Debate begins as San Diego mulls Chapter 9 option

Bankruptcy is not just for people and businesses. Town, cities and other municipalities can file for court protection from creditors as well.

Historically, city government bankruptcies are rare. However, in one of the worst economic situations in a generation, it has become more common. Almost two years ago, as the recession was really starting to collect steam, the city of Vallejo, CA filed for bankruptcy. The Bay area suburb of San Francisco cited that rapidly diminishing tax revenue and the housing crisis was too much for it to handle. Cities rely on the housing market just like the business world. As values fall and the number of people moving away outpaces the number of those moving in, things become challenging in a hurry.

Additionally, a falling tax base makes it exponentially more difficult for a city to pay its employees. Firefighters and police for example, start to suffer in response as pay raises are halted, positions are cut and equipment remains outdated and unavailable. Debates get heated, city leaders lose support and lawsuits get filed.

Now, a couple hundred of miles south, The City of San Diego, one of the nation's most visited cities and the mecca of all things sunny and 70, is generating a bankruptcy buzz.

After seemingly bouncing back from a number of years under water, many have begun to believe the city's financial situation to be a sound example of how to turn things around. However, the picture is not as clear as most believe.

A volunteer task force established to address the economic problems of the city, the Citizen's Fiscal Sustainability Task Force, is not sold on their hometown's long-term stability, as evidenced in a recent report it published that stated should the city not be able to accomplish a 12-step plan it created, San Diego would "be forced to consider seeking injunctive relief by filing for Chapter 9 bankruptcy protection to allow the city to put its long-term fiscal house in order.”

Chapter 9, according to www.uscourts.gov, allows for the court-structured reorganization of municipalities, which means towns, cities, villages and school districts. Chapter 9 varies quite a bit from the more common chapters of the code, as the law contains no provisions for the surrender or sale of assets or creditor distributions.

Despite the task force's ominous report, the debate is swelling like the area surf.  Some believe the ongoing discussions to be, as put by San Diego Mayor Jerry Sanders, "... baloney."

In his January 31 column, the Mayor stated the bankruptcy option was merely a deliberate smokescreen to avoid tackling the city's serious need for reform. He also stated, "But the truth is talk of bankruptcy impedes progress on real substantive pension reform, and it poisons the climate for thoughtful solutions to our structural deficit."

Mayor Sanders went on the record in a recent speech to label the bankruptcy discourse as "extremist." Others who oppose the Chapter 9 option believe the city needs to curb executive pensions and health care and redirect those funds toward infrastructure spending.

Nevertheless, the very task force assembled to look deeply into the checking account believe otherwise. Certainly their input should not so quickly dismissed.

Mayor Sanders' column went on to include figures arranged by a city attorney who estimated a bankruptcy for the city could cost taxpayers up to $300 million and still not solve the big pension drain. He also cited that Chapter 9 bankruptcies will present added challenges if a judge happens to dismiss the case under the auspices that the city has not done enough before filing.

Stay tuned. Sunny San Diego may start to get cloudy.