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Wednesday, Nov. 15, 2006 | Of all the projects on which City Attorney Mike Aguirre has worked, few have commanded so much of his time and energy as the effort to secure a settlement on behalf of the city with the Securities and Exchange Commission.
Tuesday, he got it.
More than a year ago, Aguirre and the city’s contracted legal counsel — John Hartigan — asked the SEC to separate the city, as an entity, from the individuals who ran it. The idea was simple: While individuals may have led the city to this horrid state of perpetual legal crisis, the city should be able to shake free from their misdeeds and let them handle their own legal problems while San Diego, as a community, moves forward.
The idea faced resistance from the very beginning. It was panned, deliberately misinterpreted and its implementation was chided as inconceivable.
Tuesday, however, it was vindicated.
The SEC accepted Aguirre’s position apparently in full, recognizing the progress he said the city had made and declining to fine or otherwise punish San Diego and its taxpayers.
The SEC will simply require the city to hire an independent consultant who can keep tabs on it as it rights its ship.
At the same time, the SEC made it clear that it would continue to investigate the individuals whose actions, the agency said, amounted to clear violations of the antifraud provisions of the nation’s securities laws.
The SEC stated, in no uncertain terms, that city officials acted recklessly by failing to disclose important and unflattering information about the city’s financial health to buyers of the city’s municipal bonds. There remains little doubt that the SEC will seek enforcement action against the former city employees who are alleged to have committed securities fraud. They remain innocent until proven otherwise but, thankfully, residents no longer have to worry that the city’s operations and access to financial markets will stand on hold while the SEC sorts out the culpability of former city workers.
Every few months, it seems, the city receives yet another report that both outlines the extent of the financial damage that has been done and condemns the short-sighted and careless behavior of former city officials. We’ve seen the U.S. attorney issue criminal indictments of some of the people she insists acted most egregiously. But Tuesday’s cease-and-desist order from the SEC may be the one report so far that has a significant effect on the city and therefore taxpayers. Barring some sort of bondholder lawsuit — which most likely won’t occur unless the city stops making its bond payments — the city of San Diego may finally be able to imagine a future unburdened by its faulty financial disclosures of years past.
Aguirre is largely to thank for reaching this crucial settlement. Now all eyes most focus intently on the auditing firm KPMG, which is still supposedly working on the audit of the city’s 2003 finances. KPMG’s demands for investigation and closure to numerous city mysteries have cost taxpayers tens of millions of dollars over the last two years. If the SEC is now willing to close its investigation of the city as an entity, so should KPMG. If the firm continues to delay, the city will have final proof that the accounting giant doesn’t intend to produce an audit of city finances at all.
Finally, while Aguirre has much to be proud of, it should be noted his preoccupation with these overarching crises has left many much more simple projects incomplete. The SEC’s report again reminded residents that city officials made some very ridiculous decisions with the public’s money. One of the most absurd of practices initiated was to use so-called “surplus” investment earnings to fund retiree medical benefits and extra payouts to retirees. It is simply unconscionable to allow a retirement system like San Diego’s to build a massive deficit at the same time it siphons off valuable investment earnings to pay for benefits that the city is not legally obligated to pay retirees.
These extra benefits for retirees were funded using a complex accounting mechanism known as the waterfall. The city’s pension board, long averse to reform, has moved forward to eliminate the practice. Aguirre’s lack of attention, however, has kept the reform from moving forward. He promised a legal opinion in May, but the city still awaits his word.
Although not the most significant, these are minor changes to the Byzantine pension system that could make a material difference to the city’s bottom line. The city has already successfully stopped the practice of paying retiree medical benefits with these “surplus” investment earnings. Aguirre simply must learn to delegate responsibility so that while he pursues the important milestones like Tuesday’s settlement with the SEC, his deputies can help the City Council and pension board enact other real reforms.
The city’s settlement with the SEC is hopefully the sign that we are close to hitting the bottom of this seemingly interminable financial crisis. It will be the mayor’s challenge in coming days to articulate a viable strategy for paying off the city’s mounting debts. If he does not, and if he shows any sign of resorting to the practices of the past by delaying and denying the costs of our situation, the city will have lost its first chance in years to take a positive step forward.