SAN DIEGO — The city of San Diego was sanctioned by the SEC Nov. 14 for committing securities fraud by misleading the public about its ability to meet its pension and retiree health-care liabilities in connection with the sale of $260 million in municipal bonds in 2002 and 2003, according to a news release from the SEC. As part of its settlement with the agency, the city agreed to retain an independent consultant for three years to ensure that it complies with federal securities law disclosure requirements, in addition to agreeing to "cease and desist from future securities fraud violations," according to the release.
The city failed to disclose a dramatic projected increase in the $4.45 billion San Diego City Employees' Retirement System's unfunded pension liability, from $284 million at the beginning of fiscal 2002 to an estimated $2 billion by 2009, according to the release. Its retiree health-care costs were projected to be $1.1 billion over the same period. The city also failed to disclose that it had been underfunding its pension obligations so that it could increase pension benefits but defer the costs, and that it would be extremely difficult to fund future pension and health-care obligations, the release said.
"The city knew or was reckless in not knowing that its disclosures were materially misleading," according to the release. "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, director of the SEC's enforcement division, in a statement.
The city consented to the SEC order without admitting or denying the findings.
In a statement, San Diego City Attorney Michael J. Aguirre said he had first advocated the settlement with the SEC in February 2005, less than three months after becoming the city's attorney.
"The path we took put the city's interest first and now allows us to begin repairing our financial system in order to access the municipal bond markets," Mr. Aguirre said, in the statement.
