Aguirre Continues Legal Assault on Pension Benefits

Tuesday, June 21, 2005 | The city attorney took aim Monday at the foundation of San Diego’s pension crisis in the sixth chapter of his investigation into City Hall, expanding on his opinion that the 1996 deal that began the city’s historic pension funding is illegal and void.

City Attorney Mike Aguirre said the Manager’s Proposal 1 deal – which allowed the city to contribute less than annually recommended to its pension system while at the same time granting enhanced employee benefits – violated local and state laws governing retirement systems and forbidding the creation of long-term debt without voter approval.

“The central reality of the MP 1 proposal was the agreement among all parties to pass on the costs of the new benefits and intentional underfunding of the pension plan to future generations,” the report states.

An unfinished draft of the report was released to the news media late Monday, and Aguirre was unavailable for comment.

With the report, the mercurial city attorney continued his assault on nearly a decade’s worth of pension benefit upgrades at the heart of a pension deficit estimated to be at least $1.37 billion.

He has said he plans to bring “comprehensive legal action” to unravel the deal and seek damages from those involved in what the report calls “fraudulent and deceptive acts and practices.” Monday’s report promises that a seventh report will identify legal remedies available to the city and pension board.

Last week, Aguirre directed city Auditor John Torell to stop payment on a laundry list of benefit improvements granted to city employees and elected officials in 1996, 2000 and 2002. Torell didn’t return calls seeking comment.

For the first time, the retirement checks of current city retirees and employees are in jeopardy.

Retirement officials have pledged to usurp any such action by funneling retiree checks through an outside bank account rather than the city’s auditor.

“We may have a big fight,” said retirement administrator Larry Grissom, who on Friday called Aguirre’s demand the “most serious threat” ever brought against the San Diego City Employees’ Retirement System.

Political actions and faulty financial disclosures surrounding the pension system have attracted investigators form the Justice Department and the Securities and Exchange Commission, as well as the District Attorney’s Office.

The legality of benefits has become a central issue at City Hall and on the campaign trail, where a host of candidates jockey to replace the resigning Mayor Dick Murphy. He announced his resignation in April under the weight of the growing pension crisis and a court challenge to his November victory.

Aguirre and all of the leading mayoral candidates support some form of legal challenge to existing benefits.

The current council majority – who themselves would be financially impacted by a rolling back of current benefit levels – have balked at such a challenge, calling it costly, lengthy and risky. They have yet to offer an alternative plan for dealing with a growing deficit that has already had a tangible impact on city services and threatens to for years to come.

In the report, Aguirre explains that both city and pension officials, led by former City Manager Jack McGrory, also violated their fiduciary duties to uphold the financial integrity of the pension system. Such actions are outlawed by the California Charter, according to the report.

In order to free up extra cash for the city’s annual operating budget, city officials forged a plan to cap the city’s annual payment to its system at a specific percentage of payroll. Normally, the pension board’s actuary determines the annual financial strains put on a pension system, and the pension board then delivers the bill to the city.

In exchange for their compliance with the funding plan, union members were granted increased pension benefits, according to the report. City management and union representatives controlled a pension board majority.

“The scheme chosen was a convoluted way of admitting that the city did not have enough money and was therefore borrowing it from the pension plan,” the report states.

Attempts to reach McGrory and Grissom for comment on the report were unsuccessful.

Former Assistant City Attorney John Kaheny said he finds it difficult to comprehend how the benefit increases enacted that year could now be deemed illegal.

“The benefits were voted on in good faith by the City Council. The fact that the city didn’t set aside enough money for it should not affect that entire contract,” he said.

Union officials have echoed Kaheny’s argument and promised a swift legal challenge should Aguirre take them to court. Aguirre’s legal analysis, using California case law, provides the opinion that such contracts can indeed be undone.

Aguirre also found the pension system actuary, Rick Roeder, and outside legal counsel, Dwight A. Hamilton, to have violated their duties to guard the system’s funds and properly advise its trustees.

The report states that on several occasions the typist keeping the minutes of the City Council’s closed session meetings didn’t record or left the room when discussions surrounding labor negotiations began.

A later deal in 2002 known as Manager’s Proposal 2 allowed the city to escape the one safety net designed to protect the pension system under the 1996 deal. The safety net called for an immediate lump-sum cash infusion into the system by the city if the pension fund dropped below a certain funding level.

Officials again avoided this payment by crafting a similar deal that granted increased benefits to city workers.

The deal resulted in felony conflict-of-interest charges against six current and former pension board trustees.

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