City’s late audit stalls money-saving bond refis

by Kelly Thornton | inewsource

Significant problems with its new $50 million computer system are preventing the city from balancing its books and stalling the refinancing of bonds that were to save millions.

The glitches will delay the annual audit, a milestone document that says finances are in order and tells Wall Street the city is on track, for at least six months. It’s a stark reminder of recent years of investigations, overdue audits and abysmal credit ratings.

Just last week, the mayor’s office pulled from the City Council’s agenda the refinancing of convention center bonds that were projected to save as much as $444,000 annually in interest – or up to $3.3 million over the next 10 years. The mayor’s staff told docket clerks it would be brought back in April. Other bond refinancings are also up in the air.

The computer system failures that have sidetracked the audit also have left the city unable to issue quarterly reports, so it can’t make informed budget decisions or assess its financial situation.

“This is a very big deal,” said Councilman Carl DeMaio. “I was very disappointed. We’ve made so much progress in recent years, it would be a shame to see that go down the drain.

Jay Goldstone, the city’s chief operating officer, downplayed the delay, characterizing it as a glitch that will have little long-term impact on city finances or the city’s reputation.

“This delay, while obviously from my perspective is not ideal, will have no impact on our bond rating or ability to access the public bond market,” Goldstone said. “There will be no fines or penalties. We will disclose this”

Goldstone said the city was not forced to put the brakes on bond refinancing, but rather made a choice.

“Given the recent history in the city, if we don’t have updated financial information we want to take a more conservative approach and delay going back out in the bond market.”

Delay of the 2010 Comprehensive Annual Financial Report, which reconciles the books and is due in December, puts the city’s financial troubles in sharp relief. It’s been only six years since investigations and financial upheaval prompted talk of bankruptcy.

Since then, credit has been restored, public bonds have been issued, and the city produced an audited financial statement on time in 2009. But success has been short-lived.

News of the audit delay comes two weeks after voters resoundingly rejected City Hall’s call for a half-cent sales tax to bridge a yawning deficit and spur financial reforms. Projections for this fiscal year have the city $72 million in the red.

Goldstone dismissed the notion that the mayor’s office sat on the information just as voters went to the polls.

“That’s totally bogus. There was no intention in trying to link the release of this information to the election or anything, if that’s what people’s inferences or innuendos are.”

The computer system culprit appears to be entry errors in the new payroll system.

Chief Financial Officer Mary Lewis told council members in an Election Day memo that one problem involved time being charged to one account when it should have been charged to another.

She said “that accuracy of payroll checks is not affected.” However, two employees who asked not to be quoted by name for fear of losing their jobs, said they had received inaccurate paychecks.

They said they have been overpaid by up to 33 percent, and know of others in the same situation, an unknown number of times since July. One said the city failed to take enough money out of a paycheck to cover benefits, and is now asking for the money back.

Goldstone said he was not aware of paycheck snafus.

Linda Hurley, a partner with the city’s outside auditor, Macias Gini & O’Connell LLP, declined to comment.

Robert Doty, president of American Governmental Financial Service Co. and a municipal bond expert, said it’s difficult to predict the consequences of the delay, but the city’s response appears to be reasonable.

“It’s a disappointment, but it’s not the end of the world,” Doty said. “I think it shows they’re being careful and they’re not trying to go out into the market with stale financial statements. Probably given the history investors would be cautious until the new financial statements could be produced.

Alan Gibson, an analyst from Fitch Ratings in San Francisco, which gave the city favorable ratings in June, said he is aware of the delay and does not see it as a long-term problem.

“We’ve spoken to the city a couple of times recently and they had alerted us to the fact that there was a new financial system being implemented that was causing delays in issuance of their annual financial statement,” he said. “We don’t see it as an issue that would affect a credit rating.”

Former City Attorney Michael Aguirre said the delay is an indication of deeper financial problems. He noted that analysts who have given favorable ratings to the city have a stake in the city’s bond performance.

“The indeterminate delay in the 2010 City’s financial statement, the withdrawal of planned bond offerings, the critical budget cuts the Mayor said were needed in his budget briefings, are all storm warnings that cannot be prudently ignored. The Mayor and Council owe the people of San Diego and our bond investors full disclosure.”

The city’s outside auditors notified City Councilman Kevin Faulconer, who heads the city’s audit committee, of the delay Nov. 8, saying they would not be able to issue their opinion until June 2011.

Faulconer said the city’s chief financial officer has assured him the city’s credit rating will not be affected by this delay.

“The Audit Committee, the City Council, and the Mayor worked tirelessly to bring the City’s financial statements up to date in order to regain the City’s credit ratings and financial standing,” Faulconer said. “The cause of this delayed audit is due to technological problems rather than a gutted finance and auditing department, but the result and concern is the same.”

Seeking advice from the city’s outside bond counsel, Faulconer advocated for openness with regulators and the Securities & Exchange Commission.

“I believe that erring on the side of increased disclosure can only help the city maintain its hard-earned reputation as a transparent and trustworthy municipality that is setting a nationwide standard for sound financial practices,” Faulconer wrote.

The outside bond lawyer did not return a call seeking comment.

Some council members first became aware of computer system problems and delays with internal financial reports in July, said Tony Manolatos, spokesman for Faulconer. Part of the new system went live in July 2009, and other parts followed, including payroll in January.

DeMaio, who has proposed his own “Roadmap to Recovery” of cuts to employee wages and services, believes the delay in the audit is one reason the mayor has taken the unusual step of postponing midyear budget cuts.

“We need those changes now,” he said, criticizing the mayor’s stance. “We have a $72 million budget deficit. They’re saying we don’t want to cut because we don’t have current financial data.”

Sanders said last week he will wait until April to release his budget for next fiscal year, instead of making midyear cuts now to help with next year’s budget, as he did last year at this time.

Goldstone said the mayor’s decision not to make midyear budget cuts was based on several factors, including hopes that the economy was improving and perhaps “we might overcut the budget” – but not because the financial reports aren’t completed.

“Now do we have complete financial data for the current FY or for the year end? No. But I have enough financial information that if it was critical for us to move forward with the midyear budget that I feel comfortable moving forward,” he said.

The computer system, approved by the city council in 2007, had problems from the start.

The project was undertaken on the advice of outside consultants Kroll Inc., who in the midst of investigations and the city’s financial chaos said the technology upgrade was essential.

It was initially approved for $42 million to replace an antiquated system with a software package that would consolidate payroll, purchasing, accounting and other financial functions.

In late 2008, the city fired the consultant who had worked for more than a year to install the system, and hired the company that manufactured the system for about $400 an hour – about $125 an hour more than the original consultant.

By January 2009, the project was more than $10 million over budget and some parts of the switch were more than a year behind schedule.

Councilwoman Donna Frye, one of two council members to vote against purchase of the system in 2007, could not be reached for comment.

DeMaio said he still had faith the issues will be worked out. “The silver lining is, if we actually implement this financial system, we will have better and faster financial data.”

A version of this story appears in The San Diego Union-Tribune and on its web site.

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