Today Mayor Murphy, Deputy Mayor Mike Zucchet, Councilmember Scott Peters, City Manager Lamont Ewell and I gave an update on the status of the KPMG audit and our strong support that the City hire Mr. Lynn E. Turner, the Former Chief Accountant of the Securities and Exchange Commission (SEC), to help conclude the City’s audit with KPMG.  This afternoon, the City Council voted unanimously to hire Mr. Turner.  He will report to the full City Council in public session.

Last Friday, Councilmember Zucchet and I spoke with senior KPMG representatives to discuss the status of the City’s Audit. We didn’t want second-hand information---we wanted to hear it straight from the source.  Essentially, the City’s audit is completed with little else to do except final quality control.  KPMG supports bringing on Lynn Turner to provide his expert services.  If Mr. Turner has additional questions or finds items of concern in the audit, those items will be reviewed in detail and incorporated into the audit.  KPMG was also encouraged that the City recently hired a new City Auditor, Mr. John Torrell, who starts on March 19, 2005.

No matter what impression of the past you’ve been left with, I take 100% responsibility for solving this issue.

It remains my top priority to conclude the City’s audit and then following the audit, finalize our labor negotiations.  Our labor negotiations are crucial because including a wage freeze and other concessions will save millions that can instead be paid into the Pension system to reduce our unfunded liability.  My goal is to have the City at the 80% funded level in less than 2 years – a huge jump from the current 66% level we are at today.

Here is information that I want to call to your attention:

Who are the experts the City has hired?

KPMG (www.us.kpmg.com) – hired to do a thorough audit of the City books for Fiscal Year 2003.  This audit is almost completed with the final quality control now in process.

Macias Gini & Company, LLP (www.maciasgini.com) – hired to do a thorough audit of the City books for Fiscal Year 2004.  A second auditing firm was hired for no other reason other than KPMG told us they did not have time to commit to another audit.  The City Council thought it would be prudent to get going on FY04 now without delay.  It is expected the FY04 audit would be completed shortly after KPMG has concluded their work.

Vinson & Elkins (www.vinson-elkins.com) – hired this internationally renowned law firm that specializes in securities law and financial matters.  They conducted a full and thorough evaluation of the City and how we handle our finances.  They issued a 286-page report that was not flattering to the City.  Here is a link to the report. 

After KPMG reviewed the Vinson & Elkins Report, they wanted additional forensic research done, which is now in process.  Hiring Mr. Lynn Turner, formerly the Chief Accountant to the SEC will help finalize the City’s audit so it can be released.  Click here to read details about Lynn Turner.

What has the City Council done to address underfunding of the pension?  How do we ensure it does not happen again?  Why don’t you fire the Retirement Board?  

·                    City Council voted to fully pay its pension debt and establish an amortization schedule to pay back the deficit over 15 years.

·                    City Council established the Pension Reform Commission in 2004.

·                    City Council voted in favor of a plan that would have the City issue bonds to pay back the debt to the Retirement system more quickly.

·                    City Council put forth a proposition on the November 2004 ballot asking the voters to approve a law prohibiting the current and future councils from being allowed to underfund the pension.  This was approved by the voters.

·                    City Council put forth a proposition on the November 2004 ballot asking the voters to allow the City to replace and restructure the ENTIRE Retirement Board.  This was approved by the voters as well.  Replacement of all the board members and restructure will take place by April 1, 2005.  The law passed by the voters requires certain qualifications to be on the new Retirement Board. 

What’s the status of KPMG Audit?

·                    As stated at the beginning of the page, the audit is virtually complete; it’s in final quality control stages at this time.  Having the audit completed is a crucial first step for the City to get back into the bond markets so that we have funding for public safety, water/sewer, libraries, parks and other important projects.

·                    KPMG will not be influenced by politicians whether that is the Mayor and Council, the City Manager or City Attorney.  A couple of months ago they asked for additional information and forensic research from the City. 

·                    The City Council contracted with a forensic firm to conduct this investigation, which they are doing. 

What’s the status on labor negotiations?

·                    The City is in the process of preparing to enter into labor negotiations with the labor unions.  This has been stymied by recent press conferences by elected leaders trying to negotiate in the press.  I do not support this approach. However, I do strongly support putting everything on the table for discussion -- everything from salary freezes, salary cutbacks, furlough, retirement benefit changes for both labor leaders and employees etc.  Our labor negotiations and the results we achieve will have the largest impact on reducing the City’s unfunded liability with the pension system.  This process is critical.

What is happening with the SEC (Securities and Exchange Commission) and U.S. Attorney’s Investigation of City Officials: 

·        As the City Attorney stated in his Interim Report #2, the very last sentence (“finally, it should be stressed that much of the evidence set forth in this report was made available to the investigation only because the Mayor and Council made the honorable decision to waive the confidentially privileges held by the City. They did this knowing that it would put them at risk”) that the mayor and council have fully cooperated in fulfilling the requests of the SEC and US Attorney to provide documents.  We will continue to do so. 

·        I would anticipate at some point representatives from the SEC will want to chat with me, just as I interviewed with Vinson and Elkins when they did their report, as well as the rest of the Council.

·        I wish we could get a statement from the US Attorney as to the status of their investigation.  However, as a professional organization they will not comment on any matter pertaining to the case.  They will do so when their investigation is complete, which we are all waiting with anticipation to hear the outcome.

Why hasn’t the City Council fired the City Auditor?

·                    City Auditor Ed Ryan resigned last year.

·                    The Assistant City Auditor has been acting since Mr. Ryan’s departure and while the City Council has conducted a nationwide search for a new auditor.  Today, the Assistant City Auditor announced her departure from the Auditor’s office.

·                    On Monday, February 7, 2005 the City Council hired Mr. John Torrell to be our new City Auditor.  Mr. Torrell is a CPA and lawyer who served as the assistant auditor-controller for the County of Santa Barbara for the past 12 years.  While with the County of Santa Barbara, Mr. Torell upgraded and implemented a new financial reporting system.   

Omissions in Bond Documents:

·                    In January of 2004 when the omissions in the bond documents were brought to the attention of the Mayor and City Council, the City took immediate action.  The City voluntarily corrected the previous disclosures to ensure their accuracy. This disclosure was prior to any investigation. The Mayor and City Council then took action to make sure this did not happen again.

·                    In September 2004, the Mayor and City Council adopted new procedures recommended by Vinson and Elkins to ensure the accuracy of future disclosures. San Diego now has the toughest disclosure rules of any city in America.

Those are the facts.  I will keep you updated as things progress over the next six months as we ALL work to fix the City’s fiscal problems.