The Morning Report
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Saturday, October 22, 2005 | Two scenarios emerged Friday under which the long-awaited independent investigation into the city of San Diego’s troubled finances would not be finished by its anticipated December deadline.
Officials with the city’s pension board said at their monthly meeting that they were privy to information that the vital report – the lack of which has virtually paralyzed the city for several months – would not come out until at least January.
The statements raised the specter that the myriad investigators and auditors called in to straighten San Diego’s financial mess could be waiting for someone else to play their cards first.
“There is an interesting dynamic of ‘a race to be last,’” said Frederick Reish, an attorney for the pension board. “It became apparent just within the last 30 days or so that there was a possibility that a strategy would develop … where everybody wanted to go last.”
However, also Friday, the audit committee unexpectedly postponed a scheduled appearance Monday in front of the City Council. Officials said technical problems accessing the e-mail archives of current and former council members and top aides have forced the committee to postpone their monthly update for a week.
The audit committee asked for the extra time to determine if the technical problem would affect their December deadline. For now, committee officials believe they can still finish their report by the end of the year.
During a Friday meeting, lawyers and officials of the San Diego City Employees’ Retirement System said that they had learned that Kroll Inc., which staffs the audit committee, would not be publishing any report until after the pension fund’s own investigators had completed a similar project – a goal that will not be reached until at least January.
The audit committee report is considered crucial for the city, which is unable to enter the bond market until after it has produced an audit of its finances from as far back as fiscal year 2003. And the auditors working on that have said they will not publish anything until Kroll completes its investigation.
Without access to the bond markets, the city has been forced to delay vital infrastructure projects and it is unable to refinance costly past loans.
But countless delays have plagued the effort to produce the audit and the city’s pension board has found itself in the middle of the controversy the much of the time. Most recently, Kroll and the city’s retirement system were at odds for several months while the firm pushed the pension board to release several thousand confidential documents.
Pension board President Peter Preovolos told his colleagues and the public Friday that a Kroll representative had told him the firm would not finish its work as planned by the end of the year. Preovolos said Kroll Partner Troy Dahlberg had read him a letter that made that clear.
“His letter makes no bones about it – that they will not meet the promised deadline of their report,” Preovolos said.
Reish, the pension attorney, said he had also concluded that Kroll would be delaying their investigation until after the board finished one of its own.
In September, the board of administration of the retirement system hired its own audit committee – the firm Navigant – to complete its own investigation of everything the board did between 1995 and 2002. The work is similar to what the city’s audit committee is being asked to do.
Reish said he had witnessed conversations between Kroll and Navigant that indicated Kroll was reluctant to publish the vital city report until Navigant finished the one on the retirement system.
“The tenor of the conversation was the Kroll doesn’t want to issue its report until well after Navigant has completed its,” Reish said.
But Dahlberg said that was not correct.
“We have always consistently said we will get our report done when we have finished a complete and thorough investigation,” Dahlberg said.
Benito Romano, an attorney for the city audit committee, said that as long as the audit committee is granted unfettered access to pension documents and other information, it will be able to complete its work regardless of Navigant’s completion.
“So much of our investigation turns on pension related matters, it would be something that we couldn’t investigate accurately without (access to) all the information,” he said.
The 60,000 pages of documents turned over by the pension board to the audit committee last month after a federal court order are considered only the beginning of the pension board’s cooperation with the audit committee, officials have said. Additional requests for documents have been filed and the audit committee is waiting to see what exactly what the pension board will ask Navigant to do in its investigation, Romano said.
“But who knows what is going to happen,” he said.
City Manager Lamont Ewell said he had heard nothing similar to Preovolos’ statement.
“I was with members of the audit committee yesterday and today and nothing has been shared with me like that,” he said.
Also on Friday, the audit committee sent a memo to the City Council seeking to postpone their monthly update report that is scheduled for Monday afternoon’s council hearing.
“Our request is due to additional time needed in order to assess and attempt to resolve technical problems we are encountering in our efforts to gain access to e-mails on the GroupWise system,” the memo states.
GroupWise is the city’s e-mail system.
Last month, the audit committee informed the council that they would begin reviewing the hard drives and e-mail archives of 30 to 40 current and former council members and top aides as part of their investigation.
Romano said the access to these e-mail archives is being hindered by technical problems, not cooperation problems.
Dahlberg said that if they do not resolve the email problem it could delay publication of the report on the entire investigation. Kroll representatives said they’ll take the next week to decide if the technical problem is serious enough to cause such a delay.
The audit committee announced in September that its predecessor, law firm Vinson & Elkins, failed to review 57,000 of the 160,000 documents related to its investigation. However, at the time, officials said they hoped that technical problem wouldn’t delay the release of their vital report.
Vinson & Elkins was paid $6 million by the city in their 18-month tenure and produced two investigative reports that were dismissed by auditors for their lack of independence. Kroll was hired to pick up its work.
In addition to receiving the report Nov. 1, the council will be asked to approve an additional $1.75 million for Kroll Inc., the risk management firm staffing the audit committee. The council will also be asked to allocate an additional $1.25 million to Willkie, Farr & Gallagher, the audit committee’s law firm.
The city has spent nearly $20 million on consultants and lawyers in connection with its political and financial crisis, which is highlighted by a pension deficit of more than $1.4 billion and ongoing investigations into city politics and finances by the Justice Department and the Securities and Exchange Commission.
On Monday, the council is scheduled to allocate a total of $425,000 toward additional legal bills for current and former politicians in connection with federal investigations.
Everyone except Madaffer and Inzunza requested a $50,000 increase.
Madaffer’s request is for $85,000. The councilman’s attorney has been actively waging a public relations campaign in recent weeks, scheduling meetings with local reporters and sending a letter defending his clients’ actions to the press.
Inzunza’s request is for $100,000; it is the first time he has sought legal representation in connection with these investigations, whereas his colleagues already had retained representation.
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