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— "That's when the real gaming of the system began," says Shipione. The city went to more permissive pension accounting. It began skimming earnings from the pension plan to fund the healthcare plan. In 1996, to fund the Republican convention, the underfunding got rolling. The pension board, with city employees and their labor union representatives having a solid majority, would only go along with the underfunding if benefits would go up.

In 2002, Shipione warned that the system was headed for trouble. She was hooted down by officialdom, including her colleagues on the pension board, and the council passed a measure that delayed reform. The only person to vote against it was Donna Frye, who is the only member who understands business and finance, according to Barnett. In January of this year, the city admitted that its disclosures in bond prospectuses dating back to 1996 were flawed, and now the city is under federal criminal and civil investigation.

Moody's says that "financial reporting remains an area of concern." It points out that San Diego did not take advantage of the prosperous late 1990s to do something about its structural deficit, kept its reserves too low, and, unlike other California cities, didn't put away money to make up for the amount the state would pilfer.

The city has been riding bubbles. Perhaps the stock market boom of the late 1990s closed its eyes, although, as Moody's points out, the city's problem lies in underfunding, not in the bear market. San Diego rode another bubble: real estate values. On a per-capita basis, debt grew by 30 percent from 1996 through 2002. But as a percentage of real estate valuation, it remained flat -- perhaps another reason for the lack of discipline.

The council has now authorized spending $1.2 million for an audit. "Why does it take six months and cost $1.2 million to fix footnotes?" asks DeMaio.

"I tried to find out about that," says Frye. "I just kept getting stonewalled. It's a culture in city hall. You are supposed to get answers on your own time and not ask questions in public."

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