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Bond Rating for San Diego Is Suspended

Standard & Poor's says a promised outside audit of the fiscally troubled city is long overdue.

September 21, 2004|Tony Perry | Times Staff Writer

SAN DIEGO — Another day, another piece of bad financial news for City Hall as Standard & Poor's on Monday suspended its rating for city bonds.

The credit rating service said it could not continue to rate the city's fiscal integrity because a promised outside audit of the 2003 books is long overdue.

Standard & Poor's lowered its rating for the San Diego municipal bonds in April -- although the city's ratings remained in the middle of the pack of American cities -- and other agencies did the same. Lower ratings mean cities must pay higher interest rates on the bonds they issue.

The immediate effect of Standard & Poor's' action Monday is limited because the city is not in the market to sell bonds. The city is delaying, for example, going to Wall Street to refinance Petco Park, the Padres' downtown ballpark, until the controversy over the city's pension plan and misleading financial reports is settled.

But the action is another indication of how far the once fiscally mighty city has fallen. Even longtime watchers of city finances are puzzled over the quick and precipitous fall from financial grace.

"San Diego is such a beautiful place, it's hard to picture problems this big in such an environment," said John Hallacy, an official with the New York-based Municipal Bond Insurance Assn. and former director of municipal securities for Merrill Lynch.

Hallacy said Standard & Poor's decision could make it difficult for current bondholders to resell San Diego bondings, the so-called secondary market for bonds.

City officials are hoping that an audit being done by accounting giant KPMG will help regain the confidence of Wall Street. Much is riding on whether KPMG gives the city an unqualified recommendation or whether its analysis is hedged with concern about the city's budgeting process and pension debts.

Mayor Dick Murphy issued a statement that called the Standard & Poor's action "unfortunate" but noted that it is the byproduct of the city's attempt to repair its financial house.

Suspending the city's credit rating because the KPMG audit -- considered the most complete the city has ever ordered -- is not finished "is a short-term consequence of the long-term solution" to the pension problem, Murphy said. City officials have not been told when the audit will be completed.

Within minutes of being telephoned by officials of Standard & Poor's, City Manager Lamont Ewell held a news conference to announce the agency's move and to assure the public that the city is not considering filing for bankruptcy.

Last week, the city's pension reform committee issued a report calling for swift action to reduce the pension deficit.

One item being considered is the sale of $600 million in pension bonds. In keeping with its tightfisted reputation, the city has not issued such bonds in the past, although they are commonly used by many municipalities.

Also last week, a Washington law firm hired by the city issued a scathing indictment of the city management's competence in dealing with the pension fund and with what it called an "eccentric" method of depending on an ever-rising stock market to keep the fund flush.

The firm, Vinson & Elkins, recommended several steps to improve oversight of financial information.

Ewell and Murphy said they hope that the law firm and pension reform committee reports, plus the KPMG audit, will persuade Wall Street that the city can again be trusted.

Ewell was named city manager after Michael Uberaga retired under pressure from Murphy. Uberaga was singled out for scalding criticism by the Vinson & Elkins report for a laissez-faire style that let the pension deficit grow into the worst financial crisis since the city declared bankruptcy in the middle of the 19th century.

In announcing its lifting of the city's credit rating, Standard & Poor's noted that even when the audit is completed, the city will "remain on CreditWatch with negative implications" as long as it is being investigated by the Securities and Exchange Commission and the U.S. attorney.

The SEC became concerned when the city admitted that its previous submissions of information to various credit agencies glossed over the pension problem. The Vinson & Elkins investigation suggested that incompetence, not criminality, was responsible for the omissions.

But Carl DiMaio, president of the San Diego-based Performance Institute, a fiscal watchdog, on Monday called the investigation "a whitewash that defends possible illegal behavior in City Hall."

The City Council is expected to receive the report at its meeting today.

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