Friday, May 06, 2005 | Questions surrounding the city of San Diego’s pension accounting resurfaced this week on a number of fronts, drawing concerns regarding the accuracy of financial disclosures under preparation and the annual budget.
The latest bit came in Friday: The outside auditors putting together the city’s long-delayed fiscal year 2003 audit are concerned that aggressive accounting in the pension system could understate the pension system’s $1.37 billion deficit, according to multiple sources close to the process.
The city remains essentially locked out from public financial markets as it awaits auditor KPMG’s blessing on the integrity of its finances. Its credit rating was suspended by one of the three primary rating agencies last fall over errors and omissions found in its disclosures to investors, leaving it without access to funds to complete short- and long-term projects alike.
The audit has been on hold because of inquiries into city finances and the pending completion of an investigation of possible wrongdoing by city officials related to the errors and omissions. The wrongdoing investigation itself has also taken longer than planned.
At the heart of each issue rests essentially the same theme: Although numbers used may be acceptable under applied accounting standards, do they accurately reflect the city’s pension obligations?
All told, City Attorney Mike Aguirre has asked the City Council to consider a number of pension-related issues and has threatened to hold up the fiscal year 2006 budget if the city’s annual contribution to its pension system isn’t reevaluated.
“I will not sign off on something if I don’t think that the numbers are correct,” Aguirre said.
Pension systems by nature rely on assumptions and forecasting out trends decades into the future. But in a city under scrutiny by federal investigators and teams of auditors, the issue of precision takes on a greater weight.
Sources say the outside auditors, which include KPMG and Kroll, Inc., are concerned that the reported $1.37 billion deficit could be more in the range of $1.7 billion or more because of a number of different accounting assumptions used by the San Diego City Employees’ Retirement System.
A recent committee hearing hosted by Councilwoman Donna Frye proved as much, asking the system’s actuary, Rick Roeder, to figure the deficit under a different set of accounting standards. After a few tweaks, the deficit had risen by hundreds of millions of dollars.
“It’s a matter of opinion on how you should do it. It’s not right, it’s not wrong,” said retirement administrator Larry Grissom in an interview Friday.
The auditors came to question the figure as they prepared the Comprehensive Annual Financial Report that the city must give to investors as an update of its fiscal health.
Also this week, the city released its proposed fiscal year 2006 budget. City officials, led by City Manager Lamont Ewell, have been declaring that the city is making its first full payment to the pension system in more than a decade.
However, Ewell admitted this week that the payment is still not sufficient enough to keep the $1.37 billion deficit from growing. A number of outside figures familiar with the pension system said the payment needs to be at least $200 million this year in order to hold the deficit still.
Ewell has proposed the city’s contribution to be $163.5 million. The payment technically fulfills the request from the pension board, but still doesn’t take into account a number of annual expenses and the full interest accrued on the deficit because of certain accounting standards applied.
Days after the budget was unveiled, two former members of the Pension Reform Commission – actuary and current pension board member William Sheffler and accountant April Boling – articulated their concerns in a letter to Ewell about discrepancies between figures being used by city officials and pension officials.
The problem they found was one earlier brought up by former pension board member Diann Shipione: The system’s actuary and the city’s finance department applied different payroll numbers used to figure both the system’s deficit and the city’s annual contribution into the system.
Neither Sheffler nor Boling knew which number was correct, and Shipione said neither figure is accurate. But in their letter, Boling and Sheffler concluded that if the city’s number was correct, the pension deficit could be another $200 million in the red. Or, the city’s required contribution could be $20 million too high if the actuary’s number was to be trusted.
“There’s an impossible situation because you don’t know the real numbers,” Shipione said.
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