Wednesday, April 19, 2006 | At the same time Mayor Jerry Sanders relies on a speedy reentry to the municipal bond markets to realize his financial recovery plan, city and pension officials say they’re uncertain which of the many firms working on pending audits and probes will be the next to move the city toward that goal.
The release of a January investigation into the retirement system’s past dealings was thought to be the first in a series of dominos to fall in the city’s long-stalled return to Wall Street. But three months after Navigant Consulting, Inc. issued its findings, it’s unclear which of the many auditors and consultants involved will make the next move.
Indeed, a number of the firms involved appear to be waiting on each other to finish, a situation that has done little to straighten out the city’s crumpled financial picture – one that has been complicated repeatedly by delays to the investigations and audits that are necessary to the city’s financial future, and Sanders’ financial recovery plan.
The mayor’s plan relies heavily on borrowing money to pay down the city’s $1.4 billion pension deficit. The move also touches the coming years’ budget, as cash that otherwise would have gone to the pension system is slated to instead boost the government’s emergency reserves and attend to long-neglected public works projects.
If all goes according to the estimates of the Mayor’s Office, the city of San Diego will be able to borrow on the public markets before the end of the calendar year.
The plan hinges on the city’s ability to return to Wall Street. To do so, it must complete investigations, issue three years of backlogged audits and regain a credit rating that’s been repeatedly slashed or suspended in the last two years.
And to do all that, the city also needs audits from the San Diego City Employees’ Retirement System. Officials there have their own set of delayed audits, and they say they don’t have a firm idea when those will be released.
“I never felt like I was being held hostage until now,” said Peter Preovolos, the pension board president. “It’s critical because, of course, the city needs [its audits] and they need ours as well.”
The audits will, for the first time in years, provide investors on Wall Street verified reports on the city’s true fiscal health.
As some city officials continue to groan about having to fund the multimillion-dollar investigation by the Kroll audit committee – which KPMG says is required before it certifies the city’s 2003 audits – the overdue audit of SDCERS also threatens to hold up the line of dominoes that must fall before the city returns to Wall Street.
Similar to KPMG’s statement that it needed Kroll’s investigation in hand before it completes its work, pension officials speculated that Brown Armstrong, the pension system’s auditor, was waiting for Navigant’s investigation to complete before it would bless the pension system’s books.
The pension system numbers that Brown Armstrong validates will be rolled into the city’s financial statements before auditors can certify the city’s books.
And officials from the city and the pension system say they believe that even KPMG, who is working on the city’s 2003 books, will want to know the true numbers at the pension system for 2004 because of further question surrounding the pension system’s 2003 audit.
Auditors are usually a tight-lipped bunch, and there’s no sign of when Brown Armstrong will conclude its study of the system’s finances.
It’s been three months since Navigant reported its findings, but Brown Armstrong hasn’t briefed the SDCERS board about the status of the pension plan’s 2004 and 2005 audits.
Preovolos and Assistant SDCERS Administrator Bob Wilson said the firm was asked to come speak to the board at Friday’s meeting, but Brown Armstrong turned down the request.
Preovolos said he has not heard from Brown Armstrong about what other reports they wanted to review before certifying the SDCERS audits, but said he thought it would want to review Kroll’s work.
“Brown Armstrong isn’t going to release anything until they see the Kroll report and KPMG is going to want to see Brown Armstrong’s financials. That’s kind of the way I see it,” Preovolos said.
Past communications from Brown Armstrong to the retirement board indicate that it is a bit squeamish about the SDCERS assignment. They stated in October that they would not release an unfettered opinion without the signatures of the individual retirement trustees to verify that the trustees stand behind the numbers.
Months earlier, they pointed to a laundry list of accounting problems employed by the retirement system.
Wilson said the staff has been working to satisfy the auditors’ requests for communication over the past few months, and said he hopes that Brown Armstrong will have everything they need from SDCERS staff after this week.
“When I’ve legitimately gotten the ball back in their court, I will propose to them a timetable and then we’ll see if that happens,” Wilson said.
Jay Goldstone, the mayor’s chief financial officer, estimated that KPMG would release the city’s 2003 audit one month after Kroll presents its reports. Within six weeks of that, auditors Macias Gini & Co. should be able to release the 2004 and 2005 audits, he estimated. Once the audits are updated, Standard & Poor’s, the financial rating house that suspended the city’s credit line, would likely complete its new review of the city within three to four weeks.
City officials have now said that Kroll’s report will be out in June after the consultants pushed again pushed back their deadline. Under that scenario, the restoration of the city’s credit rating would land in mid-October, using Goldstone’s estimate.
Goldstone said that once the market is accessed, it will likely take another 60 days to have a court validate the bond. Under those same assumptions, the city would be borrowing money by December.
It is still anybody’s guess when any of these reports were completed, he said. The cash that would be freed up by the mayor’s borrowing plan and used to pay for deferred maintenance and increase the city’s reserves would not be allocated to those areas until the city actually borrowed the money, Goldstone said.
“We’re not going to actually do that until we know,” he said.
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