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Saturday, July 02, 2005 | After the fireworks have burst and the hot dogs have been digested on the Fourth of July, the city of San Diego’s pension board is scheduled Tuesday to continue its discussion of whether to hand over protected documents to the city’s auditors and outside investigators.
But it turns out the much-anticipated meeting is likely to be a dud.
“There’s no way we can come to a conclusion on Tuesday,” said Peter Preovolos, who presides Tuesday over his first meeting as board president.
The pronouncement surprised city officials and even some pension board trustees. It also renewed talk of sending the pension system into receivership, where an independent, court-appointed expert would take over the management of a system at the heart of the city’s legal and political strife.
“We’re going to have to take legal action because we’re done. We’re done. We’re done,” said City Attorney Mike Aguirre, who said he intends to move unilaterally to place the system in receivership next week.
Since taking control of the pension system in April, the newly-constituted board has met three times and refused to waive its attorney-client privilege each time. The documents protected by the waiver are critical to investigations being conducted into possible wrongdoing by city officials in connection to the pension board and the city’s faulty financial disclosures to Wall Street.
The outside auditors working on the city’s long-delayed fiscal year 2003 audit cannot certify the city’s financial statements until the city’s self-investigation is completed.
Likewise, the documents are central to ongoing investigations by the Securities and Exchange Commission and Justice Department.
Board members reportedly are hung up on worries concerning their own personal liabilities should documents they release incriminate prior board members. However, experts believe board members could in fact be putting themselves in more danger by choosing not to waive.
The SEC punishes both individuals and entities for failing to fully cooperate with investigations.
Preovolos said such a weighty decision cannot be rushed and has scheduled board meetings weekly for the entire month of July.
“We’re a brand new board being asked to make heavy-duty decisions – I defy anyone to make these kind of decisions in a two-month time period,” he said.
A number of board members who don’t yet support the waiver are reportedly contemplating resigning rather than supporting the waiver.
Bill Sheffler is a pension board member who was already familiar with the pension system after serving on the Pension Reform Committee. For the last three months, he’s been optimistic that the board would support the waiver.
“I’m starting to turn and think it’s not going to happen,” he said of the waiver. “If [board members] need to leave because they can’t find a way to vote in favor of the waiver or they are so concerned about their personal issues that they cannot act as a fiduciary, then they need to go.”
Both the pension deficit and the lack of an audit threaten to strangle the city’s financial lifeline, as the growing deficit crowded this year’s annual budget. Without the audit, the city’s credit rating will remain suspended and it will be essentially barred from the public financing it needs to do the things cities do – build roads, sewers and fire houses.
The pension deficit is a result of a nearly decade-long practice by the city and the retirement board of increasing employee pension benefits while inadequately contributing to the pension fund. The related political happenings resulted in the myriad ongoing investigations and the filing of conflict-of-interest charges against six current and former pension board members by the District Attorney’s Office in May.
Councilmen Jim Madaffer and Scott Peters both expressed disappointment in the news that the waiver issue likely wouldn’t be decided on Tuesday.
“This city cannot continue to operate without an audit or without a bond rating,” Madaffer said.
Preovolos still doesn’t buy the argument that the waiver is germane to the completion of the audit.
“The audit has no relevance to the retirement system. None. None at all. If it did, why has it taken so long to get to this point?” he said. “There’s nothing in the world to prevent KPMG from completing their audit except Kroll and the city attorney.”
Representatives from Kroll Inc., including two former top SEC officials, comprise the city’s outside audit committee and tasked with completing the investigations and cooperating with the outside auditors and investigators. Neither Kroll officials nor Aguirre, the city attorney, were involved in the audits when the issue of an investigation arose.
Arthur Levitt, the former chairman of the SEC, told the council earlier this month that the city’s future fiscal health, and that of the pension system, relies on the pension board waiving the attorney-client privilege.
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