Tuesday, Aug. 8, 2006 – 10:37 a.m. | The city of San Diego fell prey to the same brand of corrupt financial management and reporting that beset the poster children of corporate malfeasance such as Enron, WorldCom and others, according to a long-awaited report into city finances released today.
The report by private consultants from Kroll Inc. found that city and pension officials disregarded laws ensuring good governance and financial soundness throughout the better part of a decade in approving two pension funding schemes, violating the Clean Water Act and maintaining a user-fee structure that caused residents to subsidize large industrial users of the wastewater system in order to create a “business-friendly environment.”
The consultants, including two top former Securities and Exchange Commission officials, found that eight former top city officials likely committed securities fraud in acting with “wrongful intent” in the release of misleading financial information to investors. None of the officials are currently with the city.
They are: former Deputy City Manager Patricia Frazier, former City Treasurer Mary Vattimo, former Auditor and Comptroller Ed Ryan, former Assistant Auditor and Comptroller Terri Webster, former retirement administrator Larry Grissom, former Utilities Finance Administrator Dennis Kahlie, former wastewater Deputy Director William Hanley and former Deputy City Attorney Kelly Salt.
The report also found that former Mayor Dick Murphy, current City Council members Toni Atkins, Brian Maienschein, Jim Madaffer, Scott Peters and former Councilman Ralph Inzunza “deliberately concealed from its citizens” the city’s knowing violation of the Clean Water Act, a violation that “resulted in San Diego’s residents largely footing the sewage bill for the industrial class.”
“These facts demonstrate that Mayor Murphy and Council members, Atkins Maienschein, Madaffer, Inzunza, and Peters knowingly and improperly caused the city to violate federal and state law, and the conditions of its grants and loans,” the report states.
Murphy, Atkins, Inzunza, Madaffer, Maienschein, Peters, and Councilwoman Donna Frye and former Councilmen George Stevens and Byron Wear were also found by the consultants to have been negligent in fulfilling their duties to ensure the accurate disclosure of financial information to investors.
There are essentially three levels of securities fraud, spanning from negligent to reckless to intentional. Responsible parties can be ordered to stop engaging in the practice that was found illegal, be forced to step down from their current position as an officer or director at the entity where the wrongdoing occurred, or barred from ever serving as an officer or director of an organization that issues securities publicly.
The SEC and the Justice Department have been investigating city finances since February 2004.
The Kroll report would only serve as a guidepost to what the SEC could do – the SEC would have to bring enforcement actions on its own and then successfully reach settlement or prove its accusations in court.
The city’s outside auditors have estimated that the city issued $2.3 billion in bonds based on faulty financial disclosures, and the city has been barred from borrowing money in public markets since fall 2004, severely hampering its ability to manage a $1.4 billion pension deficit and its compliance with federal health regulations for water and wastewater systems.
“It appears to us that no one in city government viewed himself or herself as accountable for the accuracy of the city’s financial disclosures,” said Arthur Levitt, head of the consultants’ audit committee and former SEC chairman.
The report is the first step in the city issuing three years of backlogged audits, regaining its tarnished credit rating and returning to Wall Street.
The consultants issued statements of optimism regarding the city’s financial future, praising council members for having the courage to commission such an investigation. At the same time, the consultants questioned whether city leaders fully acknowledged the depth of their problems and were ready to reform.
“City government does not appear yet ready to face up to fiscal reality,” he said.
Because of this, the consultants recommended that the city appoint an overseer to monitor its reform efforts and periodically report the city’s progress to its residents, government regulators and law enforcement agencies.
“Even today, there are serious indications that the City government has not completely come to grips with the depth of its problems and the need for fundamental reform. More than two years after the fact, the City still has not found a way to successfully perform such fundamental bookkeeping tasks as reconciling the balance in its cash accounts with the cash balance on its financial statements for the fiscal year 2003,” the report states.
Levitt also expressed serious misgivings about Mayor Jerry Sanders’ plan to issue $574 million in pension obligation bonds to manage the pension debt, saying that doing so does not address the underlying ills of the system and would only push the burdens to future generations.
Lynn Turner, former chief accountant at the SEC, said that the city now had a second chance.
“But you need to change it,” he said to the council. “You need to change it from being Enron-by-the-Sea to that emerald by the sea that it once was and hopefully will be again one day soon.”
He said the City Council must pay its full pension bills each year and present to residents what it will take to fund the obligations that council members had made to employees and others.
Bill Morris, a representative from KPMG, offered positive statements regarding the Kroll report, but didn’t guarantee it would satisfy the auditor’s needs in order to issue the long-delayed fiscal year 2003 audit.