San Diego's private auditors notified the city this week that discussions with City Attorney Michael Aguirre have soured to the point that they fear he might sue them, a top administrator said yesterday in a confidential memo.
It's a development that could cast a shadow on the city's short-term budget prospects, which had brightened this year as three years of delayed financial audits were issued in quick succession between March and October.
In the memo, Jay Goldstone, the city's chief operating officer, warns that the tension between Aguirre and the auditors, from the Sacramento firm Macias Gini & O'Connell, could “have significant impacts on both the timing and costs” of future audits.
The dispute illustrates the sensitive relationship between auditors and their clients, the delicate nature of the city's financial position, and how concerns over one item in a detailed financial statement can upend the process.
Macias' auditors, who handled two of the recently released audits, are working on the 2006 and 2007 financial statements, tools that credit-rating agencies use to determine San Diego's fiscal fitness.
The city's numbers have been called into question because of federal investigations into San Diego's finances and the eventual acknowledgment of glaring errors in the 2002 financial statements.
Without reliable figures, San Diego was unable to secure favorable rates for public bonds, and has put off costly projects for years.
The city's ratings were suspended or downgraded as the scale of its financial missteps, focused on the pension system and misleading market disclosures, became clear. San Diego's ability to borrow won't improve until the ratings rise.
That could take longer if the current audit is interrupted. It's a possibility Goldstone raises in the memo – addressed to a three-member City Council committee that oversees the city's audits – in which he recounts a Tuesday conversation with James V. Godsey, a partner in the Macias firm.
Goldstone said Godsey told him that Aguirre sought a meeting with the firm's auditors and recommended that they bring an attorney.
The seemingly innocuous request raises warning flags for auditors, who can lose credibility if there's any hint that their objectivity has been breached.
The question of auditor independence lies at the center of the city's financial problems over the past decade. An internal auditor left under a cloud, and San Diego's former outside auditors settled a lawsuit by the city.
Goldstone said Godsey labeled Aguirre's request an “implied threat,” but said it fell short of giving him reason to believe a lawsuit “is probable.”
Still, Goldstone wrote that he interpreted Godsey's comments to mean the firm “may no longer be able to complete” the expected audits.
Aguirre, reached on his cell phone, refused to take questions about the memo, his statements to Godsey or his concerns about the city's financial admissions. Godsey didn't return a call to his office for comment.
Councilman Kevin Faulconer, chairman of the Audit Committee, said yesterday that he would seek out Aguirre and Godsey for their versions of the events. He also wants the auditors to inform the panel “if they think they have been compromised.”
The dispute is related to a tax matter that the city attorney publicly addressed at a meeting earlier in the day. The issue involves the pension system, and an expense that Aguirre on Monday warned must be noted in the 2005 financial statements audited by the Macias firm.
The retirement fund violated an obscure tax rule for more than a decade, laying out more than $8 million on benefits that exceed Internal Revenue Service limits on pension payments. San Diego opted to pay the excess benefits out of city accounts, a solution allowed under federal and state laws.
Fund representatives have been talking about the excess payments with the IRS for more than a year, but Aguirre and Councilwoman Donna Frye haven't been satisfied with their approach – or its effect on the city's already-strained finances.
Both sparred with pension administrator David Wescoe at the morning meeting.
Aguirre told Wescoe that the system is erring in trying “to make something work that's not workable.” He also advised Wescoe to submit more information to the IRS.
Jennifer Vigil: (619) 718-5069; jennifer.vigil@uniontrib.com
