City of Fools

— The world's greatest writers -- Cervantes, Marlowe, Sir Walter Scott -- wrestled with this enigma: is the fellow who causes calamity a knave or a fool? When a promoter drives his investors into poverty and gets charged with fraud, he pleads that he was a dreamer, a fool -- not a knave. He was naïve. He's a naïf, he claims.

Now that San Diego is sinking into the financial slough, it's time to ask whether our leaders were knaves or fools, or, if you will, knaves or naïfs.

There is no question that what has devastated city finances is an underfunded and over-bountiful pension system, combined with ever-escalating corporate welfare.

The genesis is in 1996. The Republican convention is coming to town. Mayor Susan Golding will be showcased for a U.S. Senate run. Her financial supporters will include Padres moneybags John Moores and Chargers chief Alex Spanos -- both of whom are lining up massive corporate-welfare schemes.

City manager Jack McGrory decides to plunder the pension system. But first he must get permission from the pension board -- most of whose members either represent city-worker labor unions or are city officials who will receive fat pensions. The board members agree to the underfunding if city workers receive even more generous benefits. Thus, pay-ins will descend as payouts ascend. Does anybody wonder if a deficit might result? Were they naïfs? Or knaves?

McGrory tells the council that the Padres will stay at the stadium and contribute big bucks to the city until 2010, even though the team forfeits advertising and other income to the Chargers. Anybody who believes at that point that the Padres will stay at the stadium, and not angle for their own subsidized facility, is, well, a fool.

The city council okays a 60,000-seat guarantee for the Chargers at a renovated stadium; McGrory tells the city council that the San Diego International Sports Council promises to fill those seats. But a careful reading of the sports council's commitment shows that there is no enforceable promise -- just soothing words, probably penned by a lawyer. Naïfs? Come now.

The city attorney claims he didn't read the Chargers contract. So do some councilmembers. Knaves? Think about it. The fools are the voters who believe that the council, team owners, and media cheerleaders are not knaves.

Meanwhile, the Padres and city are planning a new ballpark. The city promises it won't require any new taxes because of all the commercial development that will spring up. Even after that commercial development doesn't take place, city leaders insist that it was a case of slight naïveté and the facility will pay for itself some day. The TV stations and Union-Tribune, which stand to make bundles of loot from the massive ballpark subsidy, assure the public that the politicians are honest folk. Naïfs? Please.

But the pro-sports moguls aren't the only ones playing the game. Developer Corky McMillin gets the chance to develop the old Naval Training Center for all of $8. He makes big promises to restore the historical and educational cores and other parts on his own dime. The city council, whose members have wallowed in his largesse for years, grants him the contract. But the final document radically changes the terms of what McMillin promises. Apparently, nobody reads that final document.

When public officials claim they didn't read a contract, "It's aggressive ignorance," says former councilmember Bruce Henderson, noting that it is knavery.

The city also pays for infrastructure that McMillin had promised to fund. "The proposal that was presented was quite different from the proposal now known as the NTC Plan," says councilmember Donna Frye, who kept warning the council it was in trouble. "It was a little bit of knave and fool -- hard to know who played which role."

NTC critic John McNab says the whole ruse had been arranged through Golding. In 1998, voters, who are assured that city finances are just dandy, approve the ballpark. But the financing runs into trouble. The new mayor, Dick Murphy, who promises he won't support a ballpark unless the city's finances are sound, arranges a new deal.

The city's portion of the new bond will be reduced by $40.2 million. But, points out Frye, that $40.2 million comes from a loan that was paid off to the city by Centre City Development Corp. That money was supposed to go for environmental mitigation at the ballpark -- parking, traffic, police, etc. Now the city can't come up with the money for ballpark safety and logistics. "That was knavery," says Frye.

For the ballpark, the city winds up issuing insured municipal bonds with junk bond yields (an astounding 7.15 to 7.7 percent) -- almost unheard of. Those bonds only go to well-heeled entities because, San Diegans are told, of the risk. Risk? On fully insured bonds? The city never explains. To this day, citizens don't know who were the moneybags who got those incredibly high-yielding, tax-free, insured bonds.

Meanwhile, as the city promises potential retirees bigger and bigger benefits, the funding continues to go down and the deficit, predictably, soars. Pension-board member Diann Shipione tells the council in late 2002 that it is on the road to perdition. So it decides to dig itself into a bigger and even hotter hole. Frye is the only one who votes against the deal with the devil. Not surprisingly, the pension mess worsens markedly. In the fall of 2003, the city proposes to sell half a billion dollars in sewer bonds. Shipione notices misrepresentations in the prospectus. She alerts the city. It cancels the offering.

Then comes the bombshell. On January 27 of this year, the city admits it has been cooking the books since 1996. Of course, it says it has only been guilty of errors and omissions. Oh? What about this staggering omission: San Diego's government admits that even if it pours $200 million a year into the pension kitty until 2011, it will still be only 66 percent funded, and the deficit will have grown from $1.3 billion to $2.4 billion, while promised healthcare funds will have long since dried up. Nobody knows where the annual $200 million will come from, especially since the general fund is only $743 million. Some suggest a pension obligation bond, but after federal investigative agencies seize records for a possible criminal investigation, it's doubtful the city will be floating any bonds for awhile, especially since the bond rating keeps getting downgraded.

Ah, what (fools? knaves?) these mortals be! You supply the word.

The city is being sued over the pension debacle. In a deposition, attorney Mike Conger, representing the plaintiffs, asks the city treasurer about the misleading statements in the prospectuses. She didn't read them, she tells Conger.

After the January 27 filing, the city decides to issue bonds, supposedly amending the prospectuses to atone for the post-1996 sins. But in the new prospectuses, the city blames much of its difficulties on subpar investment returns during 1997-2003. But the pension system claims its returns have been almost as high as the 8 percent required by actuaries.

Actually, the city has been skimming capital gains from the pension fund for years and using the money to make its own fund contributions, says Shipione. Maybe that's why it blames market underperformance for its woes. "It's very cunning" in its statements, she says. It's knavery.

So politicians are saying the city can plug the hole by selling assets. Should we sell the Zoo and Wild Animal Park to Disneyland? Or sell the San Vicente Reservoir to the water-deficient Barona Indian casino? Don't laugh. Some suggest putting city-owned assets in the pension fund. It would be a Band-Aid. Sums up Michael Aguirre, by far the largest vote-getter in the run for city attorney: "The state constitution prohibits underfunding, the city charter prohibits underfunding, and a court case says it's unconstitutional to underfund. But the city attorney said it was legally okay. He was more knave than fool. The city had an ulterior motive: rob Peter's pension plan to pay Paul's corporate sports programs."

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