Tuesday, February 24, 2004

From municipal bonds to bail bonds

By Lisa Ross

San Diego-- The Feds are back at City Hall, sifting through records for the third time since the 2000 elections -- another humiliating event for the class of Y2K who said they would make city government more accountable.

Since that election, three council members have been indicted for alleged misdoings with strip club operators. One holdover from the old guard was ushered out of office in a plea bargain for engaging in a financial tête-à-tête with Padres owner John Moores while the city was negotiating terms for the ballpark.

This time the federal investigation is not about strip clubs or sports team influence peddling, but about a failure by the City Manager's office to disclose important financial information to investors when the city issued a sewer bond last September.

That $500 million bond, along with one to finance the ballpark, was put on hold after pension board trustee Diann Shipione noticed that the bond prospectus failed to fully discuss the multibillion-dollar employee pension deficit threatening the city's fiscal health.

In January, after she blew the whistle several times to the City Council and then to a bond rater, the city admitted in papers filed with the Municipal Securities Rulemaking Board to a lengthy list of errors in the prospectus.

Now, the Securities and Exchange Commission and the FBI want to know who knew what when and what did they do about it. So do we all.

Since 1995, the SEC has required issuers of municipal bonds to provide continuing disclosure of material facts that investors need to make informed decisions for the life of the bonds. The omission or misstatement of material information exposes whoever signed off on the disclosure to potential liability for securities fraud.

Simple observation of the mayor and City Council's priorities might support the view that they did not believe the pension system had any material effect on the city's financial future. Just a year ago they voted to increase benefits without making similar increases in contributions.

Even with public concern growing, with the exception of Donna Frye, they continued to reject suggestions that a fiscal tsunami created by chronic under funding and rising benefits was roaring toward the shores of San Diego.

So much were they in denial that the mayor in his 2004 State of the City address assured us again that our pension problems were no different than those experienced by a lot of other cities impacted by the stock market downturn.

And Councilman Scott Peters, in the midst of a campaign for re-election, recently announced proud support for another warm and fuzzy park bond for the 2006 ballot -- hey, man, when the credit card is full, just apply for another one.

This was after Moody's Investment Service downgraded the financial outlook for San Diego general obligation bonds from Stable to Negative, largely because of the pension deficit, but also because of a small reserve compared with similar municipalities.

We now know that if the growing pension deficit continues unabated, payment on the debt alone will consume over a quarter of the general fund without touching the problem. In the midst of a re-election campaign, the mayor continues to ask us to join him under the covers.

Municipal bond experts around the country that I spoke with last week still thought that San Diego is in good financial shape. They were unaware of our pension problems --until this week when Standard and Poor's downgraded the city's general obligation bonds to AA- and changed the outlook from Stable to Negative.

Still, they thought it would take a catastrophe the magnitude of the Orange County bankruptcy to very seriously impact our bond ratings.In the case of our neighboring county to the north, the financial wizards at the helm attracted other agencies into investment pools. They did not tell the agencies that they were dabbling in risky derivatives. The losses led to the county's bankruptcy.

The SEC censured the members of the Orange County Board of Supervisors by name, their political careers ended there, and the financial officer responsible spent some jail time under California law.
Municipal fund disclosure fraud investigations generally end up with an SEC settlement that requires the offender to provide full disclosure of the material facts from now on and admit to having failed to do so in future prospectuses for a determined length of time. The city gets a black eye, but does not go down for the count.

That is because stringent fines end up hurting taxpayers. And, city officials are frankly viewed as well-meaning people short on bond market knowledge, prone to mistakes, often victims of bad advice and subject to intense political pressure --which begs the question about the role of San Diego's City Attorney in this mess.

It appears that for anyone in San Diego to end up needing a bail bondsman, an investigation would have to uncover evidence that someone personally profited from the omission, that the worth of the city's bonds would have declined if the pension problem was disclosed, and that immediate action was not taken to fix the problem.

Mercifully, there is an election on March 2, when the people of San Diego can take the matter into their own wise hands. Why wait for the Feds?
Ross is a political writer and consultant. She can be reached at www.lisaross.com.