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Wednesday, Mar 11 1998
Peeling Onions
Susan Leal, the new city treasurer, is answering questions in precisely measured speech informed with a certain degree of exasperation and black humor. Her bemusement is understandable. She's been trying to deal with the situation she inherited when she took over the Treasurer's Office in January.

And ... the ... mess ... is ... almost ... indescribable.
"The source of the problem," Leal says carefully, "is that we haven't exerted enough control over the checks being written by the departments."

But Leal well knows that the city's banking muddle involves more than one source and more than one problem. In fact, the city's banking situation is screwed up in an amazing number of complicated ways. Indeed, this particular scandal offers almost none of the straightforward, Baghdad by the Bay pizazz our daily press seems to favor. It does not involve the multiracial, the transgendered, a football stadium, Charlotte Swig, or a great big piece of public art. There's not even a legitimate way to link this fiasco with Sharon Stone's underwear.

Even so, we think most San Franciscans who have had checking accounts will be interested in the city's banking problem. We believe they'll be interested -- and, perhaps, horrified -- because most people who have checking accounts ... usually ... know ... that ... they ... have ... them.

Yes, that's right: Until very recently, the multibillion-dollar business known as the city and county of San Francisco maintained some 150 bank accounts that the city Treasurer's Office -- supposedly the central repository of all city funds -- was unaware of. Leal has been trying to figure out this shadow banking system for a couple of months now; she clearly hasn't gotten her arms entirely around the situation yet.

"I'm peeling away the layers of the onion," is how Leal describes her continuing review of the Treasurer's Office and the city's banking practices. It's a remarkably apt metaphor; once you know a bit about it, San Francisco's banking situation really is enough to make you cry.

A few weeks ago, you may remember, we asked some simple questions about the oddly incestuous relationship between the Bank of America and the city and county of San Francisco, and got few reasonable answers.

We didn't just start asking questions out of left field: The city and the state had already sued BofA, alleging it stole somewhere between several hundred million and 3 billion dollars from bond trust accounts belonging to California governments. If true, these charges describe what is probably the largest theft of public funds in California history.

So there was, and is, ample reason to be suspicious of the Bank of America's relations with government. Even in so populous and laid-back a state as California, stealing a billion dollars is still a big deal.

Our suspicion led us to ask about other business the Bank of America was doing with the city. Specifically, we'd heard that BofA enjoyed a longtime lock on the city's depository contract -- a lock that had never been introduced to the outdated capitalistic concept of competitive bidding. We wanted a few details on this remarkable history of favoritism.

Leal, brand new to the city Treasurer's Office, said she needed time to investigate the city's banking situation. The city's other fiscal bureaucrats, apparently, were related to Sgt. Schultz.

They knew nothing.
No one knew how many city contracts BofA had. No one knew how much money BofA made off those contracts. No one could say if the law required that those contracts go out for competitive bid.

Now, after several weeks of investigation, Leal has provided us some partial answers. But they are partial, and actually raise at least as many questions as they put to rest.

We'll get to the 150 mystery bank accounts in just a minute, but let's start with the BofA accounts that the Treasurer's Office was able to locate by normal means.

City records Leal supplied (at our request) show that at the end of 1997, the city Treasurer's Office was managing -- or at least theoretically knew about -- 78 city accounts at the Bank of America. But to say those accounts were oddly managed is something akin to saying Willie Brown talks sometimes.

During last December, for example, the 78 "known" city BofA accounts contained an average total balance of $15.6 million. Please understand: These accounts are not some type of investment vehicle. They are the equivalent, in municipal finance terms, of checking accounts. Every dollar kept in them, and not put into investment, represents lost interest. (That is, interest is paid on that balance, but it is less than the interest the city could earn by investing the money elsewhere.)

But the city hasn't just been keeping ridiculous levels of money in scads of interest-losing checking accounts; at the same time, the city also has been writing millions of dollars of hot checks. And, of course, being charged for writing them. In December, for example, the city ran a $6.3 million average overdraft on its "known" BofA accounts -- and was, quite appropriately, charged interest on what is the equivalent of a running loan from BofA to the city.

Why, you might ask, would the city be writing millions of dollars in hot checks, when it actually keeps too much money in its checking accounts? Well, Leal says, city departments have been writing checks without telling the treasurer, overdrawing some accounts, even as millions of dollars sat idly in other accounts.

"There's no reason to have overdrafts," Leal says. "If you put the proper mechanism in place, there's no reason for it."

On top of crazily huge balances and absurdly large overdrafts, San Francisco has paid significant fees to the Bank of America for servicing the city's 78 "known" accounts. Without undertaking an extensive survey of the banking industry, it is difficult to know how appropriate the fees are for the dozens of services the city requested for its various accounts.

But we can tell you that the city paid BofA nearly $1.7 million in 1997 to service its 78 or so "known" accounts. That's a nice little contract to have handed to you, year after year, without the nasty necessity of competitive bidding. It's especially nice, given that the city generally bids any contract involving more than $10,000 of goods or services.

Besides the 78 or so "known" accounts, early this year city departments were keeping roughly 150 other accounts at the Bank of America. No one at the Treasurer's Office, apparently, had been told these accounts were open. Leal says her staff discovered the accounts this year in a way that might be described as unusual.

Or should we say surreal?
To find out what accounts various city departments had at the Bank of America, the Treasurer's Office had to engage in a process that most purported fiscal watchdogs would consider humiliating. The city's financial officials -- the people who are supposed to be ever-vigilant and all-knowing in their protection of the city purse -- had to call the Bank of America and ask what accounts the city maintained there.

Because the Treasurer's Office didn't know.
Of the 150 or so mystery accounts this embarrassing search turned up, some, Leal says, contained no money -- but the city was paying fees to keep them open anyway. Some of the accounts held relatively large amounts of money -- enough money that it should have been invested at interest. Some departments had accounts and money they were not legally allowed to possess. (Leal says the Police Department, for example, had a towing account from the days before the Department of Traffic and Parking took over the business of enraging illegal parkers.)

Some accounts, Leal says, were being used to purchase items that departments didn't think it necessary to run before the city's Board of Supervisors. You know, minor items. Like automobiles.

And as of last week, Leal says, there were still 40 or 50 accounts for which the Treasurer's Office did not have full documentation.

Susan Leal deserves real commendation. She says the Treasurer's Office is closing illegal accounts and returning money to the city's General Fund, where it belonged all along. And we believe her. She talks convincingly of reforming the city's financial system to bring an end to massive overdrafts and ridiculously high account balances and Iran-Contra-style mystery banking practices. And we're convinced.

But when dozens of government bank accounts are created and used beyond the realm of fiscal oversight; when million-dollar city contracts are handed out for decades without competitive bidding; when multimillion-dollar overdrafts are run for months and years, for no sane reason; when, in fact, financial stupidity (or worse) rules a large city's banking relationships for a long time, something more than an energetic new city treasurer is called for.

As much as we like Susan Leal, as much as we agree with her intent to reform the city's financial control system, we are equally certain that the city's banking situation begs for thorough outside investigation. Changing screwed-up systems to make them work properly is important. It's just as important for a city's citizens to know exactly what happened when their money was taken off the books and hidden, under layer after layer of obfuscation, in the financial equivalent of 150 different onions, any one of which might be rotten at the core.


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George Cothran


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