The Morning Report
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Friday, April 14, 2006 | On the same day Mayor Jerry Sanders continued to slowly roll out a budget whose success will be judged in the short-term on the city’s ability to again borrow money, City Attorney Mike Aguirre on Thursday released a report recommending that the consultants responsible for that effort be fired and promptly sued.
The new mayor and confrontational city attorney have, to date, maintained a public image of cooperation in Sanders’ first four months in office – defying the predictions of many observers and creating an unlikely partnership as the city attempts to recapture financial and political stability.
The events of the week, and indeed the day Thursday, could prove to be the most public test yet of the young political relationship as the mayor awaits the city attorney’s opinion on his complex borrowing plan and the city attorney renewed his public campaign to sack the controversial consultants who have pledged to return the city to Wall Street’s good graces.
Sanders has spent the week issuing sneak peeks at different compartments of the fiscal year 2007 budget he plans to present as a full package Friday. On Thursday, the mayor highlighted the neglected roofing, street and other infrastructure needs he would fund with the $20 million he plans to dedicate to the city’s estimated $372.5 million backlog of deferred maintenance.
He also offered a long list of needs that will go unmet in his budget, such as infrastructure to accommodate San Diego’s growth, emergency reserves and the Fire Department as a whole.
That list could grow longer if Sanders is unable to complete his proposed borrowing deal in 2007, as $11 million of the $20 million he plans to dedicate to deferred maintenance is freed up from the city’s annual pension bill by the planned injection of $300 million of loans into the pension system.
Getting that bond deal through will likely require both legal authorization and the end of what has become a long and costly experience for the city: releasing years of financial statements that have been on hold because of errors and omissions found in prior years’ statements.
The city attorney has said he will issue a written legal and financial analysis of the mayor’s plan, but hasn’t indicated when.
At a press conference Thursday, Sanders said it was premature to say what he would do if Aguirre were to opine against his bonding plan.
“I understand he has some ideas about the budget, but I’m the one who’s been selected by the public to bring this budget forward,” Sanders said. “Certainly we will work closely with Mike’s office, we certainly listen closely to all of his input. I don’t disregard his advice without thinking about it very carefully. We’re not at that point.”
Kroll Inc. was hired 14 months ago to be the ultimate group of consultants that would finally work to get the city’s audits released, the key lynchpin in restoring San Diego’s tarnished credit rating and again making the city attractive to investors in public finance markets.
The group dubbed itself the “audit committee” upon being hired and is led by two top former Securities and Exchange Commission officials, but its investigation into allegations of wrongdoing in connection with city finances has been dogged from the start by a number of missed deadlines and increasingly costly bills.
On Thursday, Aguirre released the eighth in his series of interim reports into city finances and other related endeavors.
– Failing to follow the guidelines for audit committees as recommended by the Government Finance Officers Association, such as the recommendation that an audit committee release an annual report on its activities.
– Improperly interacting with city officials, the editorial board of The San Diego Union-Tribune and the firm conducting the city’s 2003 audit, KPMG. The city attorney alleges that the consultants, led by former SEC Chairman Arthur Levitt, compromised their independence by working too closely with city officials under investigation and by working outside of their authorized scope of work in meeting with the editorial board of a local newspaper and publicly supporting KPMG after it settled a massive fraud case of its own with the Justice Department.
– Breached the city’s internal controls by not submitting detailed billing. “The lack of accurate billing has rendered the City unable to properly monitor the engagements,” the report states.
The audit committee has charged the city $16.2 million for its investigation. It was announced this week that its deadline would again be pushed back, this time from May to June, and it would need another $3 million.
In the report, Aguirre advises the City Council and the mayor to terminate the audit committee and initiate legal action against it and the law firm that preceded it, Vinson & Elkins.
“This financial crisis took a decade to create and it’s going to take a decade to get out of, and we need to start moving in the right direction and we’re not doing that going further down into the dark abyss with Kroll,” Aguirre said.
Sanders relationship with Kroll has been chilly from the start, but one of the first decisions of his tenure was to recommend that the City Council allocate $10 million to the consultants, saying it was the only real option to restore the city’s financial credibility.
The city attorney said Thursday that he sympathized with the fact that the mayor inherited Kroll when he took office last December and hinted that he tried to support the decision.
Although Aguirre has advocated sacking the audit committee, what to do without them has always been a question without a definitive answer, as the auditor of the city’s fiscal year 2003 financial statements, the accounting firm KPMG has always demanded an independent investigation into allegations of wrongdoing.
In a separate press conference Thursday, Aguirre recommended that the city skip releasing its 2003 financial statement altogether and terminate KPMG as well.
The audit of the city’s fiscal year 2003 financial statements has been on hold for more than two years as auditors have attempted to verify the city’s listed assets and liabilities, and KPMG has stated the need for an independent investigation into the potential financial impacts of alleged wrongdoing by city officials.
Aguirre wants the city to solely concentrate on the 2004 and 2005 financial statements, which are being audited by a different firm, Macias & Gini. Financial statements are documents provided to potential investors to gauge the city’s financial health and without professional certified statements, the city has been unable to borrow money at competitive rates publicly for more than two years. It is a problem that has complicated or stalled a number of basic infrastructure and, for example, the city’s compliance with water health regulations.
The city attorney couldn’t say if Macias & Gini would certify the audits absent an investigation of the sort being conducted by Kroll. He said it’s not unprecedented for a private corporation under extreme circumstances to skip a year in its financial reporting.
“It’s not the best option. But I think it’s the most viable option considering what we are facing,” Aguirre said.
The city attorney declared the need for an investigation into wrongdoing unnecessary for the city’s audits, as it has now admitted to the prior illegal acts of former employees and replaced previous city officials responsible for the city’s problems.
An audit committee official didn’t return a phone call seeking comment. Sanders spokesman Fred Sainz didn’t comment on the recommendation that Kroll be fired and sued.
Please contact Andrew Donohue at