San Diego Business Journal

Tenuous Financial Status Delays City's $1.2B Sewer Bond Plan
Government: Audit, Legal Issues Bring Timing Into Question


San Diego's uncertain financial situation, particularly the outcome of an ongoing financial audit of its books, caused the rejection of a planned issue of up to $1.2 billion in sewer improvement bonds last week.

The San Diego City Council voted Sept. 13 in favor of the sewer system financing by a 5-3 margin, but any bond issue requires a minimum of six votes to pass. The council's ninth seat, formerly held by 4th District Councilman Charles Lewis, has been vacant since he died in August. A special election to fill the vacancy is set for Nov. 16.

City Councilwoman Donna Frye led the charge to reject the financing plan that entails refunding a portion of sewer bonds issued in earlier years that carry higher interest rates than are currently available.

City Manager Lamont Ewell said approving the financing plan would enable the city to accomplish all the preliminary steps required to issue new bonds by the end of the year and continue work on upgrading the city's crumbling sewer and water system.

Frye said she couldn't support the plan without knowing more facts about the city's financial state, including an audit of the city's financial report for the 2003 fiscal year, and a report by a contracted law firm to assist the city in dealing with an investigation by the Securities and Exchange Commission.

Both the audit by KPMG and the legal firm's advice are the result of the city's admission this year of errors in an annual financial report that must be made to bond investors.

The city revealed the reports contained errors about its sewer revenue fund and its employee pension fund.

Those revelations led to investigations by the FBI, the SEC, and the U.S. attorney's office, none of which has been concluded.

Frye said moving ahead with another bond issue without having the results of the audit and the legal report would open the city to further liability.

Lisa Briggs, executive director for the San Diego County Taxpayers Association, said while delaying issuing the bonds isn't good, she understood council members were cautious because the financial audit has yet to be completed.

"The delay in issuing the water bonds is just the latest negative impact from waiting for this audit," she said. "Getting the audit out or at least making sure the information is out sooner than later is the wise course."

Mayor Dick Murphy advocated approving the financing plan and noted the bonds could not be issued until the financial audit is completed and reviewed.

He also noted cost savings associated with lower interest rates by approving the financing plan, which entails a minimum 60-day waiting period, because it involves passage of a resolution. That action could be challenged in court.

Council members Jim Madaffer and Ralph Inzunza joined Frye in opposing the plan. The new bonds would also be used to retire temporary debt the city was forced to obtain from Bank of America in June because it could not issue bonds until the audit and the federal investigations were completed.

The city had planned to issue some $500 million in sewer improvement bonds a year ago, but postponed the issue after revelations of mistakes in the 2003 financial reports.

San Diego has also held back from planned bond issues to refinance $169 million in bonds for Petco Park in Downtown, and for bonds tabbed for other public improvement projects as a result of uncertainties surrounding the city's financial condition.

Whenever the city moves ahead with issuing debt, it will have to pay higher interest because all three bond rating agencies have downgraded the city's ratings in recent months.

Although the city's ratings were reduced, San Diego still enjoys one of the highest ratings among large cities in California, hired bond underwriters told the council last week.