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Wednesday, January 18, 2006 | The City Council authorized an additional $10 million Tuesday for the private consultants preparing an investigation into allegations of wrongdoing at City Hall, further extending a two-year-old probe that has engaged a long list of consultants and cost the cash-strapped city tens of millions of dollars.
The allocation allows consultants from Kroll Inc. to continue an investigation that is vital to the city’s financial restoration, but that has been mired by delays, cost overruns and other problems.
The money is slated to come from $20 million in unexpected property tax revenue reaped by the city in a year in which it also had to cut basic services to deal with a deepening pension deficit and the additional costs of legal and consultant fees tied to investigations into its pension system and wastewater department.
“I don’t think any of us are happy with the way the events have unfolded but at the end of the day this is a business decision that I feel compelled to make considering the circumstances,” said Mayor Jerry Sanders.
The city’s outside auditors, KPMG, have refused to certify the long-delayed audit of the 2003 financial statement absent an independent investigation into alleged illegal acts by city officials. The audit has been suspended because of questions surrounding the veracity of the city’s financial disclosures to investors.
Without the audit, the city’s credit rating will remain frozen, as will its access to Wall Street and the cash needed for vital infrastructure projects.
The council approved the new budget for Kroll, which is known as the audit committee, by a vote of 5-to-1, with Councilwoman Donna Frye the lone dissenter. The vote brings the audit committee’s total budget to $16.2 million since it was retained last February.
A number of council members and Sanders said they had no other option but to continue with the audit committee despite the costs and delays, as KPMG has said it is the only route to releasing the 2003 audit. Councilwoman Toni Atkins said Securities and Exchange Commission officials told her their investigation into the city’s financial disclosures would last another two-to-three years absent the Kroll report.
“Yes, we’re over a barrel. But that’s where we are,” Councilman Tony Young said.
Consultants from Kroll were brought in last February after a city-hired law firm, Vinson & Elkins, unsuccessfully undertook a similar investigation. Hired in February 2004, the law firm released two reports that were ultimately rejected by KPMG and SEC for their lack of independence. The firm billed the city more than $6 million and stepped down in August.
The Justice Department and District Attorney’s Office have also brought criminal charges against pension officials and their investigations are said to be ongoing.
The Kroll investigation has hit a number of snags, as technical glitches and other problems forced the group to push back their December deadline and ask last week for an additional $13.3 million.
Officials said they hope Tuesday’s allocation is the last one needed to complete the delayed investigation, which is necessary to restoring the city’s tarnished credit and its access to Wall Street for vital capital. However, that hope has accompanied similar funding hearings dating back to the hiring of Kroll in February.
In fact, because the council only allocated $10 million of the $13.3 requested, it is possible that the audit committee will again return to chambers for more funding.
The audit committee’s tentative deadline for completion has been pushed back numerous times and is now May.
“My gut instincts tell me we are going to have this conversation again and again and again,” Frye said.
In the wake of Vinson & Elkins’ independence problems, audit committee officials have repeatedly stressed their need for independence. They have said that any desire city officials have to see detailed billing, a drop-dead timeline or a concrete budget would infringe on that independence.
Frye said she couldn’t support spending money when she had no idea where it would go. She also said there was no guarantee that the investigation would even result in the release of the audit.
Benito Romano, an attorney with the audit committee, said an investigation can’t be perfectly forecasted because important information can arise at any moment.
“It’s an investigation, we’re not manufacturing widgets.”
Sanders said he asked for only $10 million of the $13.3 million request on the hopes the smaller budget would force he and the audit committee to complete the investigation under budget.
The decision was almost postponed Tuesday when the City Attorney’s Office couldn’t offer a definite opinion on whether the city could use money from a number of its different funds to make the $10 million payment. The mayor had originally proposed taking $7 million from the city’s day-to-day budget and the remaining $3 million from enterprise funds such as water and wastewater. However, the absence of an opinion the council allocated all $10 million directly from the day-to-day budget.
The investigations focus on allegations of illegal behavior by city officials in the financing of the pension system, which is currently saddled with a deficit that’s estimated to be approaching $2 billion. Additionally, officials allegedly failed to properly account for the pension deficit and other potential city liabilities.
Aguirre also released a report last year that found that city officials failed to disclose that a rate system in Metropolitan Wastewater Department left the city open to $300 million in liabilities. The system was found to have overcharged residential users to the benefit of large industrial users. The audit committee is also investigating the issue.
Please contact Andrew Donohue at