Sanders Claims City ‘Hostage’ to Audit Committee

Tuesday, July 11, 2006 | Mayor Jerry Sanders issued a startlingly stern rebuke to the private consultants who have charged the city more than $20 million to conduct a sprawling investigation into city finances, threatening to testify before Congress, the national media and other mayors regarding “the ways in which I believe this profit making entity has taken advantage of a bad situation.”

“I don’t think it’s an exaggeration point to say they’re holding our city hostage,” reads a copy of the speech Sanders was scheduled to give to City Council on Monday.

The planned speech was temporarily postponed until Tuesday’s council meeting after City Attorney Mike Aguirre determined it hadn’t been properly noticed under the state’s open-meeting laws. But the comments, expected to be delivered Tuesday, reflect a marked shift in Sanders’ attitude toward the high-priced consultants hailed as San Diego’s financial saviors when they arrived in February 2005.

The remarks come as the consultants from Kroll Inc., who call themselves the audit committee, have suggested that their report could be further delayed until August.

Since taking office in December, Sanders has grudgingly supported Kroll Inc.’s work as it has repeatedly returned to the City Council to seek additional funding and has regularly pushed back the release date of its vital report. Sanders, whose office oversees Kroll’s contract, now joins City Attorney Mike Aguirre and Councilwoman Donna Frye as vocal critics of the consultants’ work.

“I have publicly rationalized their repeated delays,” Sanders’ statement reads. “It all stops today.”

In his prepared statement, Sanders essentially embraced the stance of Kroll’s harshest critics: that it has leveraged auditor’s desires for independence in order to run willy nilly over a desperate city. He also called on Congress to act before other municipalities are faced with the same fate.

“There is no reason that I can think of as to why a private corporation with a profit motive should be allowed to serve as an audit committee – or worse, as an investigation arm with no controls – for a government entity with limited resources,” Sanders’ statement reads.

The consultants, led by former Securities and Exchange Commission Chairman Arthur Levitt, were hired by former Mayor Dick Murphy and former City Manager Lamont Ewell to complete an independent investigation into allegations of wrongdoing in connection with the pension system and the city’s financial disclosure practices.

The investigation is necessary to satisfy the concerns of the city’s outside auditors in the midst of investigations into city finances by the Justice Department and the SEC. The SEC also wants to see the city complete an independent investigation into its past indiscretions and takes such reports into account when levying sanctions against entities.

Without the report, the outside auditors, KPMG, won’t bless the city’s delayed 2003 financial statements. Without the audited statements, the city cannot regain access to public finance markets – a right it lost when its credit rating was suspended in 2004.

The lack of access to affordable loans from Wall Street means the city remains unable to complete vital infrastructure projects such as mandatory sewer and water system upgrades and the construction of roads and fire stations.

That access is also crucial to Sanders’ financial recovery plan, as he hopes to borrow at least $574 million in the next two fiscal years in an attempt to tame the pension deficit. Without that power, a key part of his reform package would be stalled and the city would likely fall out of compliance with the terms of its labor contracts.

“The only power that I have over our current situation is the truth – to tell the whole unvarnished truth. So, I will use that power as freely as I must in the hopes that Kroll will understand that their delay is affecting the lives – and livelihoods of millions of people,” Sanders’ statement reads.

Calls to Kroll associates for comment weren’t returned as of press time. A message on the cell phone of Lynn Turner, a Kroll consultant and the SEC’s former chief accountant, stated that he was out of the office until July 20.

It was impossible to measure the practical impact of Sanders’ comments. The consultants have been unflinching in the face of criticism, claiming to have the support of both KPMG and the SEC. Despite Sanders’ comments, the city still is desperately in need of the report and Kroll associates claim to be close to wrapping up.

The City Council, which approves Kroll’s funding after hearing recommendations from the mayor, has been largely supportive of the consultants’ work.

Politically, it is likely to be a popular move, as the audit committee appears to have lost any public support they may have had months ago.

Since last fall, consultants with Kroll and their law firm, Willkie, Farr & Gallagher, have claimed to be within months of completing the report. They’ve claimed that technical glitches, a lack of access to certain documents and other delays have pushed back their deadline.

They’ve also repeatedly returned to the council for increased funding.

Kroll was originally retained for $250,000. That bill now tops $20 million at a time when city officials are scrapping for extra bucks to put toward retaining fleeing police officers, replenishing parched emergency reserves and solving multibillion-dollar deficits in employee pensions and retiree health care.

Consultants have repeatedly rebuffed attempts to hold them to deadlines or regular billing procedures, saying such confines would infringe on their independence. Such claims proved to be sensitive topics at City Hall, as two previous attempts at completing the investigation had been thwarted by a perceived lack of independence.

Those investigations were done by the law firm Vinson & Elkins at a cost of more than $6 million. The firm completed an investigation in September 2004, only to have the SEC and auditors say it lacked the proper independence. Another investigation by the firm completed last August resulted in the same finding.

“Kroll has repeatedly based its authority to improperly expand the scope of their investigation in an all-encompassing need for independence. That’s not right,” Sanders’ statement reads. “Independence does not exist in a vacuum – everything must have checks and balances to it.”

The report is expected to uncover no shocking new facts from the time period in question, but rather provide a legal and accounting analysis of potential securities fraud violations by city officials, potential criminal law violations and a number of other financial disclosure and accounting issues.

In his prepared comments, Sanders also put blame for the city’s situation on the Sarbanes-Oxley Act. The law, passed by Congress in the wake of corporate America’s accounting scandals, was the consultants’ inspiration in the creation of the city’s audit committee. They have also invoked the law when they have been questioned about their billing, saying that the law indicates their independence can’t be infringed upon.

Sanders called on Congress to change Sarbanes-Oxley.

“The imposition of Sarbanes Oxley on a municipal entity like ours is without parallel and needs to be rethought so that no other government entity has to suffer to the extent that our city has,” his remarks read.

Aguirre has repeatedly threatened to sue Kroll for breach of contract.

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