The Morning Report
Get the news and information you need to take on the day.
Our reporting relies on your support. Contribute today!
Help us reach our goal of $250,000. The countdown is on!
Monday, July 04, 2005 | The audit. Is there really anything else that matters in San Diego City government today? Forget the mayor’s race. Unless the audit comes out, it’ll be the first thing the new mayor worries about.
And if there is one man supposedly at the center of what’s keeping San Diego from its coveted audit, it’s whoever is sitting in the president’s chair of the city’s beleaguered pension board.
Peter Preovolos, a La Mesa resident and fiduciary auditor by trade, has only been occupying that post for a short time. But he’s not too happy about the way his board is being characterized. During an interview last Thursday, he said why and then he said a whole lot more.
He called the city’s audit committee a group of unnecessary “fat cats.” The committee headed by Former SEC Director Arthur Levitt and other partners of Kroll Inc. is charging taxpayers $800,000 per month solely to help the city publish certified audits of the money the city owed, spent and collected in fiscal year 2003 and 2004.
Preovolos said that all that committee actually does is “pontificate.” That the retirement system Preovolos is now leading has no interest at all in the city’s problem and that the only thing standing in the way of the city getting its audit isn’t him and the rest of the pension board, it’s City Attorney Mike Aguirre, and, of course, the pontificating fat cats.
He said that calling certain retirement benefits illegal and hoping to roll them back – as Aguirre and virtually all the mayoral candidates have done – is “childish” and “irresponsible.”
Finally, just when we thought everyone was working from the same page – that future turmoil would be a result of clashing priorities rather than an argument about whether there was a problem in the retirement system – Preovolos proclaimed that there was no such problem. Forget the Pension Reform Committee’s warning that unless a massive amount of assets are invested in the fund, it will continue to get worse.
According to Preovolos, even if “left alone” by the city, its stellar investment performance would eliminate a $1.7 billion shortfall, or “unfunded liability,” within 28 years. “You’ve heard a lot about the unfunded liability,” Preovolos said Thursday. “I tell you, if nobody did another thing from now on, that liability disappears.”
But the most important of his stances for now is, of course, the one pertaining to the city’s audit.
And what an audit it is. The mega-accounting firm KPMG has been on the job since April 2004 in an attempt to produce the so-called Comprehensive Annual Financial Reports for those years.
Without those reports, the city’s credit rating isn’t just bad, it’s non-existent. Without a credit rating, bonds to repair and maintain the sewage system and refinance Petco Park, for example, have been delayed for more than 18 months.
The audit’s delay crippled Mayor Dick Murphy’s reelection campaign last year. He had many ideas of how to lead San Diego out of the growing pension crisis, but each one of them hinged on, yes, the audit’s completion. It must have been among the most annoying of reminders.
He kept saying he didn’t know what was taking the audit so long.
Everyone was clamoring for it, the city manager assured the press last September that the audit should follow closely on the heels of a much-anticipated report from a group of former SEC lawyers who were investigating the public disclosure process the city had.
Then, all of a sudden, a letter was leaked to the press. It was a letter from KPMG and it said that no audit would be coming until the city fully investigated any intentional illegal acts relating to the underfunding of the city’s pension plan.
The letter shattered the myth that city officials had no idea what was delaying the audit. They knew exactly what was delaying the audit: The city had not been willing to adequately answer very specific questions KPMG had asked. And KPMG claimed that it was bound by accounting rules – specifically one listed as AU 317.16 – that require it to follow procedures if it suspects it has come across evidence of illegal acts.
One of those procedures is to demand that the potential illegal acts be investigated. When confronted with the letter and the suspicion that he had, indeed, known what was slowing the audit, Mayor Murphy – just days away from one of the most controversial elections in San Diego’s history – said he simply hadn’t read it.
Now, nine months later, Preovolos said he was unaware of that correspondence as well.
Yet it’s the very reason he is under such pressure to, along with his fellow trustees, open the secret records of the retirement system. With those archives open, the theory goes, KPMG and the SEC could finally say with certainty that they’ve looked everywhere and the city could finally move on.
How does Preovolos explain his lack of sympathy for the city’s plight? Things just aren’t the way the city says they are. He said KPMG could just do a “qualified audit” – one that would include a short explanation of KPMG’s concerns in place of a thorough account. He admits that would probably hurt the city’s credit rating – if that rating can actually be hurt anymore than it has.
“It’s not the retirement board’s problem if a qualified opinion is published that hurts the city’s credit rating. My god, you know what? Even if we did everything we are asked to do, they still might write a qualified opinion,” Preovolos said.
And the city is wasting money focusing on the audit.
“The City Council is suggesting that there has to be a serious cutback in things like police and other services,” He said. “Yet the city is spending $800,000 a month for the services of the Kroll Company. Do you realize how much money that is?”
He went on.
“It sounds good to say we have the former head of the SEC here helping but what has he contributed to solving the problem other than to complain?” Preovolos said.
When an expert on cooperating with SEC investigations spoke to the retirement board of the importance of waiving its attorney client privilege, he said that without an audit, a company dies.
So the city by implication is near death.
What does Preovolos say? “I’m tired of hearing people take pot shots at San Diego,” he said.
Scott Lewis is a former reporter at The San Diego Daily Transcript. You can e-mail him at