NYTimes Article: “Enron by the Sea”?

Monday, September 6, 2004, 23:45 —by Joe Crawford
This item was posted in General, San Diego Politics category and has 6 Comments so far.

The latest New York Times article on San Diego is called Sunny San Diego Finds Itself Being Viewed as a Kind of Enron-by-the-Sea — certainly doesn’t have a very nice ring to it.

Here’s a computer generated summary:

In the summer of 2003, Diann Shipione, an investment adviser at UBS Financial Services in San Diego and a trustee of the city’s employee retirement system, was scanning a prospectus on a proposed San Diego sewer bond issue when alarm bells began to ring in her head.

…The prospectus did not mention that the city had for years been shortchanging its public pension fund, leading to an unfunded liability of more than $1.15 billion, or that the city owed nearly $1 billion more in health care benefits to retirees and did not have the money.

…Ms. Shipione’s warning began a cascade of events that have led to a legal, financial and political crisis in San Diego, the nation’s seventh-largest city, which has long enjoyed a reputation for clean and conservative governance.

…The city was forced to admit that it had misstated its financial condition for the last several years, and it has not yet produced a certified financial statement for 2003…. Retired city employees, concerned that they would lose benefits because of mismanagement of the pension fund, sued the city, demanding immediate payments into the fund.

And the Securities and Exchange Commission and the United States attorney’s office in San Diego opened investigations this year into possible fraud in the city’s financial statements and potential political corruption.

…”This is a powder keg, a major, major problem,” said Mike Aguirre, a securities lawyer and former financial fraud investigator for the United States Senate and the Justice Department who is running for San Diego city attorney.

…Mr. Aguirre blamed San Diego’s laid-back civic culture in which a handful of influential businessmen, union leaders and political figures called the shots while issuing reassurances to the public that everything was on the up-and-up.

“The basic story is that San Diego has become a thoroughly corrupt community in which the power players cut the deals, you don’t ask any questions, and everybody gets what they want,” Mr. Aguirre said. “People don’t realize that one of the largest cities in the United States is on the verge of bankruptcy, and it’s on the verge because of a massive amount of local corruption that has resulted in the thorough mismanagement of city finances.”

…He said that the city’s budget problems had many causes, including cutbacks in payments from the state, which is facing its own budget crisis.

…He also said that hundreds of other public and private pension systems were suffering problems similar to San Diego’s because of the stock market and the rising cost of benefits.

He acknowledged that the city had made a “mistake” in underfunding its pension programs, but said the practice began in 1996, under a former city administration. That year the city essentially borrowed millions from its pension plans to cover the cost of holding the Republican National Convention and has continued the practice to cover operating costs and underwrite numerous city projects.

…Mr. Kern said that the city’s actions were not illegal and that he understood that the federal investigations center on what he described as financial disclosure issues and not criminal behavior.

“The fundamental fact of the city and its finances is that it can meet its obligations, and we are working through the issues as carefully and methodically and expeditiously as we possibly can,” Mr. Kern said.

Deborah Hartman, a spokeswoman for Carol Lam, the United States attorney for San Diego, declined to comment on her office’s investigation.

Nels Mitchell, associate regional director of the Securities and Exchange Commission, said the agency did not confirm or deny the existence of any investigation.

Carl DeMaio of the San Diego Citizens’ Budget Project, a nonpartisan watchdog group that has long been critical of the city’s financial management, said the city’s wounds were almost entirely self-inflicted and not a result of state cutbacks or the stock market. Mr. DeMaio said that officials had deceived residents about the city’s fiscal condition for years but got in trouble when they issued misleading statements in recent bond offerings.

“If the U.S. attorney finds the city knowingly misled investors with Enron-like accounting, we could see both a large civil liability and criminal indictments,” Mr. DeMaio said.

…Among the chief causes of the long-term instability of the city’s employee retirement fund was a pair of decisions in 2002 to add benefits for future retirees while reducing the city’s annual contribution to the funds. Among the most costly was a program called a deferred retirement option plan, or DROP, which allows a worker to defer retirement and build up a special account earning 8 percent interest and a 2 percent annual cost-of-living adjustment.

…That action prompted an impassioned warning from Ms. Shipione, who was one of only 2 of 13 members of the San Diego City Employees’ Retirement System board to vote against the plan. She said that DROP would entitle a worker earning an average of $50,000 to collect a lump sum of more than $300,000 at retirement, along with all his or her other benefits.

…City officials ignored her warnings and approved the benefit increases and the underpayments to the account, then glossed over them in bond issues last year.

To learn more about business accounting, and bookkeeping refer to San Diego Accounting firm Allen Barron. Prepare for taxes with tax planning and internal audits so you don’t wind up like Enron! heh.
For more reading on the city’s possible bankruptcy(!), see these links:

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6 Responses to “NYTimes Article: “Enron by the Sea”?”

  1. oso said on Tuesday, September 7, 2004, 10:53

    long enjoyed a reputation for clean and conservative governance

    I don’t know about clean We’ve certainly had our share of scandals.

  2. Dave Smith said on Tuesday, September 7, 2004, 18:55

    At least all those city workers who received a boost to their pension plans less than 3 years ago are happy. Read more at:

    http://www.pensionomics.com/wp-trackback.php/38

  3. oso said on Monday, September 13, 2004, 10:26

    Paul Kedrosky writes about the article and San Diego’s financial problems. So does SD Reader columnist Don Bauder here. Is this something that’s going to affect the mayoral race?

  4. Joe Crawford said on Monday, September 13, 2004, 10:35

    I think this is definitely going to be an issue. Whether anyone is paying attention — not sure. But it’s definitely getting coverage from what I can tell.

  5. oso said on Monday, September 13, 2004, 22:23

    Was “Enron by the Sea” a stolen headline? Look at this article from January, 2002.

  6. Joe Crawford said on Tuesday, September 14, 2004, 7:23

    Heh. Well, “Enron by the Sea” is hardly the most original phrase. We might as well be calling it PensionGate. :-\

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