Wednesday, Aug. 9, 2006 | Arthur Levitt, the former Securities and Exchange Commission chief, predicted a new beginning for the much-maligned city of San Diego. The city, he said, “can learn from its mistakes and it can chart a rebirth to bring back people’s confidence in its government.”
What won’t bring it back, according to the audit committee, is Mayor Jerry Sanders’ plan to borrow more than a half a billion dollars to manage the city’s $1.4 billion pension deficit.
Levitt’s critique of the centerpiece of Sanders’ financial recovery plan – he called it a “quick fix” – was just one in a vast list of recommendations offered by his team of consultants, known as the audit committee, on the day they released their long-awaited report into city finances.
One of the key recommendations: the appointment of a monitor to oversee the mayor and City Council’s reform efforts because the city has, time and again, ignored good advice for fixing its fiscal problem. The monitor would periodically report to the public and governmental agencies regarding the progress of the reform efforts.
“By this point, in the face of several pending governmental investigations, there is little reason to have confidence that the City can reform itself,” the report states.
As a whole, Levitt said, “city government does not yet seem prepared to face up to its financial reality.”
The monitor proposal is one of 54 measures the audit committee consultants from Kroll Inc. suggested to the embattled city government, which has been banished from financial markets over questions regarding the honesty of its financial reporting. Those recommendations will be considered at the Sept. 19 council meeting, Sanders said.
“In my judgment, San Diego’s problems simply are not economic, they’re political,” Levitt said.
April Boling, former chairwoman of the Pension Reform Committee, agreed that the city was, by and large, reluctant to make “tough” reforms that resulted from studies like her group’s report.
“My experience is that they generally implement the easy ones,” said Boling, who noted that the city continues to not fund a certain set of retirement benefits despite the panel’s suggestion that it include that expense in its annual payment.
Additionally, the Kroll group offered other suggestions, some of which don’t fit in with the mayor’s strategy for fixing the city’s rocky finances or City Attorney Mike Aguirre’s efforts to rein in the city’s pension costs.
The city hired Kroll last February in an effort to satisfy KPMG, the auditing house that has withheld its blessing of the city’s books for the 2003 fiscal year. The Kroll report is seen as a milestone in the city’s efforts to return to the public bond markets, where it has been barred from seeking loans since 2004. Sanders is hoping to access the bond markets so the city can borrow money to build fire stations, roads and sewer lines, and to implement his pension bond plan.
Kroll Challenges Strategies of Sanders, Aguirre
Some of Kroll’s suggestions countered stances that Sanders favors, such as holding the line on taxes, borrowing money to pay down the pension deficit, and combining the duties of preparing financial disclosures and testing their accuracy within the City Auditor’s Office.
During his campaign for mayor last year, Sanders ruled out tax increases as a solution to the city’s mounting costs for pensions, retiree health care, and police and fire staffing and equipment. Kroll said the city should present residents with the realities of the costs associated with running a big city, hinting at the possibility of a tax increase.
“We believe that, sooner or later, you’re going to have to go back to the citizens and talk to them about what they need to pay for,” Turner said.
When asked if the consultants were advocating tax hikes, Levitt said they were likely part of a larger balancing act that had to take place.
“There are a limited number of solutions. Obviously, cuts on the one hand and taxes on the other hand are among those,” Levitt said.
In a press conference following Kroll’s presentation, Sanders said restoring the city’s financial standing “will be done through cuts, not revenue increases.”
Kroll also disagreed with Sanders’ plan to borrow money to pay down its $1.4 billion pension deficit.
“That’s an easy call, and that’s a quick fix. You need a lot more than a quick fix because that’s going to cost the taxpayers a lot of money, and that may even lure them into the feeling that, ‘You know, it’s not so bad after all,’” Levitt said.
The completion of the Kroll report was viewed by Sanders as a significant stepping stone toward allowing his to carry out his pension borrowing plan.
Sanders responded at his press conference by shrugging off Kroll’s criticism of the borrowing plan. But the mayor said that the he still supported the borrowing plan, as long as the bonds resulted in “big enough” savings for the city, referring to the amount the city saves in pension costs by issued the bonds at interest rates that fall below the 8-percent rate the retirement fund expects to earn on its investments.
Aguirre has also sought to curb its pension costs through Aguirre’s lawsuits, which attempt to roll back pension boosts given in 1996 and 2002. While conceding that illegal actions likely occurred, the Kroll consultants panned Aguirre’s legal push, arguing it was unlikely that the benefits would ever be rolled back.
“We’ve analyzed it and tried to examine your arguments and we concluded that a court can’t … forfeit the benefits,” said Benito Romano, the audit committee’s lawyer, to Aguirre.
The audit committee also refuted Aguirre’s assertion that he should be the chief legal advisor to the retirement system, an issue he has fought unsuccessfully for in the courts. Aguirre argues that an elected official that is not beholden to the retirement board’s wishes should be general counsel, while the Kroll consultants stated that the governance of the pension plan should be in the retirement system’s hands.
Aguirre accused the audit committee of producing a “political document” that protected council members who approved paying $20.3 million for the report – while rebuking the city attorney for being critical of the consultants. Aguirre is currently investigating Kroll for breaching its contract.
Also, Sanders has favored the placement of the City Auditor’s Office under his purview, a change that came along with the strong-mayor form of governance that made the mayor the city’s chief executive this January.
Sanders has argued that requiring the auditor, a key position in the checks and balances of the city’s process for disclosing its true financial health, to report to mayor’s chief financial officer provides much-needed accountability to the office.
Kroll disagreed, stating that the city’s practice of allowing the mayor to oversee the auditor, who is charged with inspecting the very financial records that his office produces, made for bad government. That reporting structure breaks a necessary system of checks and balances in the city’s financial disclosure process, the audit committee said.
The consultants recommended dividing the document preparation and auditing functions of the City Auditor’s Office. Preparing financial statements will be left up to the city comptroller, who would report to Chief Financial Officer Jay Goldstone under the Kroll proposal.
The auditor would be hired by a three-member panel – to be known as the permanent audit committee – comprised of one City Council member and two financial experts from outside the city government. Improperly influencing this panel would be a criminal offense, the report said.
The City Can’t be Trusted, Consultants Say
One reason the auditor must be removed from the mayor’s purview is because that supposedly watchdog position has ignored criticisms of the city’s dealings in the past, the consultants said.
“In some of the matters, there were whistleblowers and there wasn’t an independent voice that the whistleblower could go to,” audit committee member Lynn Turner said.
Separating the auditor for the city’s financial reporting structure was longstanding practice in many municipalities and had been recommended by the Government Finance Officers Association, the report said. It was no secret that the two functions of the office should be severed, the report said.
“It’s been recommended by your peers for a decade, yet you aren’t there,” Turner told the council.
The city’s refusal to establish an independent auditor, despite even the recent urgings by City Auditor John Torell himself, was just one of the many warning signs that city leaders missed over the years, the consultants said.
Also included in those overlooked words of caution, the consultants said, are former retirement trustee Diann Shipione’s warnings that the city’s apparent benefits-for-underfunding deal with the retirement board was improper, as well as a study showing that the city was improperly subsidizing big businesses by overcharging residents on the sewer bills, the report said. The city failed to act on each instance, the consultants said.
Because of these miscues, the audit committee said the citizens of San Diego cannot be guaranteed that the municipal officials will take the steps needed to revive the city’s financial standing.
In addition to changing the chain-of-command for disclosing city finances and appointing a monitor, the Kroll consultants also listed several other recommendations. They include:
- Drawing up a five-year financial plan to encourage long-term estimates of the city’s costs.
- Reducing the size of the retirement board to nine members in order to dilute the influence of pensioners – representative of retirees and city workers – over the fund they will benefit from.
- Reevaluating several of the Pension Reform Committee’s recommendations, such as fully funding every benefit that the retirement plan doles out and raising the retirement age for employees by seven years.
- Providing the City Council with a 14-day period for reviewing the financial disclosures that are attached to bond offerings before they are made available to investors on Wall Street.