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Tuesday, May 17, 2005 | District Attorney Bonnie Dumanis filed felony charges against six former and current city of San Diego officials Tuesday on allegations that they enriched their personal retirement packages as part of their roles in a 2002 deal between the city and the pension board.
The officials, all former or current members of the troubled pension board, stand accused of breaking the state’s conflict-of-interest law – known as government code 1090. The section forbids officials from voting on matters that impact them financially.
The accused are: Ronald L. Saathoff, president of the Local 145 firefighters union; Cathy Lexin, former director of human relations; John A. Torres, a fingerprint examiner for the Police Department; Teresa A. Webster, former assistant auditor; Mary E. Vattimo, former treasurer; and Sharon K. Wilkinson, a management analyst.
In exchange for allowing the city to forgo a lump-sum payment into the pension system now estimated to be in hundreds of millions of dollars, each saw their future monthly retirement checks grow by hundreds, and in some case thousands, of dollars, according to court papers filed on Tuesday.
“The charged defendants participated in the design and voted for a contract which was tied to increases in their retirement benefits … These six board members were trusted servants of the city of San Diego,” Dumanis said. “These charges are allegations that they have betrayed the public trust.”
The six officials will be arraigned in Superior Court on Wednesday at 2 p.m. All six defendants were charged with three violations of the conflict-of-interest law; each charge carries with it a maximum sentence of three years in prison.
“As I’ve said in the past, if someone did something illegal they should be held accountable. However, as a former judge I believe that people should not rush to judgment,” said Mayor Dick Murphy in a prepared statement. “I trust the judicial system will do the right thing.”
Murphy announced his resignation last month in large part due to pressures brought about by the mounting pension scandal. July 15 is scheduled to be his final day.
The pension deficit is estimated to be between $1.37 billion and $2 billion. The political machinations that led to the deficit, as well as the failure to report it to investors, have prompted parallel probes by the U.S. Attorney’s Office and the Securities and Exchange Commission.
Ongoing questions surrounding the city’s fiscal health and financial reporting have delayed the 2003 and 2004 fiscal year audits and led one of the three major credit ratings to suspend the city’s credit rating. The city remains essentially locked out from public financial markets without the audit and credit rating.
Lexin and Vattimo resigned Monday, and Webster was placed on administrative leave last week when city officials alleged that she’d failed to fully cooperate with federal subpoenas seeking documents. Deputy City Manager Patricia Frazier, who played a role in the pension deal and the city’s disclosure process, also resigned Monday.
Nick Hanna, an Orange County defense attorney representing Lexin, called the conclusions “unfounded and unfair.” He challenged the data contained within the charges related to Lexin’s pension benefits.
“It strikes me that if the DA is wrong in something as simple as the benefits, then one has to take a harder look at the entire case,” he said.
Calls to other defendants or their lawyers for comment weren’t returned Tuesday.
The charges are sure to throw the most tumultuous city in the United States into further mayhem, as the city watches the ongoing federal corruption trial of two sitting city councilmen, anticipates a July 26 special election to replace Murphy and awaits the results of the many ongoing investigations.
“This is just the beginning,” said City Attorney Mike Aguirre.
DA’s investigation may not be done
What did come to light in Dumanis’ brief statement was that the investigation had begun in June 2004 – much earlier than when news of the investigation was leaked to the press in March.
“Today we obviously will not be able to answer your questions as this case remains under investigation and more charges may actually be filed,” Dumanis told reporters Tuesday morning at the Hall of Justice downtown.
To that end, Aguirre hinted that the next step of an investigation could head toward the city’s end of the deal and focus on those that offered the benefits to the pension board.
“These benefits were not created by the pension board, and that’s the thing we have to understand,” he said.
The roots of the deal that came to be known as Manager’s Proposal 2, which became one of the most controversial and devastating in the history of City Hall, stretch back to the fall of 2001.
City officials, including some of those charged Tuesday, began to see a startling fall in the earnings of the pension fund.
Under a previous deal authored by former City Manager Jack McGrory and former Mayor Susan Golding in 1996, the city was allowed to pay less than annually required to its pension system. The one safety net: A provision that called for the city to inject a lump-sum payment into the pension system if the funding level dropped below 82.3 percent.
The booming stock market of the mid- and late-1990s hid the funding effects of the first deal, known as Manager’s Proposal 1, because remarkable investment gains obscured the faulty funding plan.
Then the stock market fell beginning in late 2000 and revealed a plan that was underfunded and getting worse. By early 2002, it was clear the pension system’s dwindling funds would come close to hitting the trigger safety net.
Such an action would have required the cash-strapped city to pump in what was estimated at the time to be between $25 million and $75 million in a lump-sum payment. Later estimates would put these total payments at closer to $500 million over the course of a couple of years.
City officials found the payment to be unreasonable in tough budget times, and instead asked the pension board for a way out of the payment. But in order to win the board’s approval, city officials offered the city’s labor unions – which held a majority on the pension board – increased pension benefits.
The city’s annual contribution to its pension system and its labor negotiations are usually two entirely separate operations, but the deal struck between the pension board and the city connected the two. It made the union-dominated board’s approval of funding relief contingent upon the unions’ receipt of increased benefits.
The move was deemed inappropriate by some board members and called corrupt by former board member Diann Shipione.
In essence, the city-employed members of the pension board voted to increase their own benefits because denying the city its request for financial relief would have vetoed the benefits, the city’s self-investigation determined in September.
According to paperwork filed in connection with the charges, as a result of the deal:
– Saathoff’s monthly pension increased by $2,530.23 to a total of $9,703.66.
– Torres saw his future retirement check increase $386.52 a month to a total of $4,016.81.
– Wilkinson stands to collect an additional $477.60 a month upon retirement. Her total monthly retirement is calculated to be $5,096.26.
– Lexin’s monthly retirement would have increased by $537.45 to a total of $5,636.06 a month, assuming she retired at age 55. Lexin’s attorney, Hanna, said his client wasn’t a member of the union because of her position in human resources. Therefore, it was the council’s decision to include her and other unclassified employees in the benefit. Lexin was also absent from the meeting in which the board took the final vote.
– Vattimo’s monthly retirement would have increased by $703.70 to $7,108.21 at the time of the deal if she would have retired when she reached age 55. She has since received raises that have increased her retirement package.
– Webster’s monthly increase would increase by $1,073.67 to $10,862.41 if she retired at age 55.
A pension board’s primary duty is to look out for the best interests of the pension system above all others. However, because many of its board members also held prominent positions in the city administration and the unions, pension critics complained that the interests of the pension system were brushed off.
“The legislature created government code section 1090 to ensure good government,” Dumanis said. “It requires that people in fiduciary positions may not serve two masters at the same time when they act to the detriment of one or the other and it results in financial benefits to themselves.”
Vattimo, Lexin, Torres and Wilkinson all received benefits that were granted to some of the approximately 8,000 city employees represented by the white-collar and blue-collar unions.
Each of these employees saw an 11.11-percent increase in their pension, a detail that has put an estimated $150 million strain on the pension system deficit, said Mike Conger, an attorney that has sued the pension system numerous times.
Saathoff and Webster each received benefits that were more specific in nature.
Saathoff was allowed, as the president of a union, to be included in the “presidential benefit.” The benefit, already partially applicable to two other union presidents, allowed him to count his salary as a fire captain and as a union president. The total was capped at $116,000 to match that of the city’s lead labor negotiator.
Another ordinance included in the benefit package barred employees from receiving retirement payments that exceed 90 percent of their highest annual salary, with one catch: It didn’t apply to employees who started working for the city before age 24. Webster was allowed to collect a larger pension because of the exemption because she fit into that category.
Effects of the case
Rather than send the case through a secret grand jury, Dumanis has chosen to go straight to the court room.
Shaun Martin, a professor at the University of San Diego School of Law, said Dumanis’ decision to bypass a grand jury hearing was strategic because the public hearing will allow potential jurors to become familiar with the case before it goes to trial.
“In the back of the prosecutors’ minds, they will know that the public knows what’s going on,” Martin said. “It will prejudice the jurors and the public will know [the prosecutors] are working to their benefit.”
Martin said defendants often prefer preliminary hearings because their counsel can cross-examine witnesses.
“Not in a case like this where it’s high-profile and a lot of people want attention,” he said. “Everyone is going to say they’re happy this way, but in reality this was the prosecutor’s choice and they’ve decided to go with what’s going to benefit them.”
City leaders applauded the decision for a public hearing.
“The whole point of the preliminary hearing is that the public can be informed,” Councilwoman Toni Atkins said. “We’re going to have to see how this unfolds.”
Aguirre has said that all benefits granted to employees in 1996 and 2002 are illegal and therefore void.
If the defendants in this case are eventually found guilty, it is unclear what effect such a verdict could have on the benefits. The court wouldn’t likely immediately void the benefits, but they could be scrapped as part of a settlement.
Voice Staff Writer Evan McLaughlin contributed to this story.
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