Sunday, August 13, 2006

When Republicans Run The Place....

The city of San Diego has become the poster child for the effects of Republican municipal leadership. Once hailed as "America's Finest City," San Diego is now being called "America's Cheapest City" or "Enron by the Sea."

Simply put, San Diego is the victim of the Republican approach to civic governance that is the outcome of two decades of drinking the Ronald Reagan/Grover Norquist cool-aide. Averse to pay as you go government and incapable of taxing anyone but tourists through hotel and car rental fees, the city of San Diego managed to drive itself to technical bankruptcy in ten years thanks to the Republican dominance of its public administration.

San Diego's financial woes date back to 1996, when the city's Republican leaders decided to systematically under fund its city employee's pension fund in order to meet the city's current financial obligations. This was a pattern of behavior that went on for several years, as successive Republican administrations failed to balance the city's books. Exacerbating the problem, pension fund managers routinely took actions, some potentially criminal, to increase the city's pension obligations to future retirees.

The city's finances began to unravel in 1996, when the City Council voted to increase pension benefits while underfunding the retirement plan. A vote in 2002 continued the practice. The benefit increases, along with the underfunding, stock-market losses and settlements with retirees, have contributed to a pension system shortfall of $1.4 billion.


The fiscal meltdown that resulted sparked investigations by the U.S. Justice Department and the SEC in early 2004. Five former city and pension fund officials were charged with federal fraud and conspiracy in January.

And, to make matters worse, while the city's Republican leaders were stealing money from the city workers pension plan they were illegally shifting the cost of the managing the city's sewer system from corporate users to the city's households.

In a $20 million report presented to the city last week, risk management company, Kroll Incorporated lays out the city's malfeasance and names names. The report stops short of alleging criminal misconduct by city leaders, but it comes very close.

San Diego city leaders “fell prey” to the same type of “corruption of financial management” that afflicted Orange County before it sought bankruptcy and corporations like Enron before it collapsed, the 266-page report issued by Kroll Inc. stated.

The report, which cost the city more than $20 million and took 18 months to produce, outlined numerous cases of wrongdoing by San Diego's city officials related to the city's fiscal crisis and offered recommendations to improve fiscal management and accountability.

“We didn't pull any punches,” Arthur Levitt, a former chairman of the Securities and Exchange Commission and the head of the Kroll team, told the council and audience.

Two sections of the report concern violations of law concerning the wastewater system and the pension system.

The report names dozens of current and former city officials, both elected and administrative. It doesn't paint a flattering picture.

Levitt said his group found the past city leadership committed violations of the California Constitution, the city's charter and municipal code, and federal securities laws.

He decried a culture in which the city's budget decisions had a lack of transparency and were marked by “artful manipulation.”

“In my judgment San Diego's problems are not economic, they are political,” Levitt said.

Saying there was a “prevailing culture of political expedience,” Levitt said city officials made a concerted effort to water down a Blue Ribbon committee report that evaluated the city's financial problems.

“Concern was expressed that disclosure of the truth would derail the city's effort to issue bonds to build a new baseball stadium,” he said.

Levitt also said the city overcharged homeowners on their sewer bills to subsidize large industrial users. Those actions, according to the report, left the city liable for the return of $265 million in state funds.

According to the report, the city's pension system was thrown into crisis “by years of reckless and wrongful mismanagement involving any number of city and pension board officials.”

The report said that the renewal of the city's pension under funding plan in 2002 was “unlawful for a number of reasons,” a contention that City Attorney Michael Aguirre has made repeatedly since he took office in 2004.

This is not a single instance of mismanagement of misconduct. What the Kroll report clearly defines is a ten year history of willful illegal conduct. Conduct that resulted in amended city financial reports that have devastated San Diego's credit rating.

In Sunday's San Diego Union Tribune, one of the factors that started the city down the road to financial ruin is identified. According to the UT, the 1996 Republican National Convention in San Diego forced the city to dig deep to come up with sufficient funds to pay for all the frills the national party demand of the convention's host city.

The convention is now seen by some auditors and investigators as among a string of events that strained San Diego's tight city finances, leading policy-makers in 1996 to balance the books by paying less into the city pension system than was needed to meet its future obligations to thousands of retirees.


Kroll connected the dots in a 266-page report delivered Tuesday. It cited the convention among a few key things that “put a particularly severe strain” on the city's ability to meet its annual pension-payment obligation. The other strains were benefit increases and a new method of calculating the city's retirement costs.
It is indeed ironic that in a community where elected and appointed Republicans have for years proclaimed their belief in law and order and conservative fiscal policy, that financial disaster has been inflicted by these same politicians decisions to steal money from homeowners and retirees. Adding more bitterness to the irony is the fact that the Republican National Convention that the city's Republican leaders so assiduously courted was one of the unpaid bills that forced those fiscal conservatives to begin their financial ponzi scheme.