- The Washington Times - Wednesday, August 9, 2006

SAN DIEGO (AP) — The city recklessly and deliberately mismanaged its finances for years, exhibiting disregard for the law and becoming “Enron-by-the-Sea,” according to consultants who investigated how it created a $1.4 billion pension fund shortfall.

San Diego “fell prey to the same type of corruption” that ruined companies such as Enron Corp. and WorldCom Inc. and prompted Orange County to file for bankruptcy protection in 1994, said a report by the risk management company Kroll Inc.

“The evidence demonstrates not mere negligence but deliberate disregard for the law, disregard for fiduciary responsibility and disregard for the financial welfare of the city’s residents,” the report concludes.

The $20 million report, presented at a City Council meeting Tuesday, offers one of the most detailed accounts of how San Diego created its $1.4 billion pension shortfall that has crippled its ability to borrow money.

The shortfall — the gap between the value of its pension assets and its obligation to retirees — soared after the City Council in 1996 and again in 2002 skipped payments to the pension fund and, at the same time, enhanced retirement benefits.

The subsequent fiscal meltdown led to investigations by the U.S. Justice Department and the Securities and Exchange Commission (SEC) in early 2004. Five former city and pension fund officials were charged with federal fraud and conspiracy in January.

The report outlines a series of recommendations, including creation of an independent audit committee and more authority for the city’s chief financial officer.

“You got a second chance here, folks,” said one of the authors, former chief SEC accountant Lynn Turner. “I think it’s a marvelous city, but you need to change it from being Enron-by-the-Sea to Emerald-by-the-Sea.”

The report found that several former city officials likely violated federal securities law and others were negligent.

It says former Mayor Dick Murphy and members of the City Council failed to disclose the extent of the city’s problems to bond investors and “knowingly and improperly” caused the city to violate state and federal law in its collection of sewage fees.

Arthur Levitt, former chairman of the SEC, was involved in Kroll’s investigation and said the city overcharged homeowners for sewage to subsidize large businesses.

Mr. Murphy, a Republican, resigned in July 2005, less than a year after winning a disputed election to a second four-year term.

Mayor Jerry Sanders, a Republican former police chief who was elected last year, said the report “will hopefully put a very unfortunate chapter of this city’s history behind us.”

The report clears the way for San Diego to complete overdue audits, a key step to returning the nation’s eighth-largest city to Wall Street’s good graces.

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