Report Criticizes Fiscal Decisions in San Diego

In a scathing report released Thursday, lawyers hired by the City Council concluded that the city’s growing pension deficit and falling bond ratings are the result of chronically bad management that led to risky and “eccentric” financial arrangements being hidden from the public and Wall Street.

“The city’s image as a model of fiscal responsibility has been seriously tarnished,” says the introduction to a 268-page report by a dozen lawyers and investigators from the Washington law firm Vinson & Elkins.

The city bureaucracy had developed “an almost dysfunctional environment” with key officials not speaking to each other or sharing information, Vinson & Elkins attorney Paul Maco told a news conference. The city adopted a “minimalist approach” to disclosing financial information and ignored a “snake in the garden.”

Mayor Dick Murphy said he hopes the report restores the confidence of bond rating agencies in San Diego, thus bringing improved ratings and lower interest rates.

In a news conference shortly after the report was released, Murphy said he supports all of its recommendations, including hiring an outside auditor and forming a working group of senior management to review all financial disclosures to Wall Street.

“We are solving a problem that has existed for a decade,” Murphy said.

While the report found no evidence of criminality, it portrays top officials as willfully ignorant of key financial details and elected officials as lacking the background or inclination to understand the city’s complex pension plan, considered one of the most generous in the country.

The government had “a remarkable lack of internal control” that led to misleading reports being filed with Wall Street about the city’s financial problems, said Vinson & Elkins attorney Richard Sauer. Maco and Sauer are former attorneys and investigators for the Securities and Exchange Commission.

Murphy and City Council members hired the firm in February to conduct an investigation just days before the SEC and U.S. attorney’s office began probing whether laws were broken when the city filed reports with Wall Street that omitted the bad news about the pension fund.

The fund has an unfunded liability of $1.16 billion, with an additional $1 billion in unfunded health costs.

The city’s pension reform committee has warned that within five years the pension deficit will take up 25% of the annual general fund, forcing massive layoffs and reductions in public services unless the City Council takes steps to reduce benefits and increase payments.

City Manager Lamont Ewell, whose predecessor was severely criticized in the report, said he plans a more “hands-on” style.

“We will never go back to business as usual,” he said.

The city, so far, has paid $1.3 million to Vinson & Elkins, which will also represent the city before the SEC. The firm provided copies of its report to the SEC, the FBI and the U.S. attorney’s office.

County Supervisor Ron Roberts, Murphy’s reelection opponent, immediately criticized Murphy for waiting too long to admit the pension problem and for attempting to blame his predecessor.

“If [rookie quarterback] Philip Rivers could pass the ball as well as Dick Murphy can pass the buck, the Chargers would be in the Super Bowl for sure,” Roberts said.

The Vinson & Elkins report found that to placate “politically powerful” labor unions, the City Council approved increased pension benefits and concocted a method to pay for them from future stock market earnings without dipping into the city’s general fund.

When the stock market declined due to the bursting of the dot-com bubble, and the City Council opted not to increase its contributions from the general fund to the pension system, the deficit began to grow enormously.

The city’s pension board, which is supposed to warn the City Council when the pension fund is in financial peril, was stacked with current and retired city employees who benefit from the increased pension payments.

Newspaper stories about the pension plan’s problems, even a consultant report’s warning about deficits, received only a “muted” reaction from city officials, most of whom did not understand the complicated funding formulas that guide the pension program, the report said.

The report is particularly critical of former City Manager Michael Uberaga and former City Auditor Ed Ryan for allegedly delegating responsibility for preparing financial reports for the City Council, the SEC and bond-rating agencies to low-ranking employees or outside firms. Employees allegedly adopted a “fill in the boxes” routine, merely repeating past information, the report said.

While delegating responsibilities “may have been an efficient way of dealing with the constant press of business facing the city,” it lead to repeated errors and underestimations of the deficit, the Vinson & Elkins report said.

Uberaga and Ryan resigned earlier this year after the SEC and U.S. attorney’s probes began. Asked whether Uberaga would have been fired if he had not resigned, Murphy said, “We felt it best for Mike to move on.” Ryan was one of several officials who declined to discuss the pension problem with Vinson & Elkins investigators.

Other officials who declined to be interviewed included former Mayor Susan Golding and three City Council members who received labor union support, as well as the president of the local firefighters union, who is also a pension board member and the recipient of a pension boost that appeared tailored specifically for him, officials said.

The Vinson & Elkins report noted that San Diego has long boasted of its fiscal conservatism. The city’s website has a banner that proclaims San Diego “the most efficiently run big city in California.”

The city government, which was once lionized by Governing Magazine and the Government Finance Officers Assn., was plagued with “decentralized responsibility, balkanization, and poor lines of communication,” the report said.