That Mayor Dick Murphy and members of the San Diego City Council voted to approve bond documents containing misleading information about the city's finances is not exactly news. That they did so just hours after they were given a detailed briefing about the dire condition of the city's pension system is.
Evidence of that proximity was gleaned from a report released last Wednesday by City Attorney Mike Aguirre, who is conducting an ongoing investigation into possible corruption at City Hall. The Securities and Exchange Commission (SEC), the U.S. Attorney's office and the FBI are also conducting separate investigations.
Prompted by CityBeat this week, Aguirre said he had not realized that the briefing and the vote occurred on the same day but called it an “extremely good point” that establishes a “temporal connection” and provides a concrete example of a larger deception he claims took place over the span of several years.
“It enhances the prospects of some tough questioning,” he said. Others say the events of a single day nearly three years ago may provide insight into the aim of the SEC's investigation of the city's bond-disclosure practices.
According to Aguirre's report, on April 29, 2002, Murphy and the City Council, which then included City Councilmembers Byron Wear and George Stevens in the seats that Michael Zucchet and Tony Young now occupy, met in closed session to discuss ongoing labor negotiations. During that meeting the mayor and City Council were reportedly shown a PowerPoint presentation that indicated the city's pension system was only 89.9 percent funded.
That same presentation also indicated that the funding level was expected to continue to drop and that the city would be forced to make a multimillion-dollar balloon payment if the funding level fell below 82.3 percent, a threshold commonly referred to as “the trigger.” Despite the city's inability to pay its current bills, the mayor and City Council approved 10 actions related to the negotiations, including new benefits for employees and extending special benefits to union presidents. Some of those union presidents and city employees also served as trustees for the retirement system, who voted months later to permit the city to continue to under-fund the pension system.
The mayor and City Council then reconvened a few hours later in open session and unanimously approved a $30-million bond ordinance to finance the construction and remodeling of fire and lifeguard facilities. According to the meeting minutes, the City Council simultaneously signed off on what's known as the “official statement” for the bonds, a document designed to disclose all of the city's potential liabilities to Wall Street and prospective investors.
Like six other bond offerings issued within the span of 14 months, the pension section of the official statement included the following phrase: “State legislation requires the city to contribute to CERS at rates determined by actuarial valuations.” But the official statement never indicated that the city was in violation of that law by failing to pay the total amount due, nor did it contain any information regarding the trigger, pending deals to lower the trigger or the potential balloon payment.
What went wrong? Why didn't anyone put two and two together and yank the official statement?
“Unless they had a three-martini lunch... there's no way they didn't remember what they did that morning,” said Michael Conger, an attorney who successfully sued the city in 2003 to end the pension underfunding and recently sued again alleging some of the actions approved in closed session on April 29 led to a violation of California conflict of interest laws.
Conger said he sees the events of April 29 as further evidence of intent to deceive.
I think these guys intentionally misled the entire population of the city of San Diego,” he said. “But in so doing they committed massive securities fraud. I absolutely believe it and I've seen enough to say that I am 100 percent convinced that is exactly what happened.”
City Councilmember Scott Peters said the flawed official statement was approved because it had already received the blessing of city officials and private experts hired by the city.
“We were advised by the city attorney's office, the auditor's office, by our outside auditors and by our outside bond council that these disclosures... were A-OK,” he told CityBeat.
In response to Aguirre's report, the mayor and City Councilmember Jim Madaffer echoed Peters' statement.
“The City Council and I properly relied on the advice of the securities-law experts who were hired by the city attorney's office,” Murphy said in a prepared statement. “The experts and the city attorney's office advised us that everything that needed to be disclosed was disclosed.”
“Like any board member of a major corporation or organization, I have always heavily and properly relied on the advice from numerous professionals,” Madaffer said, also in a prepared statement. “I believed that everything that needed to be disclosed was disclosed and had no reason to believe otherwise.”
But simply relying on the advice of experts isn't good enough, according an Oct. 29, 2001, letter from Bryan Cave, a law firm hired by the city to school the mayor and City Council in legal bond-disclosure requirements. Citing an SEC statement issued after Orange County filed for bankruptcy in 1994, the Bryan Cave lawyers wrote:
“The message... is that members of the body approving disclosure documents cannot simply ‘rubber-stamp' the document. Rather, each member has the responsibility to demonstrate that he or she was actively involved in the process-that is, each person must review the disclosure document, inquire as to the source of the information, ask questions of the city officials and other professionals who provided information (as well as ask if there are other sources of information that should be reviewed), and follow-up to ascertain whether the information makes sense in the circumstances.”
Which raises the question of whether the mayor and City Council actually read official statements, ask questions or follow-up.
Of those queried by CityBeat, several City Council members declined to comment, citing the pending SEC investigation, and Peters and Zucchet said they typically “review” the documents but rely on city staff and experts for interpretations. Peters also told CityBeat that he believes the Bryan Cave advice pertained only to the pending downtown-ballpark bonds that were facing legal challenges at the time the letter was written.
But last year's report by Vinson & Elkins, a firm hired to probe the city's disclosure practices, stated that the only advice the mayor and City Council have ever received regarding bond-disclosure policy came from Bryan Cave.
Tony Cherin, a finance professor at San Diego State University, said the events of April 29, coupled with that legal advice, leave the mayor and City Council without viable excuses.
“If I was the SEC investigator, I would find fault either way,” he said. “If there is a better miscarriage of responsibility, I suppose not carefully reading would be less guilt-provoking perhaps than to lie about underfunding.”
But how federal investigators might view the events of April 29, 2002, may not be the City Council's biggest problem. Aguirre's report has sparked a growing chorus of outrage from City Hall critics. In a column Monday in the new Voice of San Diego online news magazine, former Port Commissioner Peter Q. Davis, who ran against Murphy in the 2004 mayoral election, called on the mayor to resign, and rumors of recall efforts have been floating since Murphy was sworn into office in December.
Conger went a step further, telling CityBeat that it's time for everyone involved in the financial mess to step down.
“I think that every single person, including the mayor and council, who was involved ought to save the city the embarrassment and expense and immediately resign-all of them.”