City Promotes Financial Clowns

San Diego — 'The foxes are being promoted," says attorney Michael Conger. "You can't take seriously anything the city says about cleaning up this mess as long as they keep giving promotions to the chief architects of the debacle."

Conger is the lawyer who successfully sued the city last year over the black hole in its pension system. He is commenting on a January 7, 2005, memo from P. Lamont Ewell, city manager, to the mayor and the city council. Subject: "organizational structure and personnel changes." Essence: the same top city managers who were cited for ineptitude and secrecy in last year's city-sponsored Vinson & Elkins investigation and are now being interviewed by federal government probers still have fancy titles and responsible jobs. Some chairs have been rearranged, but none has been shoved out in the hall or out the back door.

On January 7, Ewell announced that Lisa Irvine will become deputy city manager in charge of finance. Bruce Herring will be deputy city manager in charge of community services. Patricia Frazier will be deputy city manager of development. Mary Vattimo, former treasurer, will be the new financial management director, working with Irvine and Ewell to balance the budget.

"These people under subpoena, chided as incompetent or out of touch with the financial management system in the Vinson & Elkins report, are being promoted," says Carl DeMaio, president of the Performance Institute, a San Diego-based think tank promoting government efficiency. "The cast of characters gets rewarded for rank mismanagement of the city's finances."

The financial community -- already nervous about the city's cover-ups of mismanagement -- will hardly respond positively. "I can't see how this possibly could instill confidence on Wall Street or with the bond-rating agencies," says DeMaio. The city's near-$2 billion pension and health-care deficits have led to several credit downgrades. Standard & Poor's has suspended its rating of San Diego because the books have not been audited for 2003 and 2004.

"This doesn't help us reestablish our credibility with [accounting firm] KPMG, with Wall Street, or the rating agencies," says city attorney Michael Aguirre. KPMG won't provide a 2003 audit because it doesn't know if city employees have criminal culpability. Aguirre wants to provide KPMG and federal investigators with the information they have not been provided.

"It gives the appearance that nothing is wrong. They keep promoting people," says Diann Shipione, the pension-board member who blew the whistle on the billowing scandal in 2002 and whose challenge of a sewer-bond prospectus in September of 2003 led to the city's confessions that it had been putting misinformation in municipal-bond prospectuses dating back to 1996.

On December 16, Irvine, who is responsible for preparing the city's budget, was issued a subpoena by the Securities and Exchange Commission, which is investigating the false information in bond prospectuses. Among those ordered to turn over information to the U.S. attorney's office last February were Ewell and Vattimo. As Matt Potter revealed in the Reader on December 23, the city is picking up the tab for legal assistance to Herring in two federal probes into city-disclosure practices. On December 29, Ewell, Herring, Frazier, and Vattimo got subpoenas from the U.S. attorney's office.

Last week, Aguirre seized documents from Vattimo and acting auditor and comptroller Terri Webster, who replaced auditor Ed Ryan after his sudden resignation last February. The seized documents should have been provided to the Securities and Exchange Commission last April, says Aguirre, who is in a pitched battle with the pension system, which doesn't want to surrender the papers.

"Our evidence indicates that Bruce Herring was the primary architect of the managers' proposals" that led to the chronic pension underfunding, says Conger.

Both Frazier and Vattimo signed reports to the Securities and Exchange Commission that contained false statements, says Conger, who provided this information in his lawsuit. "Vattimo and Frazier signed statements saying that the city is required to pay the full actuarial rate [in funding its pension plan], but they forgot to tell bond investors that the city was not doing it," says Conger.

Indeed, this revelation was "our smoking gun that got the [settlement with the city]," he says. When Conger pointed out during negotiations that the city officially stated that it was required to finance the pension plan on an actuarial basis but was not doing so, "That was the final card that got them to come to Jesus. Before that, they wouldn't listen to our common sense. That got them into the church and on their knees."

Last year's Vinson & Elkins report, the city-authorized study of disclosure practices, mentions many of the people lauded by Ewell in his January 7 memo. For example, the Vinson & Elkins study discusses how in June of 2003, city officials met with representatives of bond-rating agencies and for the first time gave significant information about the retirement-system woes. But some city-generated information was kept secret. Frazier and another finance official "cited confidentiality concerns as the reason to withhold the information," says the report.

In September of 2003, an outside bond lawyer, Paul Webber, received a copy of Shipione's criticism of the sewer-bond prospectus. Webber shared Shipione's misgivings, but city officials and pension-board members "vehemently disputed" her concerns, according to the report. Webster sent an e-mail to several people, including Vattimo, blasting Shipione's purported "damaging, false allegations." Webber stuck to his guns and insisted on a comprehensive study of the city's disclosures.

According to the report, Vattimo sent an e-mail to Frazier: "I don't think that [Webber] fully understands the agreements (or maybe I don't understand what he is communicating.) In addition, this disclosure is OVERKILL."

Says the Vinson & Elkins report, "The relationship between Mr. Webber and city officials became progressively more strained over time. Mr. Webber felt that city officials did not appreciate the seriousness of the disclosure issues."

In one e-mail to a city legal official, Webber, complaining that pension-deficit information was being withheld from him, said, "The angst and anger, I believe, has grown as disclosure day has approached. Mary [Vattimo's] response was 'much ado about nothing -- all you had to do was ask.' Well, I did ask, and no one had bothered sharing that with me. So far that has not been answered, and I don't imagine it will be."

"When have we hidden anything from [Webber's law firm]?" Vattimo shot back in an e-mail. "I think we all need a rest from each other."

Says the report, "The city staff continued to believe the proposed disclosure [of pension problems] was unnecessary and potentially harmful." Vattimo said in an e-mail to Webber, "We are in an environment where mountains are made out of molehills, and true credit issues could easily be overshadowed by this one issue."

Says the report, "Eventually, however, the city acceded to [Webber's] views." In January of 2004, San Diego admitted that it had been giving out false information. Shortly, bond-rating agencies began dropping city credit ratings, and the Securities and Exchange Commission and Department of Justice launched investigations.

Says the report, "The exchanges [of testy e-mails] indicate both institutional stubbornness and the degree to which Financing Services and others had yet to fully grasp the dimensions of the problems in the pension system."

In its interviewing for the report, Vinson & Elkins asked Ewell about the "polarized environment" -- one area of city government not knowing what another area was doing, and finance officials resisting full disclosure of the pension mess. Ewell allowed that the culture seemed inexplicable but said, "Questioning the process was sometimes like questioning the Bible."

I asked the city's public relations representative, Gina Lew, for an interview with Ewell. I wanted to know why these people are getting and keeping cushy jobs in this so-called restructuring. And what will Wall Street think? According to Lew, Ewell told her, "This restructuring was not meant to address anything in the Vinson & Elkins report." Ewell added that "of the people named in the Vinson & Elkins report, no one has been found guilty of anything. The restructuring changes were made to put people in places to utilize skills that are important for the city's needs."

This was hardly responsive to my questions. Now I know how attorney Webber felt.