SEC widens S.D. finance probe

San Diego Union -Tribune ^ | 7/6/05 | Karen Kucher

[NormsRevenge]

SAN DIEGO – The Securities and Exchange Commission has widened its investigation of City Hall to include issues related to the city's funding of its wastewater system, according to documents disclosed Wednesday.

Federal investigators subpoenaed the records on Thursday, requesting documents about how the city has charged sewer users. The request included City Council minutes, e-mails and memoranda, correspondence between the city and federal and state agencies, and correspondence with the city's auditors.

The SEC specifically requested documents related to the sewer rates charged for Kelco, a San Diego company that harvests kelp and extracts algin, which is used in pharmaceutical, household and food products. The company – now known as International Specialty Products – plans to move to Scotland in early 2006.

Pat Shea, one of 11 candidates running to replace Mayor Dick Murphy in the July 26 special election, disclosed the SEC probe at a campaign news conference Wednesday. According to a June 30 letter Shea handed out at the event, the city has been ordered to produce documents dating back to Jan. 1, 1996, involving the wastewater system's rates.

In an interview, City Attorney Michael Aguirre confirmed the SEC had subpoenaed the records and said it represented a "significant widening" of the federal probe.

"Now the SEC investigation is no longer limited to the pension plan, it is expanded into a whole new area, which is, I think, real cause for concern," Aguirre said.

Aguirre said the city failed to impose a sewer rate structure based on actual use, which was required as conditions of state and federal funding the city accepted.

Instead, he said, the city "appears to have used a rate structure where smaller rate payers were subsidizing the larger ones" and was not based on the actual use of the system.

Aguirre said the city didn't impose a proper rate structure until 2004.

"The potential liability could go as high as $200 million," Aguirre said, adding that he was launching his own internal investigation of the issue. "We are trying to struggle our way through it right now. "

"It appears at the very least there was an eight-year delay in adopting a proper rate structure and this is going to be a major problem for the city. And we are going to have to get all the facts out and make sure the public is aware of what has happened."

The SEC has been investigating whether current and former city officials violated securities laws by failing to disclose to bond investors the deteriorating condition of the city's pension system, which has a deficit of at least $1.4 billion. Officials also failed to disclose unfunded retiree health-care costs totaling more than $500 million.

The FBI and U.S. Attorney's Office are investigating whether federal fraudand public-corruption laws were violated. Aguirre said he has instructed his staff to collect all the documents that have been subpoenaed.

"It is really disturbing to see the habitual misuse of official positions to obfuscate, ignore and circumvent legal requirements," Aguirre said. "There is a lawlessness about this that is really disturbing."

The city was sued in June 2004 by a consumer advocacy group that accused it of imposing sewage rates that overcharged homeowners by $10 million since 2000. The lawsuit, filed by Michael Shames, executive director of theUtility Consumers' Action Network, contended that the city was charginghomeowners for sewer fees that should have been paid by commercial customers.

The lawsuit alleged the city collected sewer fees that didn't vary based on the amount of organic pollutants in the waste. The lawsuit said sewage from commercial and industrial customers has greater levels of organic pollutants – such as pesticides and other chemical products and byproducts – than residential waste.

The lawsuit is unresolved; a mediation conference is scheduled for later this month.

Shea said the SEC investigation could lead to fines, securities fraud claims by bondholders and demands for refunds by ratepayers.

Shea's calls for the city to file for bankruptcy have been a central part of his mayoral campaign. He has said bankruptcy is the only way San Diego can avoid taking drastic steps to close a huge pension deficit, including selling city-owned property and taxing homeowners.

At his news conference Wednesday, Shea said the expansion of the SEC probe beyond the pension issue shows the need for the city to resolve its underlying financial structural problems through bankruptcy proceedings.

"Hypothetically, if we solve the pension issue tomorrow, we are still not going back into the bond market and we are still not resolving our problems in a way where we can issue bonds," Shea said.

He added, "The point about Chapter 9 is it's the only place where you can take all of your problems – civil, investigatory and otherwise – and resolve them in one place, one time, one judge."