Posted on 02/14/2004 1:32:18 PM PST by calcowgirl
Federal authorities have begun investigating San Diego's city finances, including recent disclosures of errors and omissions in documents used to sell more than $2.3 billion of the city's municipal bonds.
Sources familiar with the probe, which also focuses on the city's troubled $3 billion pension system, say lawyers with the U.S. Attorney's Office and the Securities and Exchange Commission have begun interviewing people familiar with the city's finances.
FBI agents also are beginning to collect documents as part of the investigation, according to the sources, who spoke to The San Diego Union-Tribune on condition of anonymity.
A spokeswoman for the U.S. Attorney's Office in San Diego, citing Department of Justice guidelines, would not confirm or deny whether an investigation had begun.
FBI spokeswoman Jan Caldwell also declined late yesterday to confirm or deny whether a probe is under way.
The federal government's interest in City Hall's financial practices, raising the specter of possible criminal prosecution, puts the city's deepening fiscal crisis into new and complex territory. The investigation comes at a time when the city needs to sell hundreds of millions of dollars in bonds and amid the political strife of a hotly contested mayor's race
Mayor Dick Murphy declined to be interviewed yesterday about the investigation, but issued a statement last night.
"I welcome any investigation or inquiry that will resolve the allegations about inaccurate disclosures," Murphy said in the statement.
News of the investigation came one day after city officials announced that a former top SEC official had been hired to help unravel the fiscal problems.
On Thursday, Murphy's office announced that city officials had hired Paul Maco, former director of the SEC's Office of Municipal Securities, to conduct a comprehensive review of the city's current and past financial disclosure practices.
Maco, a Washington, D.C., lawyer in private practice, is known in the investment world as a strong proponent of accuracy and transparency in financial reporting – two evidently weak areas in the city's fiscal management.
The financial problems are tied to troubles at the city's pension system, which has a $1.1 billion deficit and more than $1 billion in unfunded retiree health care costs. The system owes tens of millions of dollars more to retirees in a court settlement.
Last week, Murphy said closing the pension system deficit might require higher taxes, service cuts, benefit cuts, the sale of city land and issuing of bonds. He said that, although politically difficult, such moves would enable the city to "remain fiscally sound."
The money troubles now threaten some of Murphy's top priorities: construction of the $150 million main library downtown, and turning the underfunded Fire-Rescue Department into one of the best-staffed and equipped in America.
Problems with the city's financial statements surfaced in September, when city officials pulled back an effort to issue $505 million in sewer bonds after questions were raised about the information used to sell them.
In one document laying out the city's financial condition for investors, city officials devoted only four paragraphs to the San Diego City Employees Retirement System.
The document mentioned a deficit but did not reveal that the city had intentionally underfunded the pension system for years as a means of balancing tight annual city budgets.
On Jan. 27, city officials issued three more reports to agencies that track municipal debt. In these documents, signed by Deputy City Manager Patricia Frazier, a top municipal financial officer, the city admitted to a slew of errors and omissions in its financial reporting.
This information should have been disclosed to investors in more than $2.3 billion of San Diego municipal bonds, some first issued in 1996. The bonds have been used to finance a range of high-profile projects, such as an expansion of Qualcomm Stadium, the city's share of building Petco Park, upgrades to Balboa Park and Mission Bay Park, and fire station construction.
The Jan. 27 disclosures also told of the deliberate underfunding of the pension system, something investors had not been told.
Six days later, Moody's Investor Service, a major Wall Street credit-rating agency, lowered the city's fiscal outlook from "stable" to "negative," a precursor to a possible downgrade of the city's credit rating, a move that would add untold millions of dollars to the city's bond interest costs.
Moody's cited the errors and omissions, the pension deficit, relatively low city reserves and the possibility that Gov. Arnold Schwarzenegger's 2005 budget might take $9.5 million from city coffers. City officials say the pain from the governor's budget, which would take property tax revenues from local governments, probably will be far worse – $15 million or more.
Moody's also said that in previous years its concerns over San Diego's relatively low financial reserves had been offset by its confidence in the city's sound financial management. But based on the recent disclosures of accounting irregularities, Moody's said that confidence is now "diminished."
Last Monday, the threat to the city's ability to pay for large projects with bonds became clearer. City officials pulled from the City Council's agenda two items – action on a now-stalled bid to refinance up to $195 million of Petco Park bonds, and to refinance $36 million in park bonds.
The Padres' new ballpark is set for Major League Baseball play in April and will not be affected by the city's troubles. But the city probably will be stuck with high interest payments on its ballpark debt if officials, as some investment professionals believe, are unable to reissue the debt at lower interest rates.
The federal investigation comes at a politically sensitive time for Murphy, who is running for re-election in the March 2 primary. His main challengers have used the city's fiscal troubles to assert that Murphy, San Diego's 33rd mayor, needs to go.
Murphy, who formed a Pension Reform Committee last year to study the problem, had previously said the bulk of the pension system's woes were attributable to investment market losses, and thus were similar to other large California public pension systems.
Murphy's commission is expected to report back after the March 2 election. The mayor has frequently boasted about the city's high credit ratings, which are now in jeopardy if Moody's and other credit-rating agencies are not satisfied with the city's moves in coming months. Analysts with Standard & Poor's Ratings Services are scheduled to meet with city officials next week.
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