San Diego itself has already passed such an ordinance.)

Certainly officials in San Diego feel that they're being held up by the SEC and others as a kind of poster child of what not to do in municipal finance. Just as emergency managers across the country are reexamining their plans in the wake of Hurricane Katrina, says Mark Funkhouser, city auditor in Kansas City, "most of us ran quick and looked at our pension systems to see if there was anything obviously out of line."


What has happened in San Diego would be painful anywhere in America, but in this city, it is also bitterly ironic. San Diego long had a reputation--and a self-image--as one of the best-managed communities in the country; its boosterish civic slogan, "America's Finest City," didn't sound all that far-fetched. The city was good at delivering services and fortunate enough to avoid population loss and many other societal woes that have dogged other urban areas in recent decades.

Some civic leaders now argue that it was the city's sterling reputation and pristine surroundings that helped lead to its downfall, lulling citizens and local watchdog groups into a complacent belief that nothing too awful could be happening at City Hall. "San Diego was so beautiful and so compelling," says city attorney Mike Aguirre, "that it obscured what was taking place."

Indeed, much of the political leadership still has not come to terms- -at least publicly--with what has happened to local government. Over the past 18 months or so, the typical response of elected officials has been to castigate critics and whistleblowers while denying that the problems could really be so severe. During last year's reelection campaign, when the pension numbers were already grim, Mayor Murphy still insisted that there was no financial crisis.

When a set of bad numbers has become undeniable, the city's leaders have gotten in the habit of blaming each other. The city attorney and the city manager are openly feuding, the dispirited bureaucracy blames the city council, and members of the council complain that they were misled by current or former professional staff. "A lot of this," says council member Donna Frye, "has been a blood sport of people finding someone to blame so they don't have to blame themselves."

In her City Hall office, Frye points at a flip chart that shows the missing $1.4 billion in pension funds, as well as several other outstanding obligations from lawsuits, interest payments and retiree health care costs. The string of numbers is so long that she uses the spiky heel of her shoe to point to the bottom line. Her grand total comes to $2.3 billion. She adds on another $3 billion for deferred maintenance and just like that comes up with a figure that is more than double the city's total annual budget. "It's probably higher," she says. "We have to address this in one big package, not in parts. Otherwise, we will have to go into bankruptcy."

Frye, 53, could be the one who ends up addressing it. She finished first in the July mayoral primary and faces Sanders in the runoff November 8. She does not exactly fit the traditional image of San Diego leadership: Many people associate her with surfing rather than politics. Her political career began in protest when her famed surfer husband, Skip, was made sick by polluted seawater. Her council office is filled with surfer memorabilia, and Frye herself is deeply tanned from summers in the sun.

Frye's image as a "surfer chick" drew national attention last year, when it appeared that she had defeated Murphy and won the mayoralty. But Frye was running as a write-in and about 5,000 of her supporters didn't mark their ballots correctly, leading a judge to put aside their votes. The sense that she may have been cheated, combined with her anger at the city's fiscal deterioration, allowed her to outdistance the field in July and set up the November runoff.

Frye's strength reflects not only the current civic turmoil but underlying demographic and political changes. Viewed for decades as a rare outpost of conservatism in urban America--Richard M. Nixon considered it his "lucky city"--San Diego has gradually become more like the rest of California's major cities. It backed John Kerry by a 12-point margin in the 2004 presidential election, and public employee unions have become perhaps the most potent interest group in local politics. "There is a new, emerging political reality," says George Mitrovich, president of the City Club of San Diego, a public affairs forum, "of which Donna Frye is the most visible manifestation."

Yet Mitrovich, along with most of San Diego's developers, law firms and other downtown interests, is backing Sanders. The ex-police chief has raised more money than Frye and may benefit from their contrasting images. He has a no-nonsense demeanor and presents himself as the steady hand that the city needs to right itself. He cites his success in having turned around a pair of troubled local nonprofits.

Whoever wins on November 8 will acquire not only massive problems but significant new powers. The city is shifting from a manager-led government to a strong-mayor system, so it should be clearer whom to blame when things go wrong. "People want to see someone who can stand up and speak for the city, and hold them accountable," says Sanders, 55. "The council will want to follow that lead. The strong mayor is going to be as strong as the individual holding the office."

But the council will also be getting some new authority. Its members will be able to hire more staff, particularly in the areas of finance and budget, making them less dependent on the manager's office. Instead of having the mayor preside over council meetings, as under the old system, the council will elect its own president--a post that could provide a rival to the mayor's authority. A simple majority of five votes will be sufficient not just to pass legislation but also to override a mayoral veto.

In the end, many observers feel, the significance of the procedural changes will be dwarfed by the sheer magnitude of the hole San Diego has dug for itself. "The severity of the problem is such that the hands of anyone, whatever they call their new format, are going to be severely tied," says Ron Roberts, a San Diego County supervisor who ran unsuccessfully for mayor last year. "The debt service on their pensions is going to take every new penny over the next five years. The financial problems are going to overwhelm both the system and the individual, whoever's there."


The truth is that while San Diego's problems are extreme, it's really done nothing that other cities and states haven't done. Many governments that saw revenues start to dry up while their pension systems were still making money in the markets found it less painful to defer their payments to those systems than to close police stations and libraries. "Every single decision made in San Diego over the last 20 years was made in other cities as well," says Steve Peace, a former state senator from San Diego who also served as finance director for the state.

What made San Diego different--and compounded its problems enormously--was a longstanding refusal to raise revenue to cover its losses. For decades, it prided itself on its ability to operate a low- tax government and still provide efficient service. Howard Jarvis, the lead sponsor of Proposition 13, California's famed anti-property tax initiative of 1978, once said that "if all cities were as well run as San Diego, we wouldn't need Proposition 13." By "well run," Jarvis simply meant lightly taxed. Unlike other cities in California, San Diego adjusted its property tax rates downward as home values soared during the 1970s. Low to start with, the rates stayed low because Proposition 13 essentially froze them, as it did all across California.

San Diego has also consistently refused to raise other levies to make up the difference, in contrast to what other California cities have done. Utility taxes, for example, have become one of the top three sources of revenue for other big cities in the state, but the San Diego council once passed a motion instructing the city manager never to put the words "utility" and "tax" in the same sentence in his reports. Voters have consistently rejected attempts to boost the local hotel tax to bring it in line with rates in Los Angeles and San Francisco. Residents of San Diego have not paid a cent for trash pickup since 1919. "Consistently," says Councilman Scott Peters, "the city has refused to tax itself for the services it wants to provide."

The anti-tax environment created by conservative voters--often retirees or military families new to the area--might not have been a serious problem if the city had kept a lid on spending. But in recent years, that has not been the case. In 2002, faced with revenue erosion and thus unable to offer raises to city employees, San Diego instead granted 25 percent pension increases, after having lowered the contributions it put into the fund.

Meanwhile, San Diego was continuing to run a generous social service network that included, for example, comprehensive before- and after- school programs that stretched from six o'clock in the morning to six at night. The city and its redevelopment agency paid 70 percent of the cost of the new $400 million downtown baseball park. It spent $60 million on an expansion of its football stadium and promised to pick up the cost of any unsold tickets. The convention center had to be expanded to accommodate the 1996 Republican National Convention, and the government used pension funds rather than taxes or new bond initiatives to cover some of this expense. "The key, Nobel Prize- winning breakthrough in economics," says Aguirre, the city attorney, sarcastically, "was the discovery that the unfunded pension liability was a big hole where you could hide your debt."

All of this was happening at a time when changes in the electoral system had altered the political interests of the individual council members. The enactment of term limits and a switch from at-large to district elections for council seats left them with little incentive to worry about the long-term consequences of their spending decisions or the broader issues facing the city as a whole. Council members began focusing more of their attention on how to bring federal block grants into their districts. "People stopped minding the store," says Michael McDade, a former mayoral aide.

City officials were essentially raiding the cookie jar, but until the jar broke, the players that were supposed to keep a wary eye on City Hall weren't paying much attention. The city's long-time auditor failed to bring discrepancies to the council's attention. Watchdog groups and the media didn't do much better. The local newspaper, the Union-Tribune, has made up for it to a certain extent this year, aggressively covering the City Hall mess and publishing stories about an unreliable public property inventory that led to the resignation of the assets director in September.

For years, voters seemed happy with what city officials were giving them--expansive services, with little or no money down. There was a shared sense that nothing too terrible could be happening. Tax rates weren't going up and the city had always, apparently, been run so well. "What would you rather do," asks Frye, "go to the beach with your family and friends, or read some document about the city retirement fund?"

Last month, a new set of documents released to the media led to the revelation that private attorneys for the pension board had issued warnings as early as 2003 that its financing arrangements were probably illegal. The documents suggest that pension administrators and lawyers were pressured to sign off on the deal.

San Diego's government wasn't the only one in the area that developed some bad habits. Surrounding San Diego County lost $320 million in questionable investments during the mid-1990s. But county residents elected a new board of supervisors that purged most of the old management, put in new controls and engaged in an ambitious program of privatizing waste management and information technology. The county isn't perfect, but it trimmed down and put its affairs back in order. Recently, the county was found to be collecting some hotel taxes improperly. But once the mistake was caught, refunds were issued quickly and some needed reforms were implemented.

The city of San Diego simply lacks that kind of culture of responsibility, despite its now all-too-apparent problems. There is still a desire to castigate the messenger--most often Aguirre, the city attorney, who has been relentless in his calls for other top city officials to quit. Many people see him as a loose cannon or even a fanatic, raging madly against the vanities and impurities of political life. Lamont Ewell, the outgoing city manager, says that Aguirre is exacerbating serious morale problems among city employees by turning conjectures into accusations. Others complain that his frequent press conferences and demands for documents are distracting attention and resources away from more important investigations run by auditing firms and the SEC. "His platform is, everybody's guilty," says Councilman Peters. "If it wasn't for the city attorney, we'd probably be done with the problem by now."

That hardly seems credible to people who aren't in Aguirre's direct line of accusation. Aguirre doesn't always comport himself well--his rhetoric may sometimes be more suited to a talk-radio host than an elected official--but he has spotlighted many irregularities and kept up the pressure on a City Hall that never wanted to admit it had a problem. "He brought up issues people felt needed exposing for a long time," says Jerry Sanders. "He stepped right in when that leadership void was there and filled it."

For his part, Aguirre says the only thing that surprises him is that the city's finances and operations continue to look worse than even he had been saying. In his view, San Diego is still a great place to enjoy the beach, the sunsets, the climate, the good life and the blessings of a healthy economy. But for the time being, he adds, there's another reason to pay a visit. "If you want to study municipal failure," Aguirre says, "you can't do better than to come here."

Special Projects