By KEVIN CHRISTENSEN, The Daily Transcript
Wednesday, June 8, 2005
Mayoral candidate Pat Shea stood in front of the city-owned Torrey Pines Golf Course last week and said the only way to save the city from a slow financial collapse was to bring it through a corporate reorganization, also called bankruptcy.
On Wednesday, Shea released his plan that he claims will remove much of the unfunded pension benefits, the debt associated with it and at the same time protect all of the city's assets.
Mayoral candidate Pat Shea
"This is the process that Congress created to handle this very situation," Shea said. "It's not a silver bullet, it's not a quick fix. It's a process that has been tried and proven, and is successful."
The first step in Shea's plan -- if he's elected -- is to get permission from the City Council to enter Chapter 9 proceedings.
Shea, who represented more than 200 municipalities and organizations in the Orange County Chapter 9 bankruptcy proceedings, said that by voting him into office the electorate will have essentially given a mandate to move the city into bankruptcy.
"If the council does not approve the proceedings, I'll take the vote directly to the people which, at that time, (will) have already shown they want the bankruptcy," Shea said.
The first step, once the proceedings began, would be to restate the city's financial condition without the inclusion of "illegal" benefits. These include retroactive retirement benefits, retroactive retiree health care, Manager's Proposal I in 1996 and the Manager's Proposal II agreement in 2002.
"Once you know exactly what you have, you have a platform to begin the financial reorganization," Shea said.
Shea is careful to point out that there are two classifications of the debt that has accumulated in the pension fund.
First is the debt that has accrued as a result of the unfunded retroactive approval of retiree benefits combined with the interest that has built up.
Second is the debt that has accumulated from investment losses on the return of the bear market in 2000 through 2002.
Under the corporate restructure, Shea said, the city would only be responsible to pay for the debts accumulated in the investment losses. Once this debt is determined, a 15-year straight-line amortization plan is established.
"All of the deficit that has back loaded is gone," Shea said.
The next step would be to figure out obligations to different classes of claimants, or those that the city owes money to, including the city's labor unions.
What happens here, Shea said, is that all of the parties that feel that they have a legitimate claim come to the negotiating table and begin to argue for what they think they are owed.
As part of this, a bankruptcy team works on a "rejection and restatement" of labor contracts to bring the city into compliance with state laws "precluding the accrual of illegal debt."
Shea said this is the only way to deal with retirement benefits that have been granted illegally.
Representatives of labor unions in the city have argued that once approved, benefits are vested individually with each employee or retiree.
The case law used by unions to defend the argument is City of Long Beach v. Kern, a California Supreme Court ruling in 1947.
Shea said that case is trumped by expenditure limitation laws in the California State Constitution and the San Diego City Charter.
Shea refers to the process as creating a box and bucket. The box includes all of the city's financial debt and the payment of this becomes a primary goal of the reorganization.
"You figure out what's in there and that gets sealed up," Shea said. "So the amount that the city has to backfill is not an issue."
The bucket includes parties that do come to the table to negotiate and will be left to argue their cause in a courtroom.
Shea noted that these parties take a giant gamble.
A party that claims to be entitled to $4 billion would bring their case before a judge who could rule that they get the entire $4 billion, or that they are entitled to $1 billion, Shea said.
The advantage of negotiating, Shea said, is it's a fair way to get what both the city and the claimant know they deserve.
"Going into the bucket is a major gamble," he said. "And nobody in their right mind gambles with money like that."
The next step would be to create a new defined benefit retirement plan that contains a cap on the average pension package.
A threshold would be created where any city employee whose salary raises them above that defined average retirement cap, would be placed into a separate defined contribution plan.
Essentially, the employee would be creating two separate accounts. The first, a defined benefit plan that is fully funded by the city and capped. Second, a defined contribution plan where the employee contributes the bulk of the funds and the city provides a supplemental sum.
Once the box is established and the deal is drawn up, the next step would be to figure out the city's needs for the provision of public services such as police, fire, infrastructure and parks.
"The advantage of Chapter 9 is that in these proceedings, everyone comes to the table and tells what they really need," Shea said. "So you get an accurate depiction that cuts out recurring budget problems like police and fire overtime."
As part of this, the city would include a payment plan to keep on track with the payment of all debt service and repayment schedules on municipal bonds, public debt and commercial contracts.
"This is the step that people need to realize that we're not defaulting on these debts, which will protect our ability to borrow when we re-enter the capital markets," Shea said.
While the city is working on the financial and negotiating aspects of the plan, it would be paramount to comply with federal investigations, which is more likely when all entities in the city know that the municipality is going to end up in federal court.
"Once it's clear that the city is headed for the Chapter 9, everyone will realize that not disclosing documents leads to a federal felony offense and more severe penalties," Shea said.
The compliance plan would include disclosure of all documents by the board of administrators at the San Diego City Employees' Retirement Board.
The next step, once all documents are turned over and compliance is verified, would be to negotiate a "consent decree" with the Securities and Exchange Commission to include new control measures and additional standards.
The city then initiates an independent audit of the city's finances and retirement system by an independent company and the Internal Revenue Service.
"This will additionally highlight the irregular benefits in the retirement system," Shea said.
This step will open up a process for claimants that can potentially sue the city to bring forward claims including the U.S Environmental Protection agency for runoff and pipe replacement violations, and other third parties.
Upon finalizing what is owed to third parties, the city could issue a completed audit and finalize financial statements in conformance with the Government Accounting Standards Board.
After negotiating the deal with all parties, the deal would be taken to Federal Bankruptcy Court and placed before a judge for final approval.
Shea said it could all be done in 18 months and the city would be back borrowing money on Wall Street without selling off any assets.
As part of the deal -- an extremely important issue -- the city would reserve the right to sue "all participants in the formation of illegal debt," including the companies and individuals with outside consultants that advised the city.
"This will likely earn the city more than $100 million," Shea said.