Posted on 08/08/2006 5:32:56 PM PDT by NormsRevenge
SAN DIEGO
The city recklessly and deliberately mismanaged its finances for years, according to a report released Tuesday that marks a key milestone in San Diego's fiscal recovery.
Kroll Inc. said San Diego "fell prey to the same type of corruption" that ruined companies including Enron Corp. and WorldCom Inc. and prompted Orange County to file for bankruptcy protection in 1994.
"The evidence demonstrates not mere negligence but deliberate disregard for the law, disregard for fiduciary responsibility and disregard for the financial welfare of the city's residents," the report concludes.
The 266-page tome, which took 18 months to complete and cost the city $20 million, offers one of the most detailed accounts of how San Diego created a $1.4 billion pension shortfall that has crippled its ability to borrow money.
The investigation was led by a cast of accounting luminaries including Arthur Levitt, former chairman of the U.S. Securities and Exchange Commission. It clears the way for San Diego to complete overdue audits, which are widely considered a key step to returning the nation's eighth-largest city to Wall Street's good graces.
San Diego's unfunded pension liability the gap between the value of its pension assets and its obligation to retirees soared after the City Council decided in 1996 and again in 2002 to avoid payments to the pension fund and, at the same time, enhance retirement benefits.
The fiscal meltdown that resulted sparked investigations by the U.S. Justice Department and the SEC in early 2004. Five former city and pension fund officials were charged with federal fraud and conspiracy in January.
The report outlines a series of recommendations including creation of an independent audit committee and more authority for the city's chief financial officer.
"You got a second chance here, folks," said Lynn Turner, former chief SEC accountant and one of the authors. "I think it's a marvelous city, but you need to change it from being Enron-by-the-Sea to Emerald-by-the Sea."
The report found that several former city officials likely violated federal securities law and others, including two former city managers, were negligent in their work.
It blames former Mayor Dick Murphy and members of the City Council for failing to disclose the extent of the city's problems to bond investors and for "knowingly and improperly" causing the city to violate state and federal law in its collection of sewage fees. Levitt said the city overcharged homeowners for sewage to subsidize large businesses.
The city delayed publishing an advisory committee's findings because it wanted to avoid scaring bond investors who financed a ballpark for the San Diego Padres, which opened in 2004, the report said.
Levitt said the city also ignored warnings from whistle-blower Diann Shipione, a former pension board member.
"Her pronouncement that the emperor has no clothes was dismissed out of hand," he said.
Murphy, a Republican, resigned in July 2005, less than a year after winning a disputed election to a second four-year term.
Mayor Jerry Sanders, a Republican former police chief who was elected last year, said the report "will hopefully put a very unfortunate chapter of this city's history behind us."
Kroll has come under fire from some city officials who say the firm overcharged for its work. Its most outspoken critic, City Attorney Michael Aguirre, said the report was "essentially useless."
A visibly angered Levitt interrupted Aguirre's aggressive questioning of the authors during a hearing that lasted nearly four hours.
"We're not here to subject ourselves to your petty criticism," Levitt said. "We're not here to subject ourselves to your playing to the press."
An executive at KPMG LLP told the council that Kroll's report cleared the way for his company to finish its audit of San Diego's financial statements for the 2003 fiscal year. Without the audit, San Diego has effectively been shut out of public bond markets.
"We can move forward toward the completion of our work," said J. William Morris III, KPMG's Western Area managing partner for audit and risk advisory services.
Read the report HERE (Pdf)
SAN DIEGO – The Kroll report on management of the city's pension system concluded that the system was plunged into crisis not through low investment returns or unpredictable events but through “years of reckless and wrongful mismanagement involving any number of city and pension board officials.” It found that:
The City Council and the pension board acted improperly and illegally in approving the first of two changes to the pension system, known as Manager's Proposal I, to avoid financial obligations set by state and local law.
The proposal benefitted the city by allowing the city to reduce its pension contributions.
The pension board failed to maintain the financial stability and political independence of the pension system.
A second pension system deal, known as Manager's Proposal II, offered no real benefits and “was unlawful for a number of reasons.” Furthermore, it was approved only through the award of new retiree benefits, “one of which, when stripped of its descriptive veneer, was made available only to a single individual then serving on the pension board.”
The city weakened its financial position by using pension system assets to pay for the health care costs of city retirees.
The pension board “made false and misleading public statements to disguise the extent to which pension system assets would be insufficient to pay the promised benefits to City retirees.”
The city “knowingly failed to comply with federal and state requirements” that sewage treatment costs be shared proportionately between residential and industrial users. The result was “city homeowners being overcharged on their monthly bills . . . with the excessive payments being used to subsidize the City's industrialized water users.”
A consequence of city officials' misdeeds regarding both the pension system and wastewater treatment was that “the city repeatedly obtained money from public investors through financial statements and related disclosures that were false.”
The report noted half the city council, most of the staff, the board, advisors, etc corrupt.
Report means: Nothing will happen except the taxpayers will be forced to pay for it all.
As a native San Diegian and resident here, Who Cares.
Really doesn't affect most of us here.
We are more concerned what is going on with the Middle East wars.
If We and Israel don't win, all the money in the world won't help us.
Thanks for the
BumP. lol
The mayor is a moron to think this means the scandal is over.
You give too much weight to the terrorist's effectiveness.
A financial situation originating in the 1990s
that new leadership is dealing with here in San Diego
vs.
IslamoFasist at war against Israel and Western civilization. Attacking NYC,the Pentagon, London, Madrid, India, and other countries. War in Iraq, Israel, Lebanon,with Iran and Syria arming and financing Hezbollah
in their Jihaid.
I am more concerned about our fight for our civilization
than some city hall crap.
Those obsessed with local crap vs life or death need to face reality.
"The mayor is a moron to think this means the scandal is over."
Nope ...
The new mayor is the former police chief and knows very well that the city attorney will be chasing the illegal actions. Not his job to chase bad guys anymore.
The point is now that this report is out, a major step in straightening out the City's finanical mess has been completed, as the process was on hold waiting for this to be finished.
"Those obsessed with local crap vs life or death need to face reality."
LOL -
I suppose you don't consider taking the kids to the soccer game or the movies anymore ... after all, it's not life or death ...
It's amazing to me that the monied conservative interests in CA aren't agressively planning for a ballot initiative to reform pensions. This plan should only be for non-public safety employees and, of course, only for future employees. I leave out public safety employees because an initiative for non-public employees would be far easier to pass. A public safety employee plan could be done later.
To demonstrate how easy it would be to pass, they could begin in Long Beach, which is contemplating a special election in early '07 to place a ballot measure proposing either a sales tax increase or a parcel tax to fund public safety. Placing a concurrent pension reform measure on the ballot would be just the ticket to send a strong message to local governments. Long Beach could be a trial run for a statewide measure.
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