Posted on 10/26/2005 9:45:17 AM PDT by NormsRevenge
Consultants trying to unravel the issues surrounding San Diego's tangled finances told city officials yesterday that their work will take until at least mid-March to complete, three months later than their recent estimate.
The development adds to the uncertainty the city faces over its fiscal condition and is likely to further delay the release of long-overdue financial statements that are needed for San Diego to re-enter the municipal bond market.
KPMG, the accounting firm conducting the 2003 audit, has predicted that it will take at least a month to issue the statements after Kroll Inc., the firm handling the investigation, finishes its work.
In a letter to Deputy Mayor Toni Atkins and the City Council, Kroll representatives said two additional firms have been enlisted to help them, while the number of attorneys, legal assistants and other employees involved with the case has doubled.
City Manager Lamont Ewell said the Kroll consultants, who are led by Arthur Levitt, a former head of the Securities and Exchange Commission, met with him yesterday and warned that a broader investigation would be needed and would include examinations of City Council members' computer hard drives.
Though frustrated by the delay, Ewell said the city must cooperate if San Diego is to make it out of its fiscal crisis.
"The question is: What are the alternatives?" Ewell said. "That's what I'm struggling with now."
Forensic accountants and attorneys associated with Kroll, a New York-based risk-consulting firm, are serving as the city's audit committee to resolve the questions, a job they said last month they hoped to finish before the end of December.
The SEC, the U.S. Attorney's Office and the FBI are looking into possible securities violations and corruption involving the city's employee pension system, which has a deficit of at least $1.4 billion.
The ongoing investigations have proved disastrous for the city's budget, as legal expenses mount and auditors withhold release of San Diego's 2003 financial statements.
Lacking up-to-date audits, the city's credit ratings have been in a dive for almost two years, and officials have faced substantial obstacles in finding institutions willing to offer loans at reasonable rates.
Much of the new material sought by Kroll involves the review of previously neglected documents, including elected officials' records and other data missed in earlier computer searches.
Last month, the consultants told the city that the first firm hired to do an independent inquiry into San Diego's finances, Vinson & Elkins, had botched a records search, missing 57,000 e-mails and attached documents.
The Houston law firm, which issued two reports critical of San Diego's handling of its pension and finances, worked with a city technology agency and another private firm to collect the records. The law firm ended its San Diego contract weeks before the city acknowledged concerns regarding the data collection.
A spokesman for Atkins said she had not yet read Kroll's letter and could not comment last night.
City Attorney Michael Aguirre said his office is checking Kroll's "factual claims" for accuracy and will discuss his conclusions Friday.
Aguirre has been investigating the pension crisis since he took office almost 11 months ago, and has accused council members and city staffers of a range of improprieties.
"The best way to resolve this is to accept the findings of the city attorney's investigation that there were reckless and knowing violations of securities laws, or the Vinson & Elkins finding that there were negligent and knowing violations of securities laws," Aguirre said.
Though Aguirre has hammered away at the quality of work by Kroll and Vinson & Elkins, he tempered his criticism of the audit committee yesterday, saying he wanted to complete his review of the Kroll letter.
But he said the SEC's recommendation to the city that the fraud investigation be conducted by a private company is not working.
"The audit committee is not able to comprehend and manage the massive investigation it is undertaking," Aguirre said. "The techniques it is using are inefficient to the investigative mission."
Delay on discussion The Kroll consultants had planned this week to ask the City Council for $3 million in additional funding, but the discussion was postponed. So far, the city has approved spending more than $15 million for the audits and independent probes, including $6 million for Kroll.
Kroll representatives will appear before the council Tuesday but will not seek more money until later, Ewell said. In their letter, they declined to estimate how much more they expect to charge the city.
Aguirre said he is concerned about those costs because the consultants have no incentive for a speedy end to their work.
"We know more about the investigation into (I. Lewis) "Scooter" Libby, Vice President Dick Cheney and Karl Rove than we know about our own city's investigation," Aguirre said, referring to the federal grand jury probe into the leak of a CIA official's identity.
"We shouldn't pre-judge (the committee)," he continued, "but we should be very critical."
The city must press on with the investigation, Ewell said, though he added that any dollar diverted from public services by the legal expenses "is a concern to me."
"I do not want to become the next Aguirre and start blaming people," Ewell said. "Where we need to be at this point in time is identifying flaws that obviously occurred since the process started and getting information to all the entities that are helping to solve this matter."
According to Kroll's letter, signed by Levitt and two associates, the software firm that designed the city's e-mail system, Novell, will assist in the data retrieval after the San Diego Data Processing Corp. and another company failed in their attempts.
The Kroll inquiry has focused on 35 "individuals of interest," and set out to review more than 100,000 reports, e-mails, memos and other records from the city and the pension fund.
The new search should yield at least 185,000 new e-mails to examine.
To tell SEC The consultants also will take a closer look at the city's Metropolitan Wastewater Department, the subject of recent federal subpoenas, and report their findings to the SEC. Members of the audit committee believe it will take until the end of November to gather all the needed records.
After that, it will take at least six weeks to examine the documents, and at least four weeks to do follow-up interviews. A report, they said, could follow one month later.
The consultants also have hired accounting firm PricewaterhouseCoopers to evaluate the pension system's actuarial projections. The firm agreed on a $100,000 contract, Ewell said.
Tom Fleming, chief executive officer at the Data Processing Corp., said the city-owned nonprofit has been working with the committee for six months and has responded to every request. The agency also has answered requests for e-mail and other documents from federal investigators.
The problems the audit committee cited may be beyond his agency's ability to address, Fleming said. The corporation provides and maintains the city's e-mail system.
"We're not specialists in doing forensic search and sort methodology," Fleming said of the retrieval process the committee needs.
The city created the corporation in 1979 to provide computer and telecommunications services to 25 internal departments.
Nearly two years ago, it was rocked by disclosures that top officials spent lavishly on alcoholic beverages, parties, travel and meals.
Two former executives pleaded guilty to conflict-of-interest crimes committed while they worked for the agency. They were fined and placed on three years' probation.
The City Council has authorized spending $15.6 million on consultants hired to unravel its troubled finances, and the tab probably will grow. The major consultants are:
Kroll Inc., a risk management firm; three members of the firm make up the city's audit committee
Willkie, Farr & Gallagher, a law firm representing Kroll
KPMG, an accounting firm working on the city's fiscal 2003 audit
Vinson & Elkins, a law firm that looked at problems with past financial disclosure practices and represented the city before the Securities and Exchange Commission; the firm recently was replaced
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