Thursday, July 07, 2005 | Signaling a decided shift in its investigatory interests, the Securities and Exchange Commission has delivered a subpoena seeking information related to the city of San Diego’s sewer user fees and its bond disclosures.
The document, dated June 30, requests information regarding the city’s compliance with local, state and federal laws in how it charged residential and commercial users of its sewer system. It seeks documents from meetings of the City Council and the city board that authorizes its bond sales, the Public Facilities Financing Authority.
The subpoenas also ask for documents concerning the effect of the city’s noncompliance with sewer user laws on its bond ratings.
Mayoral candidate Pat Shea broke the news of the subpoena Wednesday at a press conference. Shea, who believes the city’s myriad financial and legal issues can only be resolved through a Chapter 9 municipal bankruptcy proceeding, used the subpoena to illustrate his assertion that the city’s problems extend well beyond its pension system.
“The focus of this campaign has certainly been the fact that we have the pension deficit that is in the multi-billions,” he said. “What hasn’t been talked about until now is the fact that the other structural problems could by themselves sink the city of San Diego.”
Shea said he received the subpoena from a member of the news media. He is also a friend and advisor of City Attorney Mike Aguirre.
The manner in which the city charged residential and commercial users of its sewers became a major issue for the city in 2004 after it was revealed publicly that residential users were wrongly charged proportionally more than commercial users.
The city was notified last year by the State Water Resources Control Board that its rate system didn’t adhere to its requirements, which put in jeopardy $266 million in grants and loans the city had already spent toward water programs. The council voted in June 2004 to adjust its fee system, avoiding the repayment of the grants and loans.
However, city officials knew as early as 2001 that its fee system didn’t comply, but kept a study explaining such findings and possible liabilities from the public and potential investors, said mayoral candidate and Councilwoman Donna Frye.
“The problem with the SEC, I think, is: How is it that the information wasn’t disclosed and why wasn’t it disclosed,” said Frye, who headed the effort to change the fee structure and comply with the state board.
Although the City Council avoided troubles with the state board by changing its fee structure, it still faces the prospect of having to reimburse homeowners as much as $100 million because of overcharges.
The Utility Consumers Action Network filed suit last year to reclaim the payments on behalf of homeowners. Director Michael Shames said the suit is headed to remediation this month.
“Even if you can address the pension deficit, we have other issues, which by themselves would put us out of the capital market,” Shea said.
The SEC has been investigating errors and omissions in the city’s financial statements to investors since early 2004. Up until yesterday, specific requests related to bond offerings had focused on pension issues. An ongoing parallel probe by the FBI and U.S. Attorney’s office is centered on possible political corruption.
The city has been essentially barred from public finance markets since last fall, pending an investigation into its finances and the completion of its long-delayed fiscal year 2003 audit.
The pension deficit is estimated to be at least $1.37 billion and has dominated talk in the short mayoral campaign to replace Mayor Dick Murphy. He announced his resignation in April and steps down officially July 15. The special election is scheduled for July 26.
Aguirre, the city attorney, said he is conducting his own investigation into the sewer fees and expects a report to be released in two-to-three weeks.
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