Kroll Report Due in Two Weeks

Friday, July 28, 2006 | The long-awaited investigation into the city of San Diego’s financial dealings, hamstrung by lengthy delays and budget overruns, will be presented by consultants from Kroll Inc. in the next two weeks, Council President Scott Peters said Thursday.

Peters said at his weekly press briefing Thursday that consultant Troy Dahlberg told him by phone that representatives from his firm, Kroll Inc., and auditing firm KPMG will attend a City Council hearing on either Aug. 7 or Aug. 8 to deliver the report.

The report is seen as the first major step in restoring the city’s tarnished fiscal credibility, as officials hope its release will trigger the completion of three years of backlogged audits, restore its credit rating and allow it to borrow money on Wall Street for the first time in nearly two years.

“We’re hoping this starts us on our way to regain our footing on Wall Street,” Peters said.

Steven DeVetter, a partner at KPMG who is overseeing the firm’s work for San Diego, confirmed that a KPMG delegation will appear before the council that week. He would not comment on whether he has seen any part of the Kroll report.

Calls placed to Kroll consultants – who also refer to themselves as the audit committee – were not returned Thursday afternoon.

“If they come without a report then we’ll obviously have a response then, and it won’t be a pleasant response,” said Mayor Jerry Sanders, who earlier this month accused Kroll of holding a desperate city hostage.

Consultants from Kroll, who include two former Securities and Exchange Commission leaders, were hired in February 2005 on a $250,000 contract. The firm’s budget has ballooned to $20.3 million as its investigation has been beset by repeated delays caused by a lack of access to documents, technical glitches and a constantly widening scope.

The prolonged, costly engagement has made them a center of criticism for Sanders and City Attorney Mike Aguirre.

The report, among other things, is expected to pass judgment on whether top officials, including current and former elected officials, committed securities fraud. It will also analyze other allegations of illegal behavior and determine the impacts of that behavior on the city’s financial picture.

The city’s journey to have an independent investigation into its finances has taken numerous twists and turns since errors and omissions were discovered on the city’s financial disclosures to investors more than two-and-a-half years ago. Indeed, the release of the report itself has taken on a life of its own within the city’s drawn-out financial struggle.

Early on into the city’s disclosure troubles, the investigating Securities and Exchange Commission recommended that the city perform its own internal investigation into what went awry in the city’s financial disclosure process. Likewise, KPMG has refused to certify the city’s 2003 financial statements until allegations of wrongdoing at City Hall were independently examined.

The city first hired law firm Vinson & Elkins to complete the investigation, but the company bowed out last year after charging the city $6.3 million and publishing two investigative reports. Both reports were rejected by KPMG and the SEC for their lack of independence.

KPMG said the firm’s work was an advocacy document for the city rather than the “warts and all” probe it promised. Aguirre also released a slew of interim reports that accused past and current city officials of securities fraud, but those officials shrugged them off as politically motivated exaggerations.

KPMG was left standing with a series of damning reports from Aguirre and a comparatively innocuous report by Vinson & Elkins. Kroll was hired to settle the facts surrounding the city’s past dealings.

The firm has racked up a growing throng of critics who say the audit committee has spent its time politicking with the SEC and the editorial board of a local newspaper instead of working on an independent document that will satisfy the auditors. The head of the audit committee, former SEC Chairman Arthur Levitt, is paid $900 an hour for his efforts.

The mayor has vowed to publicly ridicule the firm in the national media and in front of Congress; Aguirre says he is preparing to seek damages from Kroll in court.

The consultants’ report could, at best, set off a chain of events that would lead the city back to the good graces of Wall Street as early as January. At worst, the report could flop, serving as another letdown for a city government that has continued to invest time and money into clearing its name with federal regulators and the public credit markets.

“The ball is in their court now to have to perform. We’ll have to keep and open mind to see what it looks like,” Aguirre said. “If it’s a good report, I’ll say it’s a good report. If not, I’ll say it’s not.”

Without access to the public markets, the city has been unable to borrow money for nearly two years for much-needed infrastructure projects and its cash-strapped pension fund.

The city’s financial honchos anticipate that KPMG will release the 2003 audit one month after the release of the Kroll report. The 2004 audit, which is being performed by a separate auditing firm, is slated to then be released three weeks after that. The audits for 2005 will be released 90 days later.

The city’s Chief Financial Officer Jay Goldstone said he expects credit rating firm Standard & Poor’s to restore the city’s rating within four weeks of the 2004 audit. The rating outfit immediately killed the city’s ability to borrow publicly after KPMG announced that it was withholding the 2003 audits.

After regaining a credit rating, it would take another 60 days for any city of San Diego bond to become available to investors.

Some believe that the retirement system’s long-withheld audits of the pension plan’s 2004 and 2005 financial statements may also play a role in when the city returns to the bond markets but the Mayor’s Office has played that notion off.

Given that all goes well with the audits, the city could be borrowing money from the public bond markets by January.

Sanders is hoping to access the markets by the end of the fiscal year in order to borrow $574 million in pension obligation bonds. The city also plans to borrow money in order to construct fire stations, sewer lines and roads.

The council goes on a four-week recess after the Aug. 8 council hearing.

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