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KPMG reports that the City's internal controls stink

Frye bugged Sanders burro-crats for internal-controls report

— Mayor Jerry Sanders would like San Diegans to believe that the City's sins will soon be in the past. He inherited a mess and proclaims he is fixing it. His predecessors practiced "delay, deny, or deceive," he declared last year. But as his administration's bumptious handling of two recent accounting and pension-related matters reveals, all that's changed is the alliteration. It's now "befog, besmirch, and bamboozle."

For example, on March 16 the accounting firm KPMG released the long-delayed audit of 2003. In accounting patois, it was "clean"; KPMG said it represented fairly "in all material respects" the City's then-condition. That same day, a beaming Sanders and his aides held a celebratory press conference. The KPMG report referred to a second report on the City's internal controls and said it was an integral part of the audit. That devastating report concludes that the City had -- and, importantly, still has -- an accounting system so disheveled it is wide open to errors and fraud. The second report was released to city officials on March 22.

But San Diegans didn't learn about this document until April 19, when Councilmember Donna Frye finally got it from deputy comptroller Greg Levin and posted it on her website. Levin then fired off a laughable memo chewing her out for sharing information with the public.

Similarly, there is a second instance of the City's withholding information from its elected officials: until Frye asked some questions at a council meeting on April 16, she and her colleagues had not heard about a scheme to switch the payment of pension benefits of what I call "the 100 Percent Club" -- those city employees whose pensions will be 100 percent or more of their annual compensation -- from the San Diego City Employees' Retirement System to the City's fragile general fund. Right now, that sum is a relatively modest $22.8 million. But those who have been tracking city employees' billowing pension benefits say the liability will surge very quickly as growing numbers of retirees rake in 100 percent or more of their working years' pay. The pension fund is already bragging that its liabilities are falling -- yeah, because the City is picking up some of them.

First, let's consider KPMG's March 22 report that the City's internal controls stink. The report stated, "Although a number of changes in personnel and processes have been made from June 30, 2002 to the present, the City will need to continue to reorganize, improve and document its processes" (italics mine). KPMG had audited only 2003, but it realized that today's processes are a mare's nest too. (Note: a mare's nest is defined as: 1. a fraud or 2. an extraordinarily complicated situation. Often it is difficult to distinguish one from the other. KPMG stated that San Diego has to create an accounting system that is free of errors and fraud.)

The Sanders crew doesn't want the public to hear such things. For example, onetime auditor John Torell issued a report in January of this year saying internal controls were "minimally adequate." That got changed by the mayor's minions to say the controls had improved and now assured "timely and accurate preparation" of city financial statements -- an assertion KPMG wouldn't make. Torell quit that same month. It's little wonder that in late 2006, city employees said they had little respect for management's ethical standards.

Beginning in March, Frye bugged Sanders burro-crats for the internal-controls report. When she got it on April 19, "It didn't say, 'This is a draft, this should not be released, no one should see this, it's not ready to go.' It said, 'Here you go,' " she says. So she posted it.

All hell broke loose. Levin sent a memo to all councilmembers whining that Frye's action was "fraught with risk and potential liability." He complained, "The premature release of this document to the public could have resulted in a material misrepresentation regarding the City's financial condition and its internal controls." Then, contradicting himself, he went on to write that most of the specific items in the report had earlier come before council in other forms, such as the Kroll report. "The public has had numerous opportunities to hear discussion of the comments contained in the report," he said. And yet releasing it was fraught with risk?

Next, Sanders wrote a letter to the Union-Tribune saying that the report had "nothing new." After all, KPMG had to restate an amazing 66 items totaling $1.8 billion in the audit. That had already been reported, said the mayor.

Huh? If it contained nothing new, why was Levin so indignant? Here's a suspicion: the report mentions that in the City's accounting system, someone can "create vendors" or "enter invoices." That's Embezzlement 101. The controls were -- and probably still are -- so lax that an employee can create an invoice and endorse a check to himself. Or the employee can invent a vendor's name and route the loot to the fictional character -- namely, his own pocket.

Sanders wants to outsource City work to outside vendors. This idea has been pushed by Carl DeMaio of the Performance Institute. But DeMaio says that to have such a system, "We have to have internal controls and oversight to make sure we get what we paid for. This is a city that can't manage itself out of a wet paper bag." That's obvious: in a March 23 report, KPMG said that it ground out 17 different drafts of the 2003 audit, including 6 after the December 1, 2006 version. That was just for 2003; there are the 2004, 2005, and 2006 audits to go.

In trying to keep details of the internal-control report secret, Sanders's burro-crats will hardly fool Wall Street. Already, top-rated (insured AAA) San Diego municipal bonds yield 0.4 percent more than comparable AAA bonds. To attract buyers, the bonds must drop in price, sending the yields upward.

Bond analysts will certainly cock an eyebrow at San Diego's proposed method of switching the liability for the 100 Percent Club from the pension fund to the City's already-ailing general fund. The pension fund has been boasting that its unfunded actuarial liability has come down by almost $400 million. Frye noticed that in a San Diego City Employees' Retirement System document, there was a drop of $22.8 million because of "proper treatment of IRS benefit limitations."

At a council meeting, she asked city financial officials what that was all about. Well, it seems that the Internal Revenue Service frowns on pensioners who receive 100 percent or more of their annual pay. The same applies to those retirees making more than $225,000 a year from their previous municipal employment. So the pension board has to get those sums off its books. Frye notes that before she was in office in March 2001, the city council passed an act that created a Qualified Excess Benefit Arrangement that could accommodate the money shift.

Both Libertarian activist Richard Rider and DeMaio have been studying remuneration and retirement benefits of city employees. The number of retirees raking in 100 percent or more of their pay or amassing $225,000 a year "is a growing figure," warns Rider.

DeMaio points out that many escalators over the years have pushed up retirement benefits. In May 2000, the City settled a lawsuit, known as Corbett, that calls for a flat increase of 7 percent in benefits payable from pension assets. Corbett also mandates that on-the-job emoluments such as bonuses have to be reflected in retirement pay. He predicts that "the lion's share of people retiring after 1996 will join the exclusive club of those getting more than 100 percent of their pay." That will whack the general fund.

The council had a right to get this information before Frye pried it out of the Sanders donkeys. "They [burro-crats] are not providing information that we need to know," says Frye. "You have to turn into Nancy Drew, Girl Detective, to even get a document."

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— Mayor Jerry Sanders would like San Diegans to believe that the City's sins will soon be in the past. He inherited a mess and proclaims he is fixing it. His predecessors practiced "delay, deny, or deceive," he declared last year. But as his administration's bumptious handling of two recent accounting and pension-related matters reveals, all that's changed is the alliteration. It's now "befog, besmirch, and bamboozle."

For example, on March 16 the accounting firm KPMG released the long-delayed audit of 2003. In accounting patois, it was "clean"; KPMG said it represented fairly "in all material respects" the City's then-condition. That same day, a beaming Sanders and his aides held a celebratory press conference. The KPMG report referred to a second report on the City's internal controls and said it was an integral part of the audit. That devastating report concludes that the City had -- and, importantly, still has -- an accounting system so disheveled it is wide open to errors and fraud. The second report was released to city officials on March 22.

But San Diegans didn't learn about this document until April 19, when Councilmember Donna Frye finally got it from deputy comptroller Greg Levin and posted it on her website. Levin then fired off a laughable memo chewing her out for sharing information with the public.

Similarly, there is a second instance of the City's withholding information from its elected officials: until Frye asked some questions at a council meeting on April 16, she and her colleagues had not heard about a scheme to switch the payment of pension benefits of what I call "the 100 Percent Club" -- those city employees whose pensions will be 100 percent or more of their annual compensation -- from the San Diego City Employees' Retirement System to the City's fragile general fund. Right now, that sum is a relatively modest $22.8 million. But those who have been tracking city employees' billowing pension benefits say the liability will surge very quickly as growing numbers of retirees rake in 100 percent or more of their working years' pay. The pension fund is already bragging that its liabilities are falling -- yeah, because the City is picking up some of them.

First, let's consider KPMG's March 22 report that the City's internal controls stink. The report stated, "Although a number of changes in personnel and processes have been made from June 30, 2002 to the present, the City will need to continue to reorganize, improve and document its processes" (italics mine). KPMG had audited only 2003, but it realized that today's processes are a mare's nest too. (Note: a mare's nest is defined as: 1. a fraud or 2. an extraordinarily complicated situation. Often it is difficult to distinguish one from the other. KPMG stated that San Diego has to create an accounting system that is free of errors and fraud.)

The Sanders crew doesn't want the public to hear such things. For example, onetime auditor John Torell issued a report in January of this year saying internal controls were "minimally adequate." That got changed by the mayor's minions to say the controls had improved and now assured "timely and accurate preparation" of city financial statements -- an assertion KPMG wouldn't make. Torell quit that same month. It's little wonder that in late 2006, city employees said they had little respect for management's ethical standards.

Beginning in March, Frye bugged Sanders burro-crats for the internal-controls report. When she got it on April 19, "It didn't say, 'This is a draft, this should not be released, no one should see this, it's not ready to go.' It said, 'Here you go,' " she says. So she posted it.

All hell broke loose. Levin sent a memo to all councilmembers whining that Frye's action was "fraught with risk and potential liability." He complained, "The premature release of this document to the public could have resulted in a material misrepresentation regarding the City's financial condition and its internal controls." Then, contradicting himself, he went on to write that most of the specific items in the report had earlier come before council in other forms, such as the Kroll report. "The public has had numerous opportunities to hear discussion of the comments contained in the report," he said. And yet releasing it was fraught with risk?

Next, Sanders wrote a letter to the Union-Tribune saying that the report had "nothing new." After all, KPMG had to restate an amazing 66 items totaling $1.8 billion in the audit. That had already been reported, said the mayor.

Huh? If it contained nothing new, why was Levin so indignant? Here's a suspicion: the report mentions that in the City's accounting system, someone can "create vendors" or "enter invoices." That's Embezzlement 101. The controls were -- and probably still are -- so lax that an employee can create an invoice and endorse a check to himself. Or the employee can invent a vendor's name and route the loot to the fictional character -- namely, his own pocket.

Sanders wants to outsource City work to outside vendors. This idea has been pushed by Carl DeMaio of the Performance Institute. But DeMaio says that to have such a system, "We have to have internal controls and oversight to make sure we get what we paid for. This is a city that can't manage itself out of a wet paper bag." That's obvious: in a March 23 report, KPMG said that it ground out 17 different drafts of the 2003 audit, including 6 after the December 1, 2006 version. That was just for 2003; there are the 2004, 2005, and 2006 audits to go.

In trying to keep details of the internal-control report secret, Sanders's burro-crats will hardly fool Wall Street. Already, top-rated (insured AAA) San Diego municipal bonds yield 0.4 percent more than comparable AAA bonds. To attract buyers, the bonds must drop in price, sending the yields upward.

Bond analysts will certainly cock an eyebrow at San Diego's proposed method of switching the liability for the 100 Percent Club from the pension fund to the City's already-ailing general fund. The pension fund has been boasting that its unfunded actuarial liability has come down by almost $400 million. Frye noticed that in a San Diego City Employees' Retirement System document, there was a drop of $22.8 million because of "proper treatment of IRS benefit limitations."

At a council meeting, she asked city financial officials what that was all about. Well, it seems that the Internal Revenue Service frowns on pensioners who receive 100 percent or more of their annual pay. The same applies to those retirees making more than $225,000 a year from their previous municipal employment. So the pension board has to get those sums off its books. Frye notes that before she was in office in March 2001, the city council passed an act that created a Qualified Excess Benefit Arrangement that could accommodate the money shift.

Both Libertarian activist Richard Rider and DeMaio have been studying remuneration and retirement benefits of city employees. The number of retirees raking in 100 percent or more of their pay or amassing $225,000 a year "is a growing figure," warns Rider.

DeMaio points out that many escalators over the years have pushed up retirement benefits. In May 2000, the City settled a lawsuit, known as Corbett, that calls for a flat increase of 7 percent in benefits payable from pension assets. Corbett also mandates that on-the-job emoluments such as bonuses have to be reflected in retirement pay. He predicts that "the lion's share of people retiring after 1996 will join the exclusive club of those getting more than 100 percent of their pay." That will whack the general fund.

The council had a right to get this information before Frye pried it out of the Sanders donkeys. "They [burro-crats] are not providing information that we need to know," says Frye. "You have to turn into Nancy Drew, Girl Detective, to even get a document."

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