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Thursday, May 26, 2005 | The dual pension deals at the heart of the city of San Diego’s financial and legal woes could be found illegal by a court, thereby voiding a decade’s worth of new pension benefits valued at hundreds of millions of dollars, according to a legal opinion made public Wednesday.
The February report by San Diego law firm Luce Forward Hamilton & Scripps, commissioned as part of investigation into the city’s pension dealings, determined that a court could find that 1996 and 2002 deals between the city and pension board violated various local and state laws governing sound financing and behavior by public officials.
The opinion hands City Attorney Mike Aguirre more fuel in his quest to rollback pension benefits granted as part of the controversial pension deals – contracts that allowed the city to pay less into its pension system in exchange for granting increased retirement benefits to union members.
He seized on the analysis to buttress a series of reports he has issued in the past months reaching similar opinions. The city attorney believes San Diego’s fiscal salvation begins with ceasing to pay what he estimates to be $700 million to $800 million in illegal benefits.
However, outgoing Mayor Dick Murphy and a majority of City Council members – who have become quick enemies of Aguirre in his six months on the job – have largely rejected Aguirre’s plan.
“This opinion is devastating to the position of the council and the mayor and the union leadership,” Aguirre said of the Luce Forward report.
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.
The report analyzes three key components of the pension problem:
– The legality of Manager’s Proposal 1 and Manager’s Proposal 2, deals that allowed the city to set its annual contribution into the pension at a set rate. Normally, a pension system’s actuary determines the system’s annual rate and tells the city what it should contribute. The funding program allowed under the two proposals permitted the city’s annual payment to grow in its inadequacy.
– Whether pension trustees violated state conflict-of-interest laws in Manager’s Proposal 2. The deal has drawn much attention because union members were granted increased benefits contingent upon the board – dominated by city management and union members. (Such charges were filed last week against six current and former pension trustees by the District Attorney’s Office.)
– Whether an accounting method that uses earnings on pension investments to cover a number of supplemental benefits violates city laws.
In each case, Luce Forward attorneys determined that a court could find the contracts involved with these deals to be illegal in accordance with local and state laws. Such a ruling would void the contracts, according to the opinion, wiping long-established retirement benefits from the scrolls.
Aguirre interpreted the ruling to include the rolling back of benefits for those that have retired since 1996.
In many instances, the meat of the report offers alternative, conflicting interpretations of what a court could rule. But in the conclusion, it finds the two pension deals vulnerable to a court challenge.
“There is significant risk that section 1090 was violated,” the report states, referring to the government code that the six pension trustees are accused of violating.
The opinion also highlights the fundamental differences between the City Council’s and city attorney’s plans for tackling the oppressive pension deficit, which threatens to consume the city’s day-to-day budget for years.
The mayor and a majority of council members have elected to try to tame the pension deficit through labor negotiations. A plan for winning concessions from the four major unions originally would have trimmed $600 million from the deficit in two years.
With the negotiation season done, the final tally of savings comes in at an estimated $350 million over two years. This includes selling $200 million in pension obligation bonds.
Aguirre is choosing to attack the deficit rather than tame it. He said he plans to take comprehensive legal action in the coming weeks to try and repeal the benefits through the courts. Although he signaled that certain council members may be leaning more toward his point of view, he said he would file the action with or without council support.
So far, only Councilwoman Donna Frye has endorsed Aguirre’s ideas.
Other council members appear skeptical of the city attorney’s plan and are fearful of engaging in costly litigation with uncertain ends.
Some council offices that were contacted to comment on the report Wednesday said the council members had not yet read the report because they received it only days ago as back-up material for this week’s marathon council sessions. The report was delivered to City Manager Lamont Ewell on Feb. 22.
Gina Lew, spokeswoman for Ewell, said each council office and the mayor were sent a copy in March.
The report became public after the City Council voted Tuesday to waive its attorney-client privilege related to the report. The District Attorney’s Office had asked that it be waived as part of its ongoing investigation.
The opinion was originally sought by Vinson & Elkins, the law firm working on an investigation into allegations of wrongdoing at the city, to answer questions brought up by outside auditor KPMG.
KPMG is working on the city’s long-delayed fiscal year 2003 audit, which must be completed to clear up the city’s suspended credit rating and return it to the capital markets.
Luce Forward used only material found in former pension trustee Jim Gleason’s civil case against the retirement system, settled last year, and the report furbished by Vinson & Elkins in September.
The scope of Luce Forward’s work, according to the report, was to find the “pertinent legal factors” that could determine whether city officials and the retirement system acted illegally when negotiating payments into the pension plan, as well as whether the benefits granted outside of the plan were illegal.
In a press conference Wednesday, Aguirre also accused the council and pension board of engaging in a massive cover-up. He said council members went through with labor talks on new contracts conducted this spring even though it had the Luce Forward opinion.
Please contact Andrew Donohue directly at