Wednesday, August 31, 2005 | The varied groups of investigators probing the city of San Diego’s finances and politics will be granted access to the archive of long-guarded pension documents key to the city’s financial and legal crisis. The pension board voted Tuesday to hand over the documents to auditors and local and federal investigators.

The decision potentially ends one of the most high-profile stalemates in the drawn-out drama that is threatening the municipality’s vitality. In its vote, the board decided explicitly to hand over the documents solely to the U.S. Attorney’s Office, the Securities and Exchange Commission and the District Attorney’s Office, as well as the audit committee investigating alleged wrongdoing by city and pension officials.

The pension board had refused for months to hand over the documents, asserting the attorney-client privilege and thereby threatening to stall the release of the city’s long-delayed fiscal year 2003 audit.

KPMG, the firm working on the 2003 audit, won’t certify the city’s books until the audit committee is given access to the documents. Without the audit, the city cannot regain its credit rating and return to capital finance markets to raise cash for infrastructure and other projects.

“This is not the end. This is not the beginning of the end. But this is the end of the beginning of this crisis,” said City Attorney Mike Aguirre, paraphrasing Winston Churchill.

The board stopped short of waiving the attorney-client privilege, meaning that the press, public and Aguirre won’t be provided the same access. Aguirre said any documents given to the outside audit committee must be made available to the public under the state’s public records laws.

“While today’s actions by the [San Diego City Employees’ Retirement System] board does not bring about the same results as if the board had fully waived its attorney-client privilege, it may bring us closer to completing the city’s fiscal year 2003 audit,” said Deputy Mayor Toni Atkins in a prepared statement.

Brought in to replace a pension board shrouded in controversy, the new pension board took control of the troubled pension system in April. However, it had rejected constant pleas to release the documents until Tuesday. A number of board members had expressed concern they would open up the system, or themselves, to litigation should the documents be released.

Board President Peter Preovolos said there was no deciding factor that led to the board’s reversal.

“What it was, was a very normal practice – that responsible people took their job seriously to evaluate all aspects and try their very best not to listen to all the rhetoric,” he said.

To reach the seven votes needed for a binding decision, board trustee Bill Lopez had to phone in his vote while vacationing in Hawaii. The 13-member board has had four trustees recently resign in an environment thick with lawsuits and high-profile political battles. A fifth trustee, John Torres, was forced to abstain.

The District Attorney’s Office has brought criminal charges against Torres and five former pension trustees for allegedly violating the state’s conflict-of-interest law. The charges stem from a 2002 pact between the city and pension board known as Manager’s Proposal 2, which allowed the city to continue its historical underfunding of the pension system in exchange for increased benefits to city employees.

Additionally, the SEC is investigating the veracity of financial statements released by the city to the public and investors. The U.S. Attorney’s Office and FBI are investigating possible political corruption.

The pension system sits at the heart of both investigations. It is saddled by a deficit that’s estimated to be at least $1.37 billion and threatens to dominate city budgets for years to come.

Earlier this month, federal Judge Irma Gonzalez ordered the pension board to turn over subpoenaed documents to the U.S. Attorney’s Office. Trustees faced the threat of being found under contempt of court if they had refused.

Critics of the pension system argued that the judge’s order is, in fact, what spurred the decision.

“Make no mistake, the pension board only acted when they had no choice,” Aguirre said.

Bill Sheffler, a pension trustee who has supported the waiver since joining the board in April, said he didn’t believe the judge’s ruling inspired his fellow trustees to turn over the documents.

“It feels like they found a way to do it that did not include, how should we say, giving in to Aguirre,” he said.

The city attorney has engaged in a high-profile legal and political donnybrook with the pension system. He has attempted to reinstall the city attorney as the pension system’s rightful legal counsel and sued the system to void pension benefit enhancements granted to city employees in 1996 and 2002 that he argues are illegal.

Members of the city’s audit committee couldn’t be reached for comment Tuesday. They have repeatedly stated that the lack of access to the documents is the biggest obstacle to completing an investigation into allegations of wrongdoing by city and pension officials and finishing the audit.

Specifically, auditors want to know if laws were broken in connection with the funding of the pension system and the city’s financial disclosure practices. They also want a better feel for what was known and disclosed regarding the true size of the pension deficit, which critics say is downplayed by aggressive accounting.

Concerns over the integrity of the city’s financial statements arose in late 2003 and continue to dominate City Hall. A recent memo from KPMG to the City Council said that the city’s net assets were overstated by at least $642 million, or more than 9 percent, in its 2002 financial statements.

The SEC and U.S. Attorney’s Office have requested scores of documents from the pension system to date relating to everything from Manager’s Proposal 2 and the pension system’s accounting methods to handwriting samples of staff members and payroll information of former board members.

The SEC specifically measures an entity’s level of cooperation when levying fines and sanctions in enforcement actions. One of its core requests as part of its cooperation guidelines is the waiver of the attorney-client privilege.

City officials have been scolded for their lack of cooperation in the past, and there has been concern that the pension board’s refusal to hand over documents would impact the city negatively in dealing with the commission. In the past, even entities that have eventually cooperated with the commission have been punished for their initial failure.

Also on Tuesday, the pension board voted to establish its own independent audit committee to investigate allegations of wrongdoing specific to the pension system.

Navigant Consulting, Inc. was hired to fill the role of the audit committee. Such committees have become common for troubled organizations since the passage of the Sarbanes-Oxley Act. The act tightened accounting and financial reporting standards following a wave of corporate scandals that surfaced beginning in 2001.

The contract calls for a $100,000 retainer and consultants will be paid between $225 and $675 an hour.

The city’s audit committee currently charges about $800,000 a month and is headed by former SEC chairman Arthur Levitt, who charges $900 an hour.

The pension board also voted to order its legal counsel to fight any attempt by the City Council to remove board members. Councilwoman Donna Frye has attempted to have Preovolos removed, alleging he has failed his basic fiduciary duties.

The matter is slated for council consideration when members return from legislative recess Tuesday. Aguirre has advised the council to install seven new appointees.

Please contact Andrew Donohue directly at

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