Sunday, August 13, 2006


Pension Scandal


If you haven't read about what has been happening in San Diego with respect to its pension plan, a trip to SignOnSanDiego.com is well worth a visit. There you will find a slew of documents and articles about the many problems that have now led to indictments and a $1.4 billion estimated pension deficit, which in turn have led to restricted capital market access for what some consultants describe as "Enron-by the Sea". In the final audit report, made public just a few days ago, one of its authors, Arthur Levitt Jr., former SEC chairman, emphasized the need for fundamental reform.

Some of the reviewers' recommendations are listed below. Notice the item about financial statement certification, a la Sarbanes Oxley. Along these lines, this author suggests that decision-makers at least ponder the idea of a pension "financial expert", analogous to SOX audit committee rules. While an honest debate about what constitutes appropriate educational and experience requirements for such a position is a must, the hiring process could encourage objective and independent outsiders to join.

Optimists say that trouble begets reform and that lessons learned go a long way to help others avoid losses. That would be a good thing!

Excerpted Suggestions:

Creation of a permanent three-member Audit Committee empowered to retain the City's independent auditors and to inquire into all aspects of City governance and financial reporting, as well as establish and monitor "whistleblower" complaints.

Two members should be independent of the City and have significant financial expertise in accounting, auditing and financial reporting.

The appointment of a Monitor to oversee implementation of the remedial actions being recommended. The Monitor should make quarterly reports to the City's permanent Audit Committee and to the Division of Enforcement of the SEC. These reports should also be available to the citizens of San Diego.

Accountability for fiscal decision-making and disclosure must be built into the City's financial reporting system. To do this, the City must strengthen the role and accountability of the Chief Financial Officer who should be the individual primarily responsible and accountable for the accuracy and timeliness of the City's financial management, reporting and disclosure functions. Assisting the CFO should be a Comptroller, with experience in government accounting, and a Director of Financial Reporting, with specific responsibility for preparation of the City's financial statements. The CFO should also supervise a Director of Budget and Planning to be responsible for assisting the CFO in budget preparation and financial analysis. The Mayor and the CFO should annually include with the City's financial statements a statement of the City's responsibility for establishing and maintaining an effective system of internal control over financial reporting. Similarly, certain heads of each City unit, including its pension board, should be required to certify their stand-alone financial statements.

The City should provide increased pension system independence, accountability, and transparency, through, among other things, the reduction of the pension system board to nine members, five of whom should be mayoral appointees. The chairman of the pension board and its principal executive should be required to include a signed management report addressing accuracy of the Comprehensive Annual Financial Report, effectiveness of internal controls, and other relevant issues.

The City should support the Mayor's initiative to develop a five-year financial plan for City government. Each year the City Council should require a final budget that compares actual to budgeted performance, accompanied by written explanations by each department manager for variances.
posted by Susan Mangiero at 8/13/2006 12:17:00 AM