The Morning Report
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Wednesday, September 28, 2005 | The San Diego City Council unanimously agreed to start settling with the Securities and Exchange Commission on Tuesday in hopes of more quickly concluding one of the various investigations into the city’s financial practices.
While not approving the exact settlement proposal City Attorney Mike Aguirre laid out for the public last week, the council adopted his idea to settle with the SEC on behalf of the city government.
Aguirre’s proposed settlement, known as a consent decree, would separate the city from city officials in the investigation.
The city of San Diego would admit to misstatements it made in its financial disclosures while reserving judgment on the culpability of specific individuals. The city attorney is hoping that the city’s admission to faulty disclosure practices, as well as its demonstration that it is fixing the errors, would protect the city from fines and penalties.
Also Monday, San Diego City Employees’ Retirement System administrator Larry Grissom said the consultants that comprise the city’s outside audit committee on Tuesday viewed eight documents that were being sought earlier this week. The investigators determined the withheld documents were not relevant to their probe, Grissom said.
John Hartigan, the outside attorney representing the city before the SEC, said he thought the city could win points for the steps it has taken toward fixing its disclosure problems, but wasn’t so sure that the city would walk away completely unscathed after offering up a settlement.
“When looking at municipalities, the SEC’s reaction has traditionally been that it has initiated action against the municipalities and it has been a rare circumstance where they have considered a [consent decree],” said Hartigan, an attorney for Morgan, Lewis and Bockius.
He said the city’s efforts to correct its mistakes will be viewed favorably by the SEC. He referenced the City Council’s waiver of attorney-client privilege nine times to make pertinent documents accessible to investigators, the hiring of Kroll Inc. to serve as its independent audit committee, the passage of a strict disclosure ordinance and KPMG’s enlistment to examine and certify its 2003 financial statements.
“The actions by the city have been commendable,” Hartigan said.
For 19 months, the SEC has been probing the city’s disclosures practices after errors and omissions were found on financial statements and bond offerings that related to the city’s troubled pension system and wastewater operations.
The council decided to lay the groundwork for a settlement and will have to approve any deal Aguirre and Hartigan hammer out with the federal agency before a consent decree is finalized.
Aguirre said he was enthused that the council decided to proceed with a settlement, which is the centerpiece of his 15-point plan to resolve the city’s legal and financial woes. The City Council as a whole has rarely endorsed the outspoken city attorney’s assertions and actions.
“The 27th of September was the day the dam broke,” Aguirre said. “Today marks a major turning point in this long, disastrous episode in San Diego history.”
In addition to the SEC probe, the city has a myriad of other obstacles to overcome. The U.S. Attorney’s Office, FBI and District Attorney’s Office have launched investigations into the city’s pension dealings, which have resulted in a funding shortfall of at least $1.37 billion for the retirement plan. The city is awaiting its audits for fiscal years 2003, 2004 and 2005, and until those are certified the government is essentially barred from the public bond markets.
The day did not end on a happy note for everyone.
Aguirre did express dismay at news that the city has decided to hire PricewaterhouseCoopers to help it with its effort to study how raising $600 million for the pension fund over the next three years will impact the fund’s health.
The city attorney said PricewaterhouseCoopers cannot be considered independent if it answers to the city for the pension solutions project as well as the audit committee, which announced Monday it will work with the financial services firm to check whether the pension system’s actuarial assumptions were correct.
The audit committee’s assignment is supposed to be independent of the city, Aguirre said.
“Here we go again,” he said. The city attorney was referring to auditor KPMG’s earlier rejection of an investigation by Vinson & Elkins for its lack of independence. He has also accused the audit committee of not being independent because the city pays them $800,000 per month.
PricewaterhouseCoopers was selected to replace Towers Perrin, which resigned from the pension solutions assignment Monday, Deputy City Manager Lisa Irvine said.
Towers Perrin did not wish to continue working for the city after it was asked to extend actuarial assumptions for years past its original projections at the request of elected officials, she said. Irvine said that such projections leave a high level of certainty and that the firm was not comfortable with performing those.
“They preferred not to do that kind of work,” she said.
Irvine said the issue of the firm’s independence was not an issue.
“Their priority is to work with the audit committee,” Irvine said.
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