The Fantasyland Budget

— Jerry Sanders, the ex-police chief who became mayor, is already playing good cop/bad cop. He's the good cop, presenting a "feel good" budget that doesn't hurt anybody or anybody's pocketbook but is based on a wholly unrealistic and dubious premise: that the City can -- or should -- sell pension obligation bonds.

If the fantasyland bonds don't eventuate, the rug comes out from under the "no pain" budget: there will have to be even more service and infrastructure spending cuts and almost certainly higher taxes and fees.

But the good cop can blame city attorney Mike Aguirre, who ruled last week that these bonds should go to the voters. This came on top of an attack on Kroll, Inc., which was hired to be an umpire but is acting more like a vampire. Good-bye, Sanders's painkiller. "People are sick and tired of the ludicrous pension benefits and will view it as their chance to vote against them," says Libertarian activist Richard Rider. If the people aren't permitted to vote on them, Rider -- "along with half the people of San Diego," he says -- will file suit to place the bonds on the ballot.

An honest politician would have issued two budgets: one indicating what will happen without the $640 million in pension obligation bonds (the crisis will crash down on the citizenry) and another indicating what will happen if by some miracle they are issued (the City will snort coke and forget about its problems for a while).

It's important to understand that pension obligation bonds are not like school bonds that add assets to the community or bridge bonds that are paid off with user tolls. Pension obligation bonds shift previous recklessness onto future generations, permitting current generations to avoid making tough decisions. It's like paying off credit card debt with another credit card.

Former councilmember Larry Stirling objects to "pension bonds that simply roll over the debt to the next generation without addressing the problems. The mayor says that the law allows him to 'leverage' some of the debt. Aren't such financial shenanigans what got us into trouble in the first place?"

The city could get short-term money, "But if you want money over two decades, you have to have financial statements," and they will be hard to get, no matter what boosters claim, says Diann Shipione, whose whistle-blowing brought the crisis to the fore. If the city floated debt to pay off the pension deficit, that would be satisfactory, but "if the proceeds were used to supplement the required annual contribution -- or borrowing to make payments," then the troubles would intensify.

The same week the mayor released his Novocain budget, Aguirre issued a report that makes the bonds a long shot. Aguirre attacked the consulting firm of Kroll, Inc., suggesting it be booted out of town and pursued for damages. It's about time.

The first consulting firm hired to study the pension mess, Vinson & Elkins, came up with a whitewash, as it had secretly told the City it would do. Vinson said government officials had broken no laws. The accounting firm of KPMG, hired to audit the 2003 books, would not accept the Vinson report.

Meanwhile, Aguirre came out with reports with evidence that city councilmembers had broken securities laws.

Kroll was hired to reconcile the two reports. And for questionable reasons, Vinson was hired to do a second report. "Almost immediately, Kroll and [Vinson] began working together," says Aguirre's report, even though Kroll had been hired to make an objective assessment of Vinson's work. Kroll workers sent lovey-dovey notes to former city manager Lamont Ewell. They included hate messages about Aguirre -- Ewell calling him the Antichrist, for just one example. "Emails show that Kroll was working and colluding with members of the City Council supposed to be under investigation and with a city manager who was supposed to be under investigation," says Aguirre.

Kroll also stepped outside its mandate by lobbying the Union-Tribune, which responded by writing editorials in favor of more money for Kroll. The city council was billed for Kroll's seduction of the U-T. "There is a danger when a newspaper becomes actively involved as decision-maker instead of passing information to readers," says Aguirre. "It's why the publication is losing subscriptions; it's not credible."

Unless KPMG denounces Aguirre (not likely) or Aguirre denounces his own report (less likely), there is little chance that the 2003 audit will come out soon. Aguirre thinks that the City could take a pass on 2003 and just issue 2004 and 2005 audits.

"This is almost comical," says Peter Q. Davis, former banker and mayoral candidate. "You don't get to skip a year; the main reason is that all the unknowns would be stuffed into this unaudited year, and these would come home to haunt you."

So here's the scorecard: Aguirre's report on Kroll is an exhaustive one, full of disquieting details of Kroll and its law firm fleecing the City of $20 million in fees, going far beyond their mandate and colluding with people they were supposed to be investigating, among other things.

Sanders may try to ignore Aguirre's report on Kroll, but KPMG can't. Even if KPMG did come out with an audit for 2003 and other auditors issued ones for 2004 and 2005, bond counsel, bond insurance companies, debt rating agencies, underwriters, and potential bond buyers would cock an eyebrow at San Diego pension obligation bonds, particularly since the federal government is still probing the City for its bond financing sins. It's possible the Securities and Exchange Commission will complete its investigation of the City soon, but there are few signs the U.S. attorney's office is ready to wrap up its case. Aguirre's call for a vote on the bonds may doom them completely, especially since he said they are bad public policy.

Davis thinks such bonds are a good solution, although he warns, "The City is acting like it is getting credit cards in the mail and thus has no financial problem. Borrowing is a short-term solution." He also agrees that Kroll and its law firm are "milking the job."

Without the pension obligation bonds, "We go to crisis mode," Rider says. Bankruptcy would be one option he doesn't necessarily favor. Expenditure cuts would have to be deep.

"This is just another indication that we are truly insolvent," says Shipione. If the City borrows, it would probably be at a very high rate, she says.

Maybe it would be a junk bond rate. Then Sanders could blame another bad cop: interest rates.

"Generally, my philosophy on pension obligation bonds is not to encourage issuing debt to pay off existing debt," says Councilmember Donna Frye. Like many, she has other questions about the Sanders budget: why, for example, do sales tax revenues soar 63 percent in fiscal 2007 and property tax incomes rise 19 percent?

"The pension debt is void, as the council did not comply with the Charter requirement for an auditor's certificate committing to these massive obligations," says Stirling.

Says Rider, "At best Sanders's budget is tenuous; at worst it is Pollyannaish and a fantasyland, predicated on very big 'ifs.' "

From the standpoint of honesty, it's worse than that.

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