A week ago Saturday, as President George W. Bush and other federal officials hastened to bail out the U.S. economy, Democratic San Diego city attorney Mike Aguirre, facing his own uphill battle against his better-financed GOP opponent Jan Goldsmith, sat down to lend perspective to the sell-off on Wall Street and to how it might affect traditionally Republican San Diego. He also reflected on some radical moves — including putting the City’s pension fund into bankruptcy — that he insists the City will eventually have to make in the face of the predicted long-term financial squeeze besetting the world.
In terms of the global financial meltdown, what do you think about the future of property and sales taxes here? Is that going to be a problem?
Well, I think it’s a problem because we’ve allowed the [city] pension [fund] — the present value of future benefits of the pension — to be in excess of $7 billion. The assets are now somewhere below $4 billion, so the deficit has got to be somewhere in the neighborhood of $2 billion to $2.5 billion, maybe as high as $3 billion. With the shrinking property taxes and the shrinking sales taxes and the shrinking hotel taxes and the increasing liabilities of the pension plan and the backlog of infrastructure, we have a combination of the worst factors, which, you know, many people have been concerned about, been warning about — such as myself and Diann Shipione and Pat Shea. And now the City finds itself in that situation, and they’ve stuck their head in the sand. No one wants to get the information out. Even people that are with Fannie Mae and Freddie Mac and Lehman Brothers and Bear Stearns, they recognized the crisis that they were in — because they’d gone long on debt — and they took action.
Here in San Diego, we’re doing nothing. We’re just letting the situation get further and further out of hand. That’s one of the reasons that I’ve asked that a full accounting be made, right now, of exactly where we are with the pension deficits and then the plan be adopted to reduce the distributions to levels that are proportional to the ratio of assets to liabilities now. ’Cause what’s happening, as with all Ponzi schemes — and there’s no question the pension plan is a Ponzi scheme, because of the 50,000 years of credit that were created with no funding — you’re moving new money in to pay for the old liabilities, and pushing off the amortization into future years, and then reamortizing every year the losses.
We need to really look at whether we have to put the pension plan into reorganization. That needs to be done now, while there’s still good assets there. The pension is paying out about $400 million a year now. And that is a cash drain that has been paid for with money that should have gone to streets and roads and bridges and securing water supplies, having to be able to put out fires, and things of that sort. All the things that the government does to empower people have been curtailed, all the things the government does to protect people have been curtailed, except when it comes to the pension plan. And there we’ve built a Taj Mahal of pension benefits.
Since the market meltdown, does anybody have an idea what the pension fund is worth now?
Well, we know that supposedly as of September 30, it was $4.3 billion, which would be about a $700 million loss from the year before, if not more. And now, you know, since there’s been such a substantial drop since September the 30th, it’s probably under $4 billion. The liabilities are more than $7 billion. They were $7 billion last year, and the liabilities have been increasing every single year. That’s called the present value of future benefits. We know there’s a substantial gap, ’cause it started off as a $1.2 billion deficit.
The thing that I asked the mayor to do and Jay Goldstone to do last week, which they’re resisting doing, is to actually report where we are as of today. And then to make reasonable forecasts of where we’re going to be next year. And then, you know, it’s clear that our annual required contribution is going to have to be closer to $300 million, and if that’s the case — this year it was $160 million — there’s literally no fiscal way to keep the City moving forward with essential services. So that means that we’re going to have to get the debt down. And that makes it even more important to get rid of the billion-dollar illegal pension benefits, the 50,000 years we’re giving away.
But beyond that, it may very well mean that the pension plan has to go to reorganization. It’s a trust, and it may have to go into reorganization. There may be a requirement that only so many cents on the dollar actually will be paid out. Because what you don’t want is, you don’t want hundreds of millions of dollars being drained from the pension, assuming there’s 100 cents on the dollar. And so you’re draining out the assets on one hand, and then on the other end, the assets that you have in the stock market are plummeting, and that puts us in a situation where the pension plan could be broke.
What normally is done under those circumstances, and what was done with all the various reorganizations with Freddie Mac and the rest of it, is that there’s some kind of percentage reduction. With the reworking of the loans with IndyMac that FDIC has done, and with the other subprime loans with Countrywide, what they’ve announced is that they’re going to rework the loans at lower levels, lower values more commensurate with what actually is affordable. That principle is what keeps — and will keep — vast numbers of the loans viable. Same is true with the pension plan. There has to be a reworking of the liabilities. You simply cannot keep paying out $10,000 and $15,000 a month to people assuming that you have 100 cents on the dollar when you know there simply isn’t the cash flow over the time horizon that would be needed to sustain that.
What people need to understand is the management of the pension plan has not changed. The pension power brokers are still very much in control of the city council and of the mayor’s office. There has been no reform. So what we have is a more sophisticated way of hiding the losses. So now you have a high-risk investment policy that has produced massive losses, and you had the creation of 50,000 years of pension benefits with no funding. Those two things come together and create a massive, oppressive debt that the City has been trying to pay by shortchanging all of the essential services. That whole ability now has been swamped.
Let’s put it this way, if San Diego was Enron or Bear Stearns or Wachovia or Washington Mutual or Countrywide, they would have still tried to keep the businesses going and continued to hide the losses and the financial imbalances. And that’s what we’re doing. And beyond that, again, as I said, we’re putting our head in the sand. That’s why I’ve been trying to get the mayor and the council to focus on this problem, which, I think there’s a lot of reluctance because it’s a lot of unpleasant news and it’s going to upset the municipal unions because it’s going to show that they were completely and totally wrong. And now it’s a catastrophic situation that they’re not prepared to deal with.
Is there any way at all for the public to find out what the current status of the fund is?
The only way to do that is if we can get the mayor’s office to disclose that information. Right now the response from Jay Goldstone is that I’m being an alarmist. He’s not interested in getting the information out on a current basis. He did provide me the information as of September 30. That information is that it’s $4.3 billion. That is extremely serious and very telling.
Is there any suggestion that the funds themselves have been mismanaged in some way?
Well, the funds have been mismanaged in the sense that there has been the creation of 50,000 years of pension credits with no funding. And then there has been the adoption of the very high risk investment policy that was more like a high-risk mutual fund than it was a conservative pension plan. Where we are now is that they basically rolled the dice with the pension assets on the stock market and the bond markets and that it’s all blown up, as many people were saying.
Ideally speaking, what you want in a pension plan is to be in as risk-neutral, risk-averse a position as you possibly can. And then if you go out with some limited percentages of your pension plan and move it into the stock market, you know, that’s rational and reasonable. But what they were doing is they were all in. They were touting the fact that they were getting 16 percent, 20 percent returns. The problem with that is, to get those kinds of high returns, you have to be high risk, and if the market goes the other way, you know, you have the opposite effect, and that’s what happened here. There’s been a substantial hit, and it’s been hidden!
Just like in 2003 when Diann Shipione was trying to get the information out. Five years later we find ourself in the same position. The pension power brokers, again, they don’t want to release the information. They’re concealing the information. And I’ve advised them that I don’t think we can move forward with any kind of bonds until we make full disclosure of the pension debt. Which is ironic because this is exactly how we got ourselves in trouble five years ago. We moved forward without disclosing the pension debt on our wastewater bonds, and then Diann Shipione wrote the emails bringing all that out. That threw the wastewater-bond offering into a tailspin, and we’ve never recovered from it. Here we are five years later right back in the same position. We’re organizing the bond offering for the water department, a very sizeable bond offering. And I’ve advised them, until we get this information on the pension plan, you know, I don’t see how we can go forward.
Is there an issue with the downtown tax increment with the condo values going down? Is there any risk that the City could be underwater on its downtown redevelopment bonds?
Not as of yet. Nothing that I’ve seen. I think that the major problem that we have with downtown redevelopment has been the various conflict-of-interest problems that SEDC and CCDC have both just gone through, and then I think that the real question is, can we really justify using tax instruments to continue to pay subsidies to developers in downtown San Diego when their development otherwise would have been market viable. I think that’s the question.
The big question in San Diego is that we have this massive housing-production machine which has run its course, and yet it’s still spewing forth houses and tying up capital so that we have a huge backlog of housing stock, instead of making the transition over to infrastructure. We have to completely redo our roads. Seventy percent of our roads are below the standards that they should be. Our bridges, we have another half a billion dollars of bridge work that we need to do. Our alleys, our sidewalks, our rec centers, our buildings, getting our recycling together with water so we have a reliable water source. Energy, with the whole need to transition to renewable. There are these tremendous potential opportunities we could build into to the next generation — a very solid foundation to empower strong economic activity going forward. But we’re not doing that. That, I think, is where there really is the opportunity cost…that we’re not doing these other things that really could revitalize the economy.
I think what we’ve all discovered here in San Diego, and I think throughout the country, is that the crisis that we’re facing economically is that there’s been a vast inflation of values, nonexistent values, that really show that the fundamentals are not sound and that the way that we’re going to work our way out of this is to do a fundamental restructuring of our infrastructure and our water supply, energy supply, roads, streets, bridges, and all the other things, and that that is what’s going to create real economic viability. Something along the lines of what’s going on in China and going on in some of the more northern European countries. More efficient uses of power and the centralization of recycling systems and water and renewable energy and all the things that are on the forefront.
We haven’t done that because we have this old system, and it’s an old system that’s a coalition of the developers and some of the credit sources, the old-boy network in downtown San Diego, and they literally have run the City into the ground. And I think that the demise of the Union-Tribune — because it built its financial model, its business plan, on the old system — I think your seeing that go down the tubes is perhaps the most stark example, the most clear demonstration of the loss of viability of the old business plan. And yet it still is hanging around; it hasn’t quite been swept away yet, although I think it will happen. And that’s where we have to build into the future this whole new and I think really promising infrastructure focus, as opposed to a single-family-housing focus.
You know, that is what the political struggle is about. I think that, in many ways, that’s what my election is about, that’s what the election in the first, third, and the seventh districts is all about. A lot of what Donna Frye has been fighting for, and I’ve been fighting for now, has become a lot clearer to people. And that’s what this election’s going to be, really, a referendum on, do we want to have a city that’s moving forward and transitioning over to infrastructure and away from the old development model? Or do we want to continue to perpetuate what we’ve had in the past? It doesn’t seem to be financially or politically viable anymore.
What about this Tenth Avenue Terminal project? What’s your take on that?
Well, again, I would say that that is part of the old way, where you promise everything to everybody. You know, you can have a shopping mall, a football stadium, a basketball stadium, you’re going to have plenty of parking; then, the cargo is going to be all in place. And it’s not going to cost anybody anything. And it’s going to be nothing but profit, and it can be done very quickly. And it’s all about helping the community. And when you start to look at it, you realize it’s being presented as whatever it has to be in order to get people to support it. And that’s exactly the approach that has happened in the past in San Diego, a pie in the sky. And it doesn’t work.
Right now what we need is to come back and focus on the fundamentals. In my judgment, the Port needs to focus on what business activity is going to give us the most solid economic foundation going into the future that helps create good jobs. What they’re talking about at the Tenth Avenue facility is more low-wage jobs. I think that’s the opposite direction. The idea that [we could] really squander hundreds of millions of dollars more on corporate sports, that really doesn’t seem to be at the forefront for a whole variety of different reasons. I think that the Tenth Avenue Terminal right now is a big political, high-profile issue, but to me it’s more demonstrative of the old guard who continues to try to control the agenda rather than having something that’s viable and something that’s really needed in San Diego.
Speaking of the old guard, a lot of them are giving to your opponent. Obviously they are pretty smart guys, right? They made a lot of money somehow because they have it to give out. Why are you smarter than they are, or why is your agenda different than theirs is?
Well, I think that if you look at where San Diego is, I don’t think you would say that San Diego has made well-informed choices for a long time. I think that what we’ve done is, we’ve made violating the law a policy choice. So that’s meant that people that were not really competent and qualified to be in the various positions that they were in were able to administer their political offices because they were permitted to violate the law. They not only violated the law themselves, but they permitted others to violate the law, which really expanded the scope of what people could do to make money. It made it a lot easier. It’s much more difficult to have to stay within the rules and make money within the rules. And the other side of it, it’s much more viable and, in the long term, it’s much more profitable because you don’t have to look over your shoulder.
So I think that what my opponent is, is — if you think about it, he has no trial experience, no securities law or disclosure experience, no prosecutorial experience, no City of San Diego experience, and no relevant management experience. But what he does have is he has the backing of the economic power structure that seems to be on the wane. He has the Union-Tribune behind him and the Lincoln Club and the higher echelon of the Republican Party, and they’ve poured a lot of money into the campaign. But that’s to try to turn — in my opinion — San Diego back into what it used to be, when all the money in the world can’t make that happen. I think it’s more of a desperate effort to try to recapture what San Diego used to be.
Even with that, I think most people would look at the amount of money that he’s raised, and they’re kind of surprised that it’s not more. I mean, he has the backing of the mayor and the higher establishment, supposedly. But in my talking with them, I think many of the people that are in the establishment now are really worried. Many of them have been shaken by events. They look at the situation and think, “Well, wait a minute. Here’s a guy that’s being singled out — the city attorney’s being singled out by the Wall Street Journal for bringing a case — the Wall Street Journal — a pension case that was sending off the alarm that voters across America seemed to hear, and also holding out the office of city attorney and saying that other communities need a rabble-rouser, like the current city attorney is, raising these issues.” I think a lot of the establishment is stepping back and saying, “Well, wait a minute, here we have a Democrat that was César Chávez’s lawyer, you know, is from Berkeley, has a Harvard degree, doing things that the Wall Street Journal says is a national model.”
So I think that a lot of people want to control the city attorney’s office, like they control the mayor’s office and some of the council offices. There’s a temptation to want to give. But I don’t think that the support that my opponent’s getting is very enthusiastic. And I think there are a lot of misgivings because, you know, frankly, a lot of my advisors are Republican. Pat Shea’s a Republican. Don McGrath’s a Republican. Don Shanahan’s a Republican. I think our office has really been much more focused on trying to figure out what the right course is, and that does have an appeal to businesspeople. So a lot of people will come up to me and say, “Listen, don’t tell anybody, but I’m going to support you.” I’ve had a lot of that type of comment.