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A Little Later Maybe?

In an extraordinary moment of clear thinking, the City Council decided on Tuesday not to blindly “vouch” for the draft, unaudited 2003 Comprehensive Annual Financial Report as the mayor had requested.

Each Councilmember seemed to have their own reasons for the “no” vote, some better than others. Frye had 40 unanswered questions about the numbers, and concluded the numbers part of the CAFR was not (yet) an accurate reflection of the city’s financial condition, even as of 2003. In an elegant understatement, Toni Atkins found it “somewhat illogical” to approve the draft CAFR after the Financial Operations Manager advised that even he could not provide assurance that the materials were complete and accurate.

Jim Madaffer said he would “not ever find [him]self in a situation to approve something that [he] didn’t have any hand in preparing.” He had earlier advised the mayor that he would expect the opportunity to question the persons creating the CAFR if he was to be asked to approve it.

Scott Peters seemed willing to vote yes for all the numbers but took exception to some of the text describing the history of the city’s financial collapse. There is a lot of this type of text in this CAFR, which is unusual in documents of this sort and it’s a bit harsh in spots regarding the action of former officials.

Madaffer wasn’t crazy about all the text either. Only Faulconer appeared good to go on the whole thing and seemed prepared to vote with the Mayor, but had to leave before the vote occurred. In the end, the council tepidly voted only to “receive” the CAFR, that being the next step up from voting to have a person with asbestos gloves put it in a lead box and leave it in the desert.

Everything Comes with a Blessing

As a result of the council’s rational vote on the draft CAFR, CFO Jay Goldstone, and Financial Operations Manager Greg Levin (who seems surprisingly capable and candid), will be responding to lots of questions and issues and getting more info back to the council. And, the good news from all this is that the next time the council sees this thing will be after the mayor has rolled out his five-year financial recovery plan which is set to be revealed shortly.

So, in the next round the council will have the benefit of being able to see the CAFR numbers in the context of the “financial fixes” (as the U-T likes to call them) that are planned by the Mayor. Why is this so important? Well, for example, if a council member is concerned about criticisms in the CAFR relating to the financial ‘backloading’ from MP-1, MP-2 and MP-3, they can be assured that the new five-year plan will completely discontinue those prior “backloading” practices – or they can find out why it’s OK to continue backloading now when it is so poorly remembered in the draft 2003 CAFR.

That would be helpful.

And, the abandoning of backloading would be an important assurance to them given current difficulties with the SEC and others. Beyond that, we will see the ‘cuts’ the Mayor will impose, and any plan for new revenues.

Won’t have to be looking for loose change in the cushions of the “vouches.” It will make the whole thing easier to read. And, at that point more sense might be made of the U-T’s Wednesday editorial …

‘Still Negligent’

The U-T editorial board used this headline to express its lack of appreciation for the council’s concerns re: the draft, unaudited CAFR. In a moment of obvious confusion, they describe the document the council reviewed as the city’s “certified audited financial reports,” which, of course, they were not.

But, good news again comes in the reality of this situation. The ed. board wonders aloud if the council will support the city’s numbers when it comes time for the city to “[re]enter the bond market” – and that’s a good point.

Well, by then, the City will actually have the final audited version of the 2003 CAFR from KPMG which the Mayor says will be out by Oct. 27 (this Friday) notwithstanding the council’s unwillingness to “vouch,” as well as access to the ’04, ’05, and ’06 versions, the city’s problems with the SEC will have been settled, the San Diego City Employees’ Retirement System (SDCERS) 2004 CAFR will be final and all of us will know the specifics of the Mayor’s “financial fixes.” We, and the council, will know for certain what we are comfortable promising the capital markets about our financial condition. Won’t be any need to hide behind a blind vouch.

And, There Was a Prophetic Comment

At the end of the marathon CAFR hearing, Brian Maienschein had an incisive moment articulated in the form of a rhetorical question. He kind of looked absently out in the chamber and said he wasn’t sure that it was the council’s responsibility to “proofread” the administration’s financial work. He wasn’t sure that was his job. And boy, was he getting close to the next big unspoken question in city government. And that is: what n if anything n is the job of the Council now?

City Attorney Mike Aguirre indirectly addressed this earlier in the hearing by analogizing the “new form” of government as “the mayor is the president and you are the legislature.” Simple. But, you don’t find the specifics of this spelled out anywhere, which leaves room for a lot of broken field running before folks figure it out. And, so far, Mayor Jerry Sanders has been the equivalent of L.T. moving lightning fast into voids wherever the council has allowed them to exist. My next post later today is on this topic. If you’re interested, it’ll be titled, “Sanders Runs the Table”.

Is There Such a Thing as a “Charter Crisis”?

If the council insists on its ability to “line item” budget, but the mayor won’t do it, who wins? If the council thinks it has the ability to review the environmental impacts of the Navy Broadway Complex and the mayor doesn’t, who wins? Think of all the other places for dispute in the fuzzy waters of our new form of government. The mayor controls all the operating departments, auditor, treasurer and the police, who carry the guns. The council is elected, but controls, well, nothing. Just a question.

What SDCERS Needs Is Another Accounting Firm – That’ll Fix Everything

Brown Armstrong, the outside accounting firm hired to do the city pension system’s 2004 and 2005 audits has run into some delays – what a surprise. The pension board now talks about firing them.

Historically, that is what the pension guys do when outside advisors tell them stuff they “can’t understand” (read, don’t want to hear). The board president concluded the firm is like a “C-rated accounting firm” and “very unprofessional.” But, more recently, the system administrator, David Wescoe said he expects the audit by the end of October.

So, maybe they will keep their jobs, assuming their audits of SDCERS don’t come out with numbers the board thinks are “C-rated” or something they “can’t understand.” Maybe our city, and SDCERS should start at the same point.

See, what’s interesting in these “interconnected” audits at the city and SDCERS is the fact that they don’t true up in the same year, which avoids seeing the audited base lines side by side. (This would be helpful, say, if both the city and SDCERS were counting the same assets, like if they were “pooling cash”). The city is auditing 2003 which will restate 2002, while SDCERS is auditing 2004, which will restate 2003.

Oh, And One More Thing on the Audits

In case you forgot, the City and SDCERS actually already had fully audited 2003 CAFRS. Yep, both of the 2003 CAFRs were audited by Caporrici & Larson, successor to Calderon Jaham & Osborn. That firm has been auditing the city and SDCERS books since the mid 1990s. After the city got caught cooking its 2002 books in the $505 million sewer bond offering, the city worked hard to not reaudit those financial statements. Instead, the city decided to hire KPMG to reaudit the 2003 CAFR. Why not 2002? After all, we know they were all screwed up because the city had to file its multiple securities disclosure corrections. (There are now over 51 restatements for the 2003 Capporici audited CAFR and there may be more.) The city eventually sued the Capporrici firm, which quickly settled. But, SDCERS could see absolutely no reason why it should reaudit its 2002 or 2003 CAFR.

I don’t know, it just looks like someone is working pretty hard to ensure the city’s books and the SDCERS books are not reaudited beginning the same year.

Maybe because they actually do “pool their cash together.” Each entity accounts for its alleged proportioned amount on its financial statements. So, if both of their books were audited beginning the same year, that would certainly be reconciled. We’ll see if the green eye shades or Wall Street buys this. Oh, the Brown & Armstrong audit of the SDCERS’ 2004 financial statements noted that a “Material Weakness” existed because SDCERS “pooled” its cash with the city. But, they’re a C- rated firm. Right?

Pension Guys On Tweakers

Reality, slowly and quietly (ssshhhhh, no one will find out), is creeping up on the number disclosures emanating from the city and it’s partner in the numerical Rubik’s Cube business, The Pension scrammers. As reported by voiceofsandiego.org last Friday the new actuary recommended that certain benefits owed but paid only from excess earnings be booked. Previously, the theory for not booking those amounts was that since these specifics benefits would only be paid if the investment returns from the Pension assets were sufficiently large as to be able to pay these amounts along with everything else. If “earnings” in any given year were not sufficient, they would neither be paid, nor booked. That would be fine if they just “went away”.

But, of course, they don’t. They are, in fact fully owed in the future. The effect of the fantastic number scram was to create a private, secret debt, carried on a non-public set of books. Aside from the fact this intentionally deceptive approach belongs somewhere between “crazy” and “fraud”, it helped create a hole in the long term health of the system because the good earnings that were pulled out in the good years needed to pay these special benefits drained the system of profits which it would need to back fill for the insufficient earnings in the bad years, a concept the pension system (which pays over $30 million/year for of “administrative” and professional advice) wanted to forget until the Kroll’s suggested it (I’m going to go out on a limb herer and suggest it had more to do with the SEC and other administrative and compliance investigations – that’s just a guess). The pension staff brings the cost of this adjustment in at approximately $110 million. Heck, hardly worth mentioning.

And They Do a Two-fer

There was another recommendation from the pension actuary possibly motivated by those same subtle influences cited above. This one is to change the method used in billing the City for annual; pension contribution. See, the WHOLE PLANET uses a system called “entry age normal” (EAN). San Diego did, too, until 1991, when San Diego changed from EAN to PUC “just to lower contributions”, according to Vincent & Elkins, Navigant, et. al. EAN is the NORMAL one. It results in “more stable pension bills over time.”

It also provides a “generational equity” for taxpayers, says the pension system’s actuary. Of course, our “Star Wars” pension system now uses a system known as “project-unit credit” (PUC). It has the benefit of “deferring” huge payments into future years (put that in the “oh, what a surprise” file).

When it was studied by the last pension board it was noted that using the phony PUC method artificially increased the funded ratio by from 5 percent to 8 percent, and substantially lowered contributions early on so then-present employees would pay disproportionately less that what was actually due, another surprise. This PUC method is used mostly by SDCERS and Chechnya.

So, the actuary is recommending (as was recommended to these guys before) to change over to EAN. There is just one teensy little problem. How are the city folks going to respond to a change that will lower the already anemic funded ratio by 5 percent to 8 percent?

Just for “what’s that mean?” purposes, Vincent & Elkins estimated that when the city did MP-2 in order to avoid having to bring the funded ratio up 5 percent from 78 percent to 82 percent (the “trigger” number) the city avoided having to make a one-time contribution of $500 million. Starting to talk about some real money here.

By George

Like most folks, I liked George Stevens. Liked his style, his smile, his passion. I didn’t understand everything he said, but I really liked the way he said it. Sometimes he’d get going on something, and the tone and cadence of the words, and the fire and blood pressure kicked in, and even though he’d go on way too long, you’d listen anyway. Finally, at the end, the expanse would compress and the cadence would get slower and the oration would stop. And lots of times, it was great. Even when the topic at the end wasn’t the one he started with in the first place.

In 2005 when George ran again for District 4, I asked him about his decision to run. He told me God had visited him and said, “George, you should do this”. I saw him again at the Catfish Club one afternoon when Diann Shipione was speaking about the crushing impact of the pension deficit. He questioned her openly, “Can’t you fix this? If you can, I’ll do anything I can to help.” You could tell he meant it.

– PAT SHEA

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