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Friday, February 11, 2005 | This is the first in a two-part series. Voice of San Diego will look later this week at what needs to be done looking forward to lift the city out of its fiscal problems.

As the city of San Diego’s pension plan problems gradually stretched open from a pesky itch to a gaping wound, city officials employed nearly every mechanism to deal with the problem – from a public relations standpoint.

First, it was the stock market’s fault. Then reports from the city’s own Pension Reform Commission said that wasn’t true.

Then the problem wasn’t really that bad, it was being overblown for political means and by a sensationalist media. But it was hard to say that anymore after the city lost its credit rating, its accountants wouldn’t and still won’t bless its financial audit because of so many unanswered questions, and the federal government began looking into everything from its faulty disclosures in financial reporting to public corruption.

And both the city’s bond disclosure counsel and its accounting firm have remarked on its lack of cooperation while looking into financial problems.

This week, the topic was City Attorney Mike Aguirre’s nuclear analysis suggesting Mayor Dick Murphy and several former and current City Council members failed in their legal duties to disclose material financial problems to investors.

Responses from the accused questioned Aguirre’s media grandstanding, authority and his timing. But when you pare down the hyperbole, one defense remains: They relied on the advice of legal counsel when approving the bond statements.

The responses also included pleas to move the city forward, to work as a team, to stop the finger pointing.

There is one glaring fault in that heart-warming argument: KPMG, the firm auditing the city’s finances and its true gatekeeper back to Wall Street, has specifically said the city must look backward to move forward.

The firm has said the city’s self-investigation, much-praised by the same city officials, wasn’t sufficient. That investigation, released last September by the firm hired to represent the city in front of the SEC, found that city officials had accidentally disclosed erroneous figures in its bond statements and that a system, but no individual, was to blame.

“We do not believe that the city of San Diego has conducted an adequate investigation in order to conclude that likely illegal acts have not occurred, or that appropriate remedial action has been taken. Such an investigation is necessary in order for an auditor to complete and audit in accordance with generally accepted auditing standards,” reads an Oct. 11, 2004, letter from KPMG Partner Steven G. DeVetter to Deputy City Attorney Les Girard, Mayor Dick Murphy, City Manager Lamont Ewell and acting Auditor Terri Webster.

When the letter was made public, Murphy said he didn’t have knowledge of it. Questions had been mounting on what was taking the audit so long.

In November, the city announced it had struck a deal with KPMG to allow the city’s representation, Vinson & Elkins, to dig into possible illegal activity. KPMG had originally asked that someone other than the firm to finish an “appropriate investigation.” City officials said it the investigation could take only weeks, but to date it hasn’t been finished.

In an interview, Aguirre said he speaks with KPMG representatives nearly daily, that they blessed his investigation and that his report “shows in fact that the city is dealing with the problem.” KPMG doesn’t comment publicly on its ongoing investigations.

In the post-Enron and Arthur Andersen, the entire reputation, and even life, of an auditor relies on the authenticity of its approved audits.

“The accounting industry has been turned on its head, everybody is very concerned about what they put out,” said Steve Austin, partner and audit specialist at Swenson Advisors, a mid-sized accounting firm. Austin also served on the Pension Reform Commission.

KPMG will be staking its credibility on the authenticity of San Diego’s 2003 and 2004 financial statements, which they have refused to certify as questions remain about the culpability in the city’s disclosures.

“I don’t think anybody without an intimate knowledge of the KPMG engagement would know” exactly what KPMG needs to finish the audit, Austin said. Some accounting professionals believe they could even wait for the Securities and Exchange Commission and FBI investigations to conclude. Mid-management and non-management city employees were scheduled to give testimony to SEC staff throughout mid-February.

Aguirre’s next report promises to reveal the behind-the-scenes workings of the pension board. He’s said that KPMG has asked for the board to waive its attorney-client privilege, something it’s unlikely to do now. Aguirre received much of the documentation for his scathing report from the City Council’s decision to waive the same right.

Once the city has clean financial audits, it can re-enter the bond market and begin raising cash again. It could then, realistically, release pension obligation bonds to begin dealing with the plan’s $1.37 billion deficit, as recommended by the Pension Reform Commission. Vital sewer and water projects, library and fire station construction can continue.

KPMG has demanded accountability from the city.

“KPMG cannot, and will not complete an audit of the 2003 financial statements unless the city completes an independent investigation of potential illegal acts as we have outlined in our prior correspondence,” reads an Oct. 29, 2004, KPMG letter in response to further reluctance from city officials to assist the audit.

City Councilman Michael Zucchet said yesterday the city’s past problems were due to a faulty system, one that has now been replaced in City Hall. Madaffer said in his response to the Aguirre report that the city attorney “is placing the city in a precarious position.”

But an entire team of people who had the opportunity to keep the city out of this current precarious position kept silent, and, as news reports and Aguirre’s investigation have recently proven, in fact worked to keep the fiscal problems from the public. Many of those people remain in key positions, though with the proper political push they could be edged out.

Sometimes it’s imperative to look backward to move forward.

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