Posted on 10/21/2005 9:42:15 AM PDT by NormsRevenge
San Diego's leaders have denied for more than a year that the city could be headed for bankruptcy, but a report this week suggests that officials are creeping closer to being unable to pay the bills.
In a report the City Manager's Office issued Wednesday, the City Council is being asked to consider restructuring a $152 million sewer bond by delaying payments on it by one year and stretching the terms of the loan to 2011. The plan, which includes acceptance of a $10.1 million state loan, is almost the only way for the city to avoid having to begin repaying the bond next year – $38 million is due in 2006, half by March 15.
The cash-strapped city has the money to make the payments, acting City Treasurer Chuck Mueller Jr. said, but spending it on the debt would almost certainly force severe cutbacks.
Under the proposal, the city would have to agree to pay penalties of up to 2.5 percent in the case of a City Insolvency Event, a phrase in the report that delicately sidesteps the term "bankruptcy."
For more than a year, politicians and residents have debated the merits of declaring bankruptcy to pull the city from its financial morass.
"What this represents is a new level of intensity in the efforts to try to juggle our assets and liabilities," City Attorney Michael Aguirre said yesterday. "It is a short-term, stop-gap effort to try and keep ourselves in positive financial cash flow, but it cannot go on indefinitely."
The City Council is scheduled to discuss the proposal Monday.
Deputy Mayor Toni Atkins said the city must save for immediate wastewater department needs and resist spending to retire the sewer bond debt. She acknowledged, however, that future interest costs will rise as a result.
Delaying the repayment of the bond, though not "the best deal in the world for the city," she said, would help San Diego avoid regulatory fines that could result from failing to keep up with sewer maintenance.
"We need to really manage our cash flow as it relates to these projects, because we don't want to be in violation of court orders to reduce sewer spills," she said.
Atkins acknowledged that it is difficult to read about the potential for insolvency in a city report, but said she was not surprised that banks dealing with troubled companies or agencies would have that concern.
"It may be language we're not used to seeing. We haven't been in this situation before," she said. "We shouldn't gloss it over. We have a serious situation here."
Chester A. Newland, a public administration professor at the University of Southern California, said the move to restructure the bond is a sensible way for a creditor to ensure payment from a debtor.
It also could hint at a long-term strategy for the city to address its finances, he said.
"Typically, companies and banks that know municipal finance would work with a city to restructure its obligations and how it's going to meet them," Newland said. "And that's a really tough thing."
Atkins said she doesn't know if city officials are trying to renegotiate other debts and said any other deals would "depend on the terms."
Though it is unusual for a city to acknowledge in a public report that a bank is concerned about possible insolvency, San Diego's troubles are too well documented for anyone to deny, said Eric Hoffman, a senior vice president at Moody's Investors Service.
"It would certainly be rare, but considering the circumstances it's not surprising," Hoffman said. "It's well known the city is having severe fiscal difficulties."
The city has reeled from the fallout of its employee pension system crisis, which is about to enter its fourth year.
Investigators from several federal agencies, including the Securities and Exchange Commission and the U.S. Attorney's Office, are probing actions by the city related to the pension system, which has a deficit of at least $1.4 billion.
The city has scrimped the past two fiscal years to deal with the deficit, calling on residents and employees to endure fee increases and cuts in community services and jobs. As a result, $300 million will have been pumped into the pension by July.
City Manager Lamont Ewell also warned the council two weeks ago that there is a potential $19 million gap in this year's budget.
In addition, San Diego's credit ratings have been in a free fall while auditors continue to work on the city's 2003 financial statements, which have been withheld because of questions tied to the federal investigations.
Moody's ordered its most recent credit-rating downgrade two months ago, criticizing city leaders for taking a soft line on the budget by restoring jobs Ewell had recommended be cut. Moody's also noted that there is little flexibility in the city's $865 million general fund, which pays for day-to-day operations, should unforeseen expenses arise.
Another agency, Fitch Ratings, dropped the city to just above junk status in May. Standard and Poor's suspended San Diego's rating more than a year ago.
The financial unease has forced the city to come up with alternative means of borrowing money, which it cannot do through the municipal bond market without enduring punitive interest rates. The city canceled issuing a $1.2 billion sewer bond nine months before seeking the $152 million bond sale.
Earlier, the city had acknowledged making errors and omissions in bond offerings dating to 1996, alleged disclosure violations that the SEC is examining.
Unable to enter the municipal bond market, officials have worked to secure financing through private sources. The $152 million sewer bond and a line of credit were handled by Bank of America last year.
The $120 million the city drew from the initial line of credit was repaid in April, and another account, worth $155 million, was opened through the bank this year. Both were guaranteed by tax receipts and other revenues.
Under the proposed new terms for the sewer bond, the first payment would be delayed until 2007. Extending the maturity date by three years to 2011 would allow principal payments to fall to $7.6 million.
The sewer bond was meant to serve as bridge financing until the city could return to the municipal market, Mueller said. City officials thought the re-entry would take place months ago.
The 2003 audit is expected by January, Mueller said, and examinations of the financial statements for the succeeding two years should follow by March. With those in hand, the city could proceed with the plan to pay off the privately placed bonds earlier by going to the public market.
$1.4 billion: an estimate of the employee pension system's deficit.
$300 million: the amount of contributions the city will have made toward retiring the deficit over the past two fiscal years.
$865 million: the amount of the fiscal 2006 city general fund, which pays for daily operating expenses, including the pension deficit.
$19 million: the amount of potential cuts to the general-fund budget needed by July 2006 to keep it balanced.
$38 million: the amount the city will owe on a $152 million sewer bond by July 2006 unless the City Council opts to restructure the debt.
Read the report (PDF)
http://www.signonsandiego.com/news/metro/pension/images/051021sewer.pdf
SD needs to declare bankruptcy so they can nullify the ridiculous pension benefits they granted in recent years.
They aren't ridiculous and in 110 days I'll start collecting them. Yee-hah!!!!!
Bankruptcy would allow the city to nullify the ridiculous pension benefits they granted in recent years and ease the pressure on tax payers.
A city with $$millions in real estate assests that they could sell in a heartbeat can't declare bankruptcy.
Orange County did some years ago.
http://www.erisk.com/Learning/CaseStudies/ref_case_orangecounty.asp
If I was a current or recent SD retiree, I'd sure be concerned. Tax increases aren't going to fly this time (witness the firestorm of protest when Frye proposed such) and the city can't borrow it's way out of this mess.
Once Sanders gets elected and proposes massive layoffs, watch how quick the unions come to the table to re-negotiate. You might find your pension being cut to save existing jobs.
Yes they are ridiculous - sorry! They bankrupt the City and they would eventually run out because the City would no longer be able to keep up the payments.
From America's Finest City to America's Most-fined City?
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