The Kroll report is so overrated. Sure, the 266-page volume delivered to the City Council Tuesday ought to be the lead domino in finally getting the city back into the public bond market, which means overdue building and maintenance projects can get back on track. But it turns out the city has had other avenues to revenue all along, through what Chief Financial Officer Jay Goldstone calls “private placements.” That's “banks” to the rest of us.
Perhaps best to start from the beginning-no, it's too complicated; let's start from the middle: Due to massive pension debt precipitated in the early 2000s by rubber-stamping city officials and sleeping-dog journalists, the city's books were in such poor order that bond rating agency Standard & Poor's suspended the city's credit rating. That meant San Diego could no longer sell bonds. For a municipal government, publicly traded bonds represent the cheapest way to borrow money. To placate the S&P-and the Securities and Exchange Commission-the City Council hired an outside auditor, KPMG, to look over the books from 2003. Then KPMG asked the city to hire another company, the law firm Vinson & Elkins, to investigate possible criminal activity related to the pension mess, but V&E's report was deemed inadequate. So San Diego hired another company, Kroll. Presumably, the Kroll report would make it possible for KPMG to finish its work, and then another company, Macias Gini & O'Connell, could finish the 2004 and 2005 audits, and the road to financial health would at last be passable.
In the meantime, city officials told San Diegans that the municipal credit card had been revoked. Cities need the ability to borrow for the same reason people do: to make large expenditures that might otherwise take years to save up for. Since there simply isn't enough money from tax revenues to take on big new projects, and bonds were not an option, some of San Diego's most pressing needs went unmet:
* Not a single one of San Diego's fire stations meets national response-time standards, according to 2005 report by the Commission on Fire Accreditation International. Renovations and new fire stations would alleviate the problem. But, no bonds, no fire stations.
* In 2002, the City Council promised to double the square footage of city libraries, including a vast new main branch, which required three separate bonds. The first was to be issued in June 2004, but the city's poor credit rating sank the project. No bonds, no new libraries.
* The water and sewage systems are so decrepit that a mystery leak led to an E. coli contamination of drinking water last weekend. Waste-treatment processes must be improved or suffer the wrath of the Environmental Protection Agency. No bonds, no fixing the-hey, wait a second, there's money here!
Faced with a federal court order and EPA regulators, Mayor Jerry Sanders put out a request for proposals in January, hoping to find a private institution willing to loan the city $500 million to fix water and sewage infrastructure. No fewer than 11 lenders answered the call, and they weren't exactly lightweights: Citigroup and Goldman Sachs are on the shortlist.
Maybe San Diego isn't such a terrible credit risk after all. Indeed, the city has borrowed from private sources before, like in 2004, when it got a $150-million line of credit from Bank of America.
City Hall watchdog Mel Shapiro has been singing this song for months: “Here was a way to get along without the bond issue, without the Kroll report, and without the audit.”
Private money is a bit more expensive than publicly traded bonds, but not by much. The pension shenanigans coupled with the lengthy investigations have left bond traders leery of San Diego's offerings. Former SEC chairman and Kroll luminary Arthur Levitt said after Tuesday's City Council meeting that a bond issue “would be so costly that it would not be advantageous to the city.” The interest rates on the bonds would be only slightly better than the rates offered by the banks.
Which is why Kroll's report is so overrated. Important, yes, but not the only option for bringing in needed capital.
As a coda, CFO Goldstone (echoing the opinions of Sanders and City Council President Scott Peters) explained to CityBeat why San Diego hadn't availed itself of this option earlier in the process.
“Had people known then what we know now, they might have been more aggressive,” in taking out private loans, he said. “Everyone thought this would be over soon-KPMG just needs to do the audit, we'll wait a few months. Vinson & Elkins will do an investigation, we'll wait a few months, and so on.” Hindsight, as the saying goes, is 20-20.
Now the Kroll report is here, and, Sanders spokesperson Fred Sainz says, “we expect to be back in the bond market by the beginning of 2007.”
That would be great. But that's five months from now, and KPMG has said definitively that the Kroll report will allow them to finish their work promptly. But that's OK, no rush on those fire houses.