City Often Loses Track of Outside Legal Costs

Monday, Dec. 10, 2007 | The city of San Diego has had to pay millions in legal expenses over the past few years as a result of the many investigations it’s had to traverse and the aggressive style of its city attorney.

But even with several years of these experiences under its belt, the city is still grappling with how to plan for — and rein in — the multimillion-dollar costs of hiring outside attorneys.

The process of budgeting and paying for outsourced legal services has fallen into dysfunction, officials say, and the issue has swelled into one of the main points of contention between City Attorney Mike Aguirre and his critics on the council and in Mayor Jerry Sanders’ administration.

Several City Council members — and, more recently, Sanders — have complained that Aguirre’s appetite to file litigation unilaterally and his advice to represent individual city officials with outside attorneys has spawned a cottage industry of sorts. They also say they’ve had to hire attorneys to represent the city government in instances where they feel Aguirre’s position about the city’s liability and theirs diverge.

Aguirre has fired back, attributing much of the need to hire outside attorneys to prior decisions that several council members made before his entrance to City Hall in December 2004. When Sanders and the council circumvented him for legal advice, such as in cases involving a pension benefit dispute and the Mount Soledad landslide, Aguirre says the moves were meant to embarrass him.

Regardless of the reasons for hiring outside attorneys, even Aguirre’s top aide concedes that his office has been lax in ensuring the outside firms don’t run up bills for more than has been authorized.

“There’s no answer to it, it’s out of hand,” said Don McGrath, executive assistant city attorney.

Aguirre’s office frequently submits bills for payment that are over the amount authorized by the council, sometimes by several hundreds of thousands of dollars. He’s also let firms work past the expiration of their contracts — in one instance two years past.

That lapse has contributed, although not exclusively, to a larger budget challenge for a city government that has seen continual budget turmoil for a number of years.

The city has withdrawn more money than it sets aside for legal expenses in recent years, forcing the government to tap into the depleted cash reserves it is at the same time trying to rebuild. Even though officials have anticipated greater costs after the city’s newfound penchant for outside help became well known, this year appears to be no different.

At the beginning of the current fiscal year, which began in June, the city of San Diego had about $25 million budgeted for the fund that pays for attorneys and legal settlements, known as the public liability fund. With more than half of the year to go, only $2 million remains, according to a Nov. 29 report.

“It’s not a secret that the public liability fund will run out of money,” said Risk Management Director Greg Bych, who oversees the fund.

The council’s budget professional notes that Sanders doesn’t budget enough money for the expenses, even after seeing legal expenses skyrocket in recent years. The cloud of investigation over the city’s past pension and financial dealings has dissipated somewhat, yet costs related to the probes continue to parch the fund. Those investigations forced beefed-up legal consulting on the city’s financial reporting, yet that cost went unbudgeted.

“From a budgetary perspective, anything that is known … needs to be factored into the budget,” said Andrea Tevlin, the council’s independent budget professional. “If you know that we’re going to have outside counsel working for us, they need to be in the budget.”

Some council members and budget officials now want to set up more checks on Aguirre’s management of, and Sanders’ budgeting for, outside legal help. Jay Goldstone, the chief operating officer for Sanders, said the public liability fund had been inappropriately used in previous years to pay for KPMG’s 2003 audit and Kroll consultants’ report.

Even with those hefty expenses behind the city, the fund is still bleeding money rapidly because of myriad legal bills, he said.

“The city attorney has greater flexibility in hiring layers and firms than through the regular procurement process, but the city attorney should not be putting us in this position,” Goldstone said.

Aguirre, himself, has been recalcitrant in allowing other officials to involve themselves in the legal affairs of the city, billing their efforts as attempts to curb the independence of his office and muzzle him.

However, for all of his charges that past and present city officials pushed the city to the edge of bankruptcy by not taking better care of the city’s financial affairs, Aguirre’s management of this particular responsibility has not been a high priority.

McGrath, who is in charge of handling outside counsel for Aguirre, said he watches the strategy employed by outside attorneys very closely and that he has set ground rules for the amount of manpower the firms can use — and bill for. But he conceded that he’s often unaware of when a firm goes beyond its authorized limits financially.

“That shouldn’t happen, but unfortunately, once in a while, we go a little bit over,”

McGrath said.

The council has frequently been summoned to approve payments to firms that have worked over their budget.

At one July meeting, for example, Aguirre told the council that it was $1.19 million over budget in cases brought against the city by police officers and a former employee. Council members approved payment on those bills. Typically, the department that oversees the contract is supposed to ask the council to raise the financial limit of the contract before the contractor exceeds the current authorization.

In another example, the City Attorney’s Office disclosed last month that the firm advising the city on its disclosure practices, Hawkins Delafield & Wood, was owed $158,000. The firm’s last contract expired in December 2005, but the city continued to accrue bills anyway.

Legal invoices are sent to Aguirre’s office before they are forwarded to city accountants, who check to see that the appropriate authorization exists for the firm to be paid. Aguirre is allowed to order contracts up to $250,000 on his own, but the council needs to sign off on expenditures exceeding that.

That dynamic has frustrated some council members and members of the mayor’s financial team, who point to the sizable delays between the city attorney’s receipt of legal bills and the time his office forwards it on for payment.

On the Hawkins account, an invoice dated February was submitted in July. It took until September for $850,000 in bills from Latham & Watkins to reach city accountants, who were asked to pay the firm for defending a lawsuit brought by the police union. In another case, Latham billed the city as early as March 2006 for its work in the De Anza Cove mobile home case, but Aguirre’s office didn’t ask to cut them a check until this June.

The months of lag time make it difficult to gauge the city’s ongoing legal expenses, budget officials said. Further, bookkeepers say the delays pose problems when reflecting the expenses in the city’s books at a time when the municipality has been barred from the municipal bond markets because of its lack of credible financial statements. Two weeks ago, Comptroller Greg Levin requested that Aguirre put in writing a list of the city’s legal bills, paid or unpaid, in order to satisfy the audit firm that is inspecting the city’s 2006 financial statements.

“Now it’s become a financial reporting situation in which I need to know the costs,” said Greg Levin, the city’s comptroller. “If I’m not getting invoices in a timely manner, then it’s tough to make estimates.”

It’s one of the recommendations officials are trying to implement in order to get a better handle on legal expenses.

As part of this year’s budget legislation the City Council attempted to rein in Aguirre by prohibiting the payment of outside law firms on cases the council didn’t authorize. The city attorney’s unilateral decisions to sue the pension system, former pension and city officials, and Sunroad Enterprises were not welcomed by several council members.

Council President Scott Peters said he wants to add an extra safeguard.

Peters said the city should budget money for a “legal services fund” that would include money for work done inside the City Attorney’s Office and out. Peters frequently complains that too much of the city’s legal work is outsourced. If Aguirre wants to use money for outside lawyers, it should be his responsibility to balance that need with the resources he needs to perform the everyday operations of the office, Peters argued.

“It’s a question of whether the City Attorney’s Office is becoming a contract manager of legal services rather than a provider of legal services,” Peters said, “and if that’s case, we should adjust our budget strategy and take money out of that department.”

Peters also suggested that city accountants begin taking more initiative in tracking the legal fees instead of waiting for the city attorney to make reports.

To better prepare for overruns, Goldstone said the mayor wants to sock away more money for the public liability fund’s reserves in coming years. It’s a strategy he began employing this year, when an extra $5 million was added to act as a reserve for legal costs. However, the city is on pace to chew up a large chunk of that money as well.

McGrath said that, despite the overruns on contracts, he believes his office will be vindicated for its ability to defend against big cases, such as the litigation brought by the police union and landowner Roque de la Fuente — both of which have been scaled back in scope by the courts.

“Day in and day out, we’re going to be ahead when it’s all done,” McGrath said.

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