Municipal Bankruptcy Threatens San Diego Benefits

In a report published on June 8, the San Diego County Grand Jury recommended that the city of San Diego should consider chapter 9 municipal bankruptcy to help it reduce costly fringe benefits, pension and health obligations. This marks San Diego as the second major city in California, and the fifth in the U.S. this year, to consider municipal bankruptcy as a means to restructure and reorganize its assets and debts while attaining relief from current and future obligations.

The June 8 report calls the city's unfunded liabilities of $2.2 billion in its pension plan and $1.3 billion for health care, "unsustainable." After over two years of serious budget cuts and a mounting public pension crisis, this otherwise unthinkable option is becoming more and more attractive. According to the report, "Municipalities are not required to raise taxes or cut costs to the bone before filing for reorganization under Chapter 9."

Pension and benefits have been a problematic issue for San Diego for years. In 2006, allegations by the Securities and Exchange Commission that the city was failing to disclose to investors that its pension system did not contain enough funds were settled in court. The report's recommendation that the city council and mayor convene a panel of municipal bankruptcy experts to debate the situation is, for a major city like San Diego, disturbing, to say the least.

According to Natalie Cohen of National Municipal Research Inc., New York, making the case that the city is insolvent will be difficult. She went on to say that it seems as if the grand jury report's goal is to open up the discussion about the irrevocable nature of pension obligations, which will continue to devour the city’s budget, even though previous city administrations are to blame for the underfunding of the pension system.

 

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