Risk & Compliance

San Diego Settles SEC Pension Charges

"America's Finest City" does not disclose the whole truth about its financial condition.
Stephen TaubNovember 14, 2006

The city of San Diego settled charges with the Securities and Exchange Commission for failing to disclose to investors important information about its pension and retiree health care obligations when it sold municipal bonds in 2002 and 2003. Under the settlement, the city agreed to cease and desist from future securities fraud violations and to retain an independent consultant for three years. The city was not fined for the violations.

“This action signifies our resolve to hold state and local governments accountable when they commit fraud while seeking to borrow the public’s money,” said Linda Chatman Thomsen, the director of the SEC’s Enforcement Division, in a statement. The SEC issued an order finding that city officials failed to disclose that San Diego’s unfunded liability to its pension plan was projected to dramatically increase, growing from $284 million at the beginning of fiscal year 2002 to an estimated $2 billion by 2009. Furthermore, the city’s liability for retiree health care was another estimated $1.1 billion.

The order also pointed out that officials failed to disclose that the city had been intentionally under-funding its pension obligations so that it could increase pension benefits but defer the costs. As a result, said the SEC, San Diego would face severe difficulty funding its future pension and retiree health care obligations unless new revenues were obtained, pension and health care benefits were reduced, or city services were cut.

The order further found that the city knew or was reckless in not knowing that its disclosures were materially misleading. In fact, the SEC found that the municipality disseminated the misleading statements in three ways: in the offering documents for five municipal bond issues in 2002 and 2003; to the agencies that gave the city its credit rating for the municipal bonds; and in its continuing disclosure statements, which described the city’s financial condition and were provided by the city to the municipal securities market with respect to prior city bond offerings.

Randall R. Lee, the Regional Director of the SEC’s Pacific Regional Office in Los Angeles, noted that an independent consultant would be appointed to oversee San Diego’s investment programs that access the public markets. The independent consultant is expected to review and assess San Diego’s policies, procedures, and internal controls regarding disclosures relating to municipal bond offerings. That includes conducting annual reviews for a three-year period, and making recommendations to assure that the city’s disclosures obligations comply with federal securities laws.