San Diego In chaotic times, outsiders have the inside track. So-called "outside" lawyers, accountants, consultants, actuaries, investment bankers, and self-proclaimed experts-for-hire are like taxicab drivers: they salivate when the meter is running. Often, opposing lawyers, feigning belligerence, are conspiring so that each can submit higher invoices to their clients. Ask someone who has been through a divorce: in many cases, the husband and wife figure out that each other's lawyers are prolonging the hostilities to boost their incomes.
The outsiders-for-hire have other tricks. Consultants are like sociologists: their conclusion is that there has to be another study. A surefire moneymaker is one consultant being hired to audit the work of another and vice versa. And consultants know they are hired to tell management what it wants to hear.
When a client is in disarray, on the financial brink, and dysfunctional from top to bottom, it is vulnerable. That describes the City of San Diego -- and may explain why so many outsiders are in evidence these days. Are they helping one another pick the pockets of the drunk in the gutter?
Outsiders by the bushel are being hired at big pay to protect one city hall faction (the mayor and his crew) from another (the city attorney's office).
Ineptitude has played a role, too. "Nobody in this government of the City of San Diego is a sophisticated consumer of legal services," says Pat Shea, the attorney who assisted city attorney Mike Aguirre in his move into office and is now running for mayor on a platform of taking the city into municipal bankruptcy. "People don't know the product they want to buy, don't know the task to assign, don't know how to measure the product they are getting. It's an inefficient marketplace -- people employing consultants, lawyers, and accountants but not being sure how to direct them."
The door opened in September of 2003, when Diann Shipione, Shea's wife and a member of the pension board, challenged the veracity of pension-related information in a $500 million sewer-bond prospectus. The offering was taken off the table, while the city's outside bond counsel studied her questions and in the end shared her misgivings. In early 2004, the city admitted that it had been putting false information in bond prospectuses since 1996. Investors had not been told the depth of the pension system's underfunding. Neither had the public. Government investigators moved in.
The city dropped its auditing firm, Caporicci & Larson, and hired giant KPMG. Then the city hired Enron's former law firm, Vinson & Elkins, to represent it in front of the Securities and Exchange Commission, which was beginning its investigation. Vinson charged almost $4 million for a report that reached one conclusion that was obvious (the city's bond disclosure bureaucracy is abysmal) and one that was beyond its mandate (no individual was culpable). KPMG wouldn't accept such findings and refused to certify audits of past years. Vinson agreed to look into whether there had, in fact, been misconduct -- a curious appointment, since it had earlier found none. "In the second hiring of Vinson, I was never provided documents outlining the scope of the work product -- once burned, twice shy," says councilmember and mayoral candidate Donna Frye, who opposed the move.
To induce KPMG to complete the audits, Aguirre then probed the pension mess. He began issuing reports citing San Diego city officials for fraud and illegal acts, as well as violations of state and local laws. The mayor and councilmembers who were cited for such violations didn't like it. Result: more outside professionals came on board. Officials of Kroll, Inc., raking in up to $900 an hour, were hired, supposedly to "reconcile" the benign Vinson report with the biting ones by Aguirre.
Early this year, the city established an Outside Professionals' Audit Committee headed by the Kroll group. It, in turn, brought in two New York lawyers at $560 and $825 an hour to do what Vinson was going to do. Vinson may or may not give an oral report to the audit committee. The city isn't talking and neither is the commttee. "All I know is that Vinson is charging a lot," says Don McGrath of the city attorney's office, who studied the question last month.
What's all this costing? Aguirre thinks the tab is more than $10 million. Attorney Michael Conger, who successfully sued the city over the pension underfunding, puts it between $10 million and $12 million. Shea says it could be up to $20 million.
In a sense, the city is paying for comedy. In 2003, the establishment law firm of Luce Forward Hamilton & Scripps was defending the city against the underfunding suit filed by Conger. On December 19, 2003, the firm asserted, "Nowhere does [the city charter] state that the city is required to pay [into the pension fund] what the actuary determines that the city must pay." It made close to $900,000 defending that case, says Conger.
On February 22 of this year, the same firm did a backflip, opining in a memo to the city manager that the city's failure to fund the system on an actuarial basis may have been a violation of both the charter and the municipal code. It got $127,000 for that opinion. "That is called talking out of both sides of your mouth for a million dollars," chuckles Conger. The law firm refuses comment.
"The city fired Caporicci because, in part, it didn't do a good job on the pension part of the audit," says Aguirre. "But the pension fund retained Caporicci. The city had to do an illegal-acts investigation to get the city's audit. Why was it that the pension plan was able to use the Caporicci firm without any illegal-acts investigation?"
More churning of outside firms is inevitable. The outside audit committee wants the pension board to fire its long-time outside auditor, Rick Roeder. Roeder had expressed concerns about the underfunding but then went against his own professional judgment, says the committee. "He was an expert witness for CalPERS [California Public Employees' Retirement System] when Governor Pete Wilson tried to delay payment of pension contributions, then went along with [San Diego's underfunding]," says Aguirre.
Another who expressed opposition to underfunding, then caved in, is the former outside attorney for the pension system, San Francisco's Robert Blum. The city, following Conger's lead, filed suit against Blum for giving bad advice. Although all details have not been worked out in court, Blum will settle for the amount of his insurance. After legal expenses, the city should get about $11 million, says Conger.
But why did both outside actuary Roeder and outside lawyer Blum go against their earlier disapprovals? "We should try to find out who twisted their arms," says Shipione. She objects to the Blum settlement. "What happened between June of 2002 and November of 2002 that caused Blum to eliminate from his letter to the retirement system about 45 reasons why not to do the [underfunding]?" she asks. "It appears there was a great motivation to settle with Blum so that no discovery would be done, no depositions would be taken, questions like that would not be answered."
Outsiders knowing inside dirt get special treatment.