For three years, Boston-based securities attorney Stanley Keller served essentially as the city of San Diego’s financial babysitter.
The federal Securities and Exchange Commission required the city to appoint someone to monitor how the city reported its finances to the public and investors after its 2006 settlement ended a years-long SEC securities fraud investigation.
The city chose Keller. Keller’s experience includes serving as chairman of American Bar Association’s Committee of Federal Regulation of Securities when Congress crafted the Sarbanes-Oxley Act — the landmark law that increased disclosure requirements for public companies.
Keller’s services, he said yesterday, cost the city $1.8 million over the last three years.
His fourth and final report, which he discussed at a City Council meeting Monday, said the city had made “dramatic progress” in financial reporting. At the meeting, Keller cited San Diego as a model for its disclosure practices.
We sat down with Keller after he spoke to the council for an interview.
Can you help me understand what your role was and what your role wasn’t? There was talk about San Diego being a model, but I want to know how San Diego is a model and with respect to what.
That’s a good question and I tried to identify that. My responsibility was to focus on the adequacy of the city’s disclosures. I think in connection with that, what are the structures in place to ensure good disclosure and in the broader sense legal compliance? That’s what the SEC order was all about. My responsibility was not to address the city’s fiscal problems. For that, a receivership could have been appointed. But that’s not what the order provides for. The city can have a large unfunded pension obligation, can have a large retiree (health care) obligation. Indeed the situation could get worse. The issue is, OK is that being adequately disclosed?
What was the one thing that most impressed you about working here over the last three years?
I don’t know that there is one thing. If you bundled everything together I think it was a commitment on the part of all branches of government to do the right thing.
By the right thing you mean?
To build the kind of infrastructure that we were talking about and to have adequate disclosure. That doesn’t mean that the City Council or individual City Council members necessarily agreed with the Mayor’s Office on everything. But I think at the end of the day there was a commitment that the mistakes of the past need to be remedied and not repeated.
You were asked a couple times by different council members how the city would fare before the SEC. I know you didn’t want to answer that directly …
In the sense that the SEC ultimately decides whether the city has complied. But I haven’t seen anything that would suggest that the city has not fully complied with the enforcement order.
You mentioned $1.8 million, you mentioned also that your contract was for up to $4 million. Forgive me for being blunt, but as a city of San Diego taxpayer what does the city of San Diego have for that $1.8 million?
(Laughs.) It’s part of the overall superstructure. It’s funny, that’s a question that in private corporations the internal legal department is asked: What’s the price of avoiding violations of law? One answer is it’s priceless. I think in a more tangible way you take pieces of it. Take the internal audit function, for example. Having a robust internal audit function in the city of San Diego will in itself produce savings. There are already examples of that where the internal audit showed deficiencies in revenue collections. But I think the real answer is overall, that it is coming into compliance as part of the responsibility and avoiding violations of law, in fact is priceless. The $1.8 (million) is a drop in the bucket compared to the total cost that the city has incurred as a result of the problems of the past.
Is it your role at all to speak to any of the budget issues that are going on in San Diego, particularly in the sense that in L.A. for example some of the rating agencies are concerned or downgraded the city’s credit related to the city delaying action or using one-time funds to solve their budget gap?
Not directly. Let’s put it this way: I tried to address to some extent fiscal responsibility and fiscal transparency as a way of avoiding disclosure problems. Healthy financial institutions, by and large, don’t get into disclosure problems. It’s unhealthy financial institutions that tend to be overly optimistic and feel motivated to hide the ball and that creates the problems. If you look at it in that broader way that dealing with fiscal issues responsibly helps put the city in a position where they’re likely to avoid disclosure responsibilities, there’s some relationship.
But it wasn’t my role to tell the city how to do it. Rather, OK you’ve got a budget deficit. You should deal with it and you should explain that you have the deficit and here’s how you’re dealing with it. This structural budget deficit that’s been identified and everybody now accepts that, OK. Identify it, start addressing it, and that will help ultimately in the disclosure. Take the one-time measures. Make sure you’re disclosing what are one-time measures and why and that you know it and here you’re using it. You have the city coming out through the Mayor’s Office saying yes, we’re using so much as one-time measures. We’re doing that because it buys us the 18 months in order to give us time to come to grips with the more endemic structural deficit.
It buys you 18 months, but right now by April you’re looking at at least $30 million in another deficit.
Well there was another surprise and they have to deal with it. And if it affects the reserve funding and the like, that’ll be a stop-gap measure. But again, the question is stepping up, being transparent about what’s going on. I think the city gets credit, rather than demerits, for being up front.
— Interview conducted and edited by LIAM DILLON