Memo: Investigation Likely Needs More $

Monday, January 30, 2006 | Less than two weeks after the City Council increased their budget by $10 million, the consultants conducting an investigation into allegations of wrongdoing at City Hall have notified Mayor Jerry Sanders and council members that the allocation might fall short by as much as $3.3 million.

Consultants from Kroll Inc. told the mayor and council members earlier this month that they would need as much as $13.3 million to complete the investigation that has been underway for nearly two years. However, the mayor requested that the group’s budget be increased by only $10 million – thereby creating the likely scenario that the consultants would have to return again to council chambers to petition for more funds.

The council approved the payments on Jan. 17 by a vote of 5-to-1, with Councilwoman Donna Frye casting the lone dissention. The move boosted Kroll’s expenditures to a total of $16.2 million in city funds for their investigation, which has been beset by technical and budget delays.

In a memo last week to Sanders and Council President Scott Peters, Kroll managing partner Troy Dahlberg confirmed that the council’s authorization was likely insufficient.

“Be advised, however, the authorized level of funding, based on our present best estimate, will very likely fall short of the funding required to complete the investigation by as much as approximately $3.3 million,” he wrote. The memo was copied to all council members.

The consultants, who refer to themselves as the audit committee, appeared surprised at the Jan. 17 council hearing that the mayor had asked for $10 million rather than the $10.3 million to $13.3 million estimate they had offered prior to the hearing. After the hearing, Sanders said he asked for only $10 million in an effort to cajole the consultants into completing the investigation under budget.

“We are just trying to make it clear that it appears to us that the funding amount was less than what was asked (for),” Dahlberg said in an interview.

Fred Sainz, spokesman for Sanders, said the memo from Dahlberg wasn’t a surprise.

“Kroll did apprise us at the time that they might be in need of additional funds,” he said. “The mayor, though, it is his intention to keep them within the scope of the $10 million that was authorized by the council and to [tell] them it is the best interest of the taxpayers to work within the budget approved by the City Council.”

Sainz added: “If we find that it might not be possible for them to do that, we will reconsider an additional funding request at the time.”

The costs of the Kroll investigation have become a sensitive topic in a city that has been forced to curtail its basic services to pay its ballooning pension bills and the legal and consultant fees associated with federal investigations into City Hall and a suspended credit rating.

However, officials are nearly unanimous in their belief that the Kroll investigation is mandatory to the city regaining its financial credibility. It cannot bond in the public finance markets for vital infrastructure projects until outside auditors bless the outstanding 2003, 2004 and 2005 financial statements, which have been delayed by errors and omissions found in the 2003 statement.

Outside auditors will not release the audits until the Kroll investigation is complete.

The Securities and Exchange Commission, Justice Department and District Attorney’s Office are all investigating City Hall and the latter two agencies have filed criminal charges against a total of eight officials tied to the pension system.

The city first hired law firm Vinson & Elkins in February 2004 to complete an independent investigation. However, the firm produced two reports, both of which were rejected by outside auditors and the SEC for their lack of independence.

Kroll was hired last February to reconcile differences between conclusions reached in the Vinson & Elkins reports and a number of investigative reports released by City Attorney Mike Aguirre. Officials from Kroll quickly deemed that neither party’s investigation would be sufficient and has undertaken its own.

The Kroll investigation has run into problems of its own, as glitches in its electronic documents database caused the group to miss its December deadline. The consultants now believe their report will be released sometime in late spring or summer.

One-time SEC Chairman Arthur Levitt is the political muscle behind the group of a dozen or more accountants and lawyers that comprise the audit committee. He earns $900 an hour for his work, which has included meetings with the editorial board of The San Diego Union-Tribune, a local newspaper.

The audit committee had essentially shut down its operation in November and December because it had run out of money. However, Levitt billed the city for 25.5 hours of work between Nov. 26 and Dec. 9, for a total of $22,950, according to copies of the latest Kroll invoices obtained by the Voice of San Diego.

Dahlberg said Levitt’s hours reflect the time he put in to educate Sanders and his chief operating officer Ronne Froman on the investigation after the mayor was elected in November. It also includes the time it took Levitt to prepare for the meetings and get back up to speed on the details of the investigation.

He said the meetings came at a time when the mayor was trying to assess whether or not he should continue with Kroll. Sanders ultimately chose to stick with Kroll.

Please contact Andrew Donohue at