City under a Cloud

Why San Diego needs a CFO. Plus: PepsiCo selects its former CFO, Indra Nooyi, an Indian-born woman, as its new CEO.

San Diego calls itself “America’s Finest City,” but a financial scandal that has been unraveling since 2004 has earned it a new nickname: “Enron by the Sea.”

The city is accused of hiding massive underfunded pension liabilities and issuing false financial disclosures. The Securities and Exchange Commission, the FBI, and the Department of Justice are investigating, and eight city officials have been charged with corruption, with more indictments expected.

Now, an independent audit committee, led by former SEC chairman Arthur Levitt, is calling for private-sector-style reforms. A report commissioned by the committee cites widespread mismanagement within San Diego’s government, and calls on the city to strengthen the role of its CFO.

“The CFO should be the individual primarily responsible for…the accuracy and timeliness of the city’s financial-management, reporting, and disclosure functions,” say the authors of the 266-page report by Kroll Inc., a New York–based risk-management firm. San Diego installed its first-ever CFO, Jay Goldstone, in January, long after the pension debacle came to light. According to the report, the city’s CFO should provide greater supervision over financial reporting, budget and planning, and the controller.

Levitt told the San Diego City Council that the evidence suggests that city officials fell prey to the same type of corruption that has afflicted municipalities such as Orange County and private-sector companies like Enron and HealthSouth.

The upshot is that San Diego now faces an unfunded actuarial pension liability of $1.4 billion and an inability to tap the financial markets, according to Levitt. Further, in failing to comply with wastewater mandates, the city illegally took money from San Diego homeowners and now must return $265 million, he says.

The authors also suggest that San Diego should create a permanent three-member audit committee with the power to hire the city’s independent auditors and to set up and monitor a whistleblower system. — Stephen Taub and David M. Katz

Rising to the Pepsi Challenge

When PepsiCo tapped Indra Nooyi to become its next CEO, it ushered in a new generation, not just for the soft-drink giant, but for the corner office in general. Nooyi, 50, is not your father’s CEO. She wears a sari on occasion and in college fronted an all-female rock band.

Nooyi, CFO and president at Pepsi since 2001, takes over for Steve Reinemund, who is retiring. She played a lead role in the acquisition of Tropicana, the merger with Quaker Oats, and the divestiture of Pepsi’s restaurant business and company-owned bottlers. Nooyi, who was born in India, becomes just the fifth CEO in Pepsi’s history.

Erin Ashley Smith, an analyst at Argus Research, says only the timing of the move was a surprise. “It came a little earlier than some expected,” she says. She adds that Nooyi’s ascension to the top spot is good for all CFOs because it indicates that finance executives who have vision and take risks will be rewarded.

Richard Goodman, current CFO of PepsiCo International, will replace Nooyi as CFO. Hugh Johnston was promoted to executive vice president of operations, assuming some of Nooyi’s duties as president. Reinemund joked about Nooyi’s successors: “It’s taken two great men to replace one woman.” — Joseph McCafferty

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