Wednesday, June 22, 2005 | The idea of placing the city of San Diego’s embattled pension system under the management of a court-appointed receiver, initially dismissed by City Council members as an unneeded and dangerous means to resolve the city’s financial woes, is gaining traction.
Placing the responsibility of overseeing the embattled San Diego City Employees’ Retirement System in the hands of a court-appointed expert, or receiver, has been one of the pet pleas of City Attorney Mike Aguirre since taking office in January.
Receivership has since garnered more thoughtful consideration from council members – if not full-fledged support by a few – who have expressed frustration with the retirement trustees’ actions.
The centerpiece of that frustration is based on the board’s continued refusal to waive the attorney-client privilege.
The city’s outside auditors, as well as investigators from the U.S. Attorney’s Office and the Securities and Exchange Commission, need the board to open up its archives in order to complete their probes into city finances and politics.
Members of city’s audit committee, a group of five prominent national accounting and legal experts charged with assisting in the repair of the city’s fiscal and legal woes, say that the board’s refusal to hand over protected documents will eventually shut down city business. The city of San Diego is essentially barred from the municipal bond market until those audits are released, stalling its progress on basic construction and maintenance.
The City Council can request that a judge decide whether the system’s board or staff is managing SDCERS in the system’s best interest. If the court finds that the trustees or staff members, such as attorneys or actuaries, are not upholding that duty, it can approve a “receiver” – either an individual or a firm – to take over the responsibilities found to be at fault.
Receivership was once seen as a potential solution for councilwoman and mayoral candidate Donna Frye. Now it is the highlight of the financial plan she touts on the campaign trail.
For others on the council, receivership is looking to be a decent alternative to waiting for the SDCERS board’s waiver.
As of Tuesday, Frye and Councilman Jim Madaffer were in favor of some form of receivership. Council members Toni Atkins, Tony Young and Scott Peters said they were considering it as a legitimate option. Both Mayor Dick Murphy and Councilman Michael Zucchet refused comment. Councilmen Brian Maienschein and Ralph Inzunza were unavailable as of press time.
Madaffer said he favors a limited receivership that includes the option of remediation.
“I want the shortest number of steps needed to get into the retirement system, comply with the audit committee’s requests, right-size any problems and get out,” Madaffer said Tuesday.
He said the urging by the audit committee that the waiver was the key to getting audits released led him to advocate a by-any-means-necessary approach.
Councilman Scott Peters said he would still prefer to have the trustees work out the board’s problems, but that given their history of refusing to waive the attorney-client privilege, receivership is looking like a more viable option. In a May 25 letter to the SDCERS board, he expressed potential support for a court-appointed receiver.
“I hate to do it, and I know it takes some time and is a risk – but we have to get the audits out, so it needs to be looked at. Hopefully we’ll get a good vote on the fifth,” he said in an interview Tuesday, referring to a special pension board hearing to consider the waiver scheduled for July 5.
The board has chosen not to waive the privilege in its April, May and June meetings over concerns that such a move would open the fund, or its trustees, to possible legal liabilities. The city’s experts say such fears are unwarranted.
Judy Italiano, president of the Municipal Employees Association, which represents 6,000 white-collar city workers, rejected the idea as part of the city attorney’s “posturing dialogue.” She said the council is using the receivership concept as an ultimatum for the board; that either they waive the attorney-privilege client or that they will be relieved of their fiduciary responsibility.
“I think Mr. Aguirre is moving this council down this path and I don’t think it’s a wise path to follow,” Italiano said.
Johnnie Perkins, governmental affairs director for the Local 145 firefighters union, said his organization’s leaders “haven’t come to any conclusions” regarding receivership.
The strongest case the city can make for a receiver is to demonstrate to the judge that the actions of the SDCERS board have negatively affected the city’s ability to operate, said Don McGrath, the senior deputy city attorney in charge of the office’s investigations into the pension system.
McGrath said the judge could respond in a number of ways to a request, including denying a receivership wholesale or only granting certain responsibilities to a receiver.
The city’s primary request would be most likely to get the attorney-client privilege waived, he said. McGrath said the city could also claim that city should be making actuarially sound payments into the pension fund, not just an agreed-to amount, and that the board members have acted in their own self-interest as SDCERS beneficiaries at the detriment of the fund’s financial health.
“The problem is that you can’t have two masters running the ship,” he said.
David Osias, a private attorney specializing in bankruptcy and receivership, said that receivership can be especially helpful to parties seeking a waiver of the attorney-client privilege, to get out of contracts that were improperly agreed to, and to pursue suits against professionals that gave bad advice.
Above all, the city of San Diego would need to prove to a judge that a receiver is needed for it to function, Osias said.
Please contact Evan McLaughlin directly at