Tuesday, February 06, 2007 | City Attorney Mike Aguirre said Tuesday that the city’s financial and legal conditions are worsening while elected officials continue to rely on hired help whose investigations aren’t answering San Diego’s tough questions.

Aguirre released a confidential draft of a hired law firm’s ongoing investigation of the city’s disclosure practices on Tuesday. A day earlier, the City Council made the report available to federal investigators by waiving the council’s attorney-client privilege, but did not instruct that the document be made public.

The city attorney pointed to new subpoenas issued by a U.S. grand jury as indication that federal probes into the pension system continue to raise more legal questions that the city must answer. Aguirre also used the afternoon press conference to blame the City Council’s “slow-go approach” to the government’s finances for a major rating agency’s downgrade of the city’s credit on Tuesday.

Aguirre blasted Washington-based Vinson & Elkins for its review of the city of San Diego’s financial disclosure practices and its dealings with the embattled San Diego City Employees’ Retirement System, calling the firm’s latest work product “Whitewash Report No. 2.”

In the report, attorneys found that “insufficient evidence to conclude that any members of city administration had intentionally caused the city to provide materially misleading information to the public,” but that “the city fell short of acceptable standards” over the years.

The firm released a report last September with the aim of detailing the city’s finances “warts and all,” although KPMG, the firm charged with auditing the city’s 2003 financial statements, said the investigation was insufficient and withheld the audits.

Among the findings included in the July 15 draft:

— The city’s financial disclosures failed to inform the potential bond buyers of “critical facts” that posed a threat to the pension system’s financial bill of health.

— From 1997 to 2003, the city did not accurately describe the risks associated with a  1996 agreement between the city and SDCERS to underfund the retirement system in its annual financial statements and bond offering documents.

— In 2001, the city failed to address a stipulation in the 1996 underfunding agreement to pay a lump sum into the retirement fund because the funding level was below an agreed-upon point.

— In 2003, the city did not disclose information showing that underfunding would continue through at least 2011 unless a drastic policy change occurred.

— City officials had an “apparent desire” to avoid notifying bond rating agencies to pension issues.

— Former city auditor Ed Ryan and assistant auditor Terri Webster knew that the underfunding of SDCERS was risky, yet continued to provide false assurances as to the accuracy of the city’s yearly financial statements. The report suggests that the acts of Ryan and Webster appear to “constitute negligence and perhaps a higher level of culpability.”

— Former city manager Michael Uberagua, former deputy city manager Patricia Frazier and former city treasurer Mary Vattimo were also to blame for avoiding bringing the inaccuracies to light.

— The evidence “does not indicate that any city employees, including senior officers, suspected at any time that they were engaging in conduct that might be prohibited by law.”

Paul Maco, the lead Vinson & Elkins attorney reviewing the city’s books, maintains that the report is lacking some evidence the firm has sought but not received, and that the report’s conclusions are preliminary.

“It lays out some of the evidence available to the investigation, analyzes the actions under applicable law and presents its conclusions in draft form because there’s evidence not available to investigation,” Maco said Tuesday. “We stand by the content of our report and note that it’s just a draft report.”

Aguirre said Vinson & Elkins’ investigations, which have cost the city $3.8 million thus far, were a waste of taxpayer money because they “tried to get the client off the hook,” referring to the council who approved hiring the firm. Aguirre said Interim Report No. 2, which was released by his office in February, alleged wrongdoing by not only city management and pension officials, but also former Mayor Dick Murphy and council members who signed off on inaccurate disclosures.

“The public has the right to know whether there is, in the opinion of the city attorney, a continuing cover-up going on,” he said.

Before many of them viewed the document themselves, council members and city officials were informed in the afternoon that Aguirre made public an incomplete version of a second Vinson & Elkins report. The news annoyed some who didn’t think it was appropriate for the city attorney to release information about an investigation in progress.

“I think the city attorney took liberties by releasing a report the mayor and council wanted available only to investigators,” City Manager Lamont Ewell said.

Deputy Mayor Toni Atkins said it was Aguirre’s decision to make.

“My feeling is that by waiving the attorney-client privilege, we allowed the city attorney to determine whether it is a matter of public record,” Atkins said.

Councilman Jim Madaffer said he was advised by his personal attorney to not view the report because he is a witness to the Securities and Exchange Commission’s investigation of the city of San Diego. Because material from the report will likely be used in the SEC investigation, he does not want to be a “detriment” to the probe by allowing facts gathered by Vinson & Elkins to taint future testimony.

Ewell and Aguirre also blamed one another for a dip in the city’s credit rating, which will not immediately affect the city of San Diego because it has been essentially barred from the public bond markets because auditors have not issued certified financial statements for 2003 and 2004.

Ewell said the city attorney’s “irresponsible call for bankruptcy must stop,” citing Moody’s report that Aguirre discusses bankruptcy as a last resort when the agency thinks such talk is unnecessary.

“The push for personal political agendas must end and the city’s interests must come first,” Ewell said in a prepared statement.

Aguirre said that Moody’s Investor Services downgraded the city’s general obligation bond rating from A1 to A3 because of narrowing cash reserves and the council’s approval of Ewell’s budget for the upcoming fiscal year.

“In essence, the efforts we had made in the City Attorney’s Office to persuade the council to discuss the budget in the context of the pension crisis and to relieve itself of illegal pension obligation was not considered and was rejected by the council,” said Aguirre.

He has filed a lawsuit that attempts to recover between $700 million and $800 million in benefits he believes were created illegally. The fund currently has a shortfall of at least $1.37 billion.

Aguirre also pointed to subpoenas requesting salary information dating back to 1995 from four former and current SDCERS officials as an indicator that the U.S. Attorney’s criminal investigators are “digging very deep.”

Please contact Evan McLaughlin directly at

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