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Friday, May 13, 2005 | Somewhere in the guarded archives of the San Diego pension system sit documents that hold a crisp truth blurred by more than a year of investigation, accusation and speculation.
Only a select few – former and current pension board members, administrators and lawyers – know what revelations, if any, the documents hold; two different eras of pension boards have forbid federal investigators and outside auditors access to their mysterious contents.
Although what’s written on these documents remains speculative to the outside world, one thing is clear: The city’s financial lifeline remains choked as long as the pension board maintains its attorney-client privilege.
It is a fundamental right to keep confidential communications between a client and its lawyers, but the board’s invoking of the right is one of the paramount issues holding up ongoing federal investigations and the city’s return to fiscal credibility.
“We need you to do this so that the city can do its business,” said Councilwoman Toni Atkins this week during a hearing in which the City Council voted unanimously to urge the board to waive “in the strongest language possible.”
What’s contained within those documents is central to resolving investigations being conducted by the Securities and Exchange Commission and U.S. Attorney’s Office, as well as the long-delayed fiscal year 2003 audit being conducted by KPMG.
If investigators can gain access to these documents, they can attempt to resolve issues surrounding the following:
– Errors and omissions in the city’s disclosures to investors dating back to 1996, when the deal that first began the city’s problematic pension underfunding was agreed upon by the pension board and the city. Auditors and investigators hope to understand what was known by officials and disclosed to investors regarding the true depth of the now $1.37 billion deficit and the general acceptability of the pension system’s accounting methods.
– Possible violations of conflict-of-interest laws in the board’s 2002 agreement with the city, in which the city was allowed to contribute tens, or perhaps hundreds, of millions of dollars less into the pension system in exchange for the granting of increased benefits for labor unions. The board at the time was heavily populated by union members.
For the city’s purposes, the waiver is especially vital because it appears unlikely outside auditor KPMG will fully bless its financials without access to these documents. The city’s credit rating remains suspended – as does its access to the bond markets for cash to complete short-term and long-term projects – pending the completion of the long-delayed audit.
Equally important is the SEC’s need to view these documents. In the wake of the accounting scandals that have struck the private – and now public – sector, one of the tenets of the SEC’s new enforcement policies is cooperation with investigators.
An entity’s cooperation plays no small role in determining the severity of punishments handed down by the commission. As part of this effort, the waiver of the attorney-client privilege is a key step.
City officials have already been scolded once by SEC officials for their level of cooperation. In the past, corporations have been dealt fines in the tens of millions of dollars for their lack of cooperation. Although some doubt that it would levy such fines on a taxpayer-funded organization such as the city, it’s also possible the SEC could make an example of San Diego for other municipalities if cooperation continues to be an issue.
The council has waived its attorney-client privilege in connection with the investigations.
Nearly all of the 13 trustees who sat on the pension board during the time the controversial 2002 pact was struck have been replaced. The inner-workings of the deal have attracted criminal investigations from the U.S. Attorney’s Office and District Attorney’s Office. Only John Torres, the representative from the Municipal Employees Association union, remains on the new San Diego City Employees’ Retirement System board.
The former board was accused by pension critics of maintaining the waiver to protect its actions in the 2002 deal, which is known as Manager’s Proposal 2. A largely new pension board took control last month and voted 8-to-4 to continue to assert the privilege during their first meeting.
Bill Sheffler, a new board member, was among those voting for the waiver.
“I think it’s important because it makes the statement to the citizens of San Diego and to the beneficiaries of the fund that we have nothing to hide. I’m in the minority though,” he said. “But I don’t think that the people that are in the majority necessarily disagree with me about that, but what they are weighing against that is there is a possibility of opportunistic litigation that arises.”
Several board members said their legal counsel warned against the waiver out of the fear that it would expose the retirement system to potentially costly litigation from private attorneys.
Bill Lopez, the city manager’s appointee on the board, said the board must put the retirement system’s interests before those of the city, and the requests for information have to date been overly broad.
And questions exist surrounding exactly how important the waiver is to the audits and investigations.
“No one ever told [the new pension board members] why it’s important,” said Troy Dahlberg, an outside accountant brought in along former SEC commissioner Arthur Levitt and chief accountant Lynn Turner to speed the completion of the audit and investigations.
To that end, Dahlberg plans to meet with pension officials to convey the importance of the waiver. With their vote this week, City Council members hope to do the same.
U.S. Attorney Carol Lam has sent a letter to the board’s outside council requesting the waiver, and the council members decided Tuesday to solicit similar requests from Dahlberg’s firm Kroll, Inc., KPMG and the SEC.
Although some on the board believe the pressure will help, others will be hard to convince that the waiver is so important to the financial interests of the city that it is also vital to the pension system.
“I don’t buy that crap. I don’t buy it for a second,” said Thomas King, a banking executive recently appointed by Mayor Dick Murphy.
He said he relies first and foremost on the pension board’s outside attorneys for advice, and believes the council’s request is being made out of political expediency rather than for the best of the system.
It is possible that the board will reconsider the waiver at its monthly meeting, when Atkins and Murphy plan to deliver the city’s message. City Attorney Mike Aguirre also plans to make a presentation to the board as well.
“If the city fails – and without an audit this city will continue to fail and ultimately will fail miserably as we go how many ever more months without a certified audit – and the retirement board’s lack of a waiver is what perpetuates that, then I would hope and expect that the retirement board members would change their decision,” said Councilman Michael Zucchet.
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