City Attorney Initiates Challenge to Pension Benefits

Friday, July 08, 2005 | The legal front to repeal the pension benefit increases central to San Diego’s multibillion pension deficit began Thursday as City Attorney Mike Aguirre announced the filing of a lawsuit against eight current and former city officials.

The suit is the first in a series of legal actions Aguirre has planned as part of his attempt to repair the city of San Diego’s deficit-laden pension system; it claims officials misused their positions for personal gain as part of a scheme that has led to the multibillion pension problem that jeopardizes city finances.

Increases in pension benefits given in 1996 and 2002 to all city employees as part of this scheme should be voided because of officials’ corrupt acts, according to the suit.

“This is an effort to set aside the illegal benefits and to help restore some stability to the pension plan,” Aguirre said at a press conference.

The pension deficit is at least $1.37 billion, although Aguirre and others believe $1.7 billion is a more realistic figure because of accounting methods currently used by the pension system. The deficit, as well as the city’s annual payments into the pension system, is estimated to grow in the coming year.

The suit alleges that officials violated the state Political Reform Act of 1974 in creating funding agreements in 1996 and 2002 that allowed the city to pay less than annually recommended into the pension system while granting increased pension benefits for city workers. It seeks to nullify these benefits, which Aguirre estimates would knock $700 million to $800 million off of the deficit.

The officials named in the suit are: Lawrence Grissom, the retirement system’s administrator; Ron Saathoff, president of the firefighters’ union; John Torres, a fingerprint analyst; Sharon Wilkinson, a management analyst; Terri Webster, former assistant auditor; Cathy Lexin, former human resources director; Bruce Herring, deputy city manager; and Loraine Chapin, lead counsel to the retirement system.

Saathoff, Torres, Wilkinson, Webster and Lexin were charged with felony conflict-of-interest charges in May by the District Attorney’s Office. All are former pension board members save Torres, who currently sits as a pension trustee.

Each official worked to create the funding plans, known as Manager’s Proposal 1 and Manager’s Proposal 2, while also possessing financial interests in the form of pension benefits, according to the complaint.

The Political Reform Act calls for public officials influencing decisions in which they have a personal stake to disclose their financial interests or be disqualified from acting. The suit alleges that the defendants did neither.

Aguirre said the eight officials were chosen because they were central to both the 1996 and the 2002 deals, although many other officials played roles in the creation of the separate plans.

“So these individuals that we have named in this litigation were the architects and were actively involved in this self-serving creation of benefits for themselves,” Aguirre said. “They knowingly created this debt, these liabilities, knowing that there was no money to pay for them.”

The defendants or their lawyers either didn’t return calls for comment or chose not to comment when contacted.

Joan Raymond, president of the Local 127 union that represents the city’s blue-collar workers, said the union had contacted its lawyers and plans to fight the suit, possibly with the help of the international union organization.

“We haven’t done anything illegal so of course we’re going to fight it out … [The lawsuit] is the latest in a series of attacks on our workers,” she said.

Raymond added: “If anything should be rolled back it should be Petco Park. Money that was supposed to be put into the pension was diverted into projects like Petco.”

Officials from the City Attorney’s Office are also expected to announce today a plan to put the entire pension system into a court-supervised receivership. Courts often appoint experts to take over mismanaged entities. Aguirre said an additional suit will challenge pension benefits on grounds that they created an illegal debt in violation of local and state laws.

Many members of the City Council didn’t return calls for comment Thursday. Councilwoman Donna Frye has been the sole council supporter of Aguirre’s planned legal challenge. Nearly all of Frye’s fellow candidates in the mayoral campaign have endorsed his strategy.

Recently, outgoing Mayor Dick Murphy and Councilman Scott Peters have warned that Aguirre’s challenge would be risky, lengthy and costly. But the city attorney said the alternative would be more costly.

“The most expensive thing we could do is preserve the benefits. This problem is going to be a centerpiece of what we talk about for the next five to six years,” Aguirre said.

If successful, the rollback would affect the pension benefits of the approximately 11,000 current city employees, as well as an estimated 800 to 900 workers who have retired since the 1996 benefit increases went into effect on Jan. 1, 1997.

Aguirre said he would ask the court to set benefits back to pre-1997 levels for current city workers pending final judgment on the case. He said he would not go after the benefits of those already retired, but acknowledged their benefits could be in jeopardy.

“So the question then becomes, who suffers the penalty: the innocent taxpayer or the innocent pensioner? And that’s where the balancing has to take place,” Aguirre said.

The pension deficit is a result of a nearly decade-long practice by the city and the retirement board of increasing employee pension benefits while inadequately contributing to the pension fund. The financial burden of pension benefits has more than doubled in the last six years, contributing to more than 40 percent of the pension deficit.

As the pension system’s funding level has dwindled rapidly in the last three years, the city’s annual contributions to the system have increased dramatically. In fiscal year 2005, the city paid $163.5 million into the system, an increase of more than $30 million over the prior year. The increased payment consumed most of the city’s $40 million increase in revenues, leading in part to cuts in after school programs, library hours and swimming pool openings.

Despite the increased payments, pension experts predict the deficit will continue to grow next year.

“If we don’t get this problem turned around, the quality of life as we know it in San Diego is going to significantly drop for a generation,” Aguirre said.

Others on the council are hoping for a less dramatic approach for managing the deficit, including levying a pension tax on homeowners, selling city real estate and issuing pension obligation bonds. However, no comprehensive plan has come forward and the city remains frozen from the bond market because of its suspended credit rating.

Aguirre brought the suit on behalf of the people of the state of California, which allows him to unilaterally act as a prosecutor without the approval of the council.

The Political Reform Act holds a statute of limitations of four years, meaning Aguirre’s attack on the 1996 benefits will face litigation.

He contends that the entire set of actions from 1996 to 2004 constitute one ongoing fraud perpetuated against the people of San Diego, but admits that it will meet a stiff legal challenge from opponents. Aguirre also said he expects opponents to also challenge one interpretation of the Political Reform Act that exempts pension benefits from the law by classifying them as salary decisions.

He claims the personal interests came as part of a contractual trade-off and aren’t simply pension benefits.

Bob Stern, a government ethicist who co-authored the Political Reform Act, agreed that the statute of limitations could restrict any challenge to the 1996 benefits.

“There’s some real question about that,” Stern said.

Seeking to repeal the benefits for an entire class of people will also be an issue in court. Although Aguirre believes the action of the eight named in the suit make the contracts as a whole void, Stern said cases can fall both ways in that regard. Sometimes, only the benefits given to the specific parties found in violation are voided, he said.

Bill Kay, a Bay Area labor lawyer who negotiated the city’s recent labor contracts, said the city was headed for a three-to-five year legal battle that would likely be joined by dozens of individual employees and retirees fighting for their benefits. And, he’s not convinced the actions of the eight named defendants would void all of the benefit increases.

“It might well be that Aguirre could prevail, even if he does … there’s a major reach in terms of the individual defendants having some of the pension benefits modified,” Kay said.

The move would likely hamper the ability of the new mayor to renegotiate with the unions, he said.

In addition to drawing investigations from the city attorney and District Attorney Bonnie Dumanis, the city’s pension system – as well as its financial disclosures to investors – has attracted ongoing investigations from the Securities and Exchange Commission, the FBI and U.S. Attorney’s Office.

Voice Staff Writer Evan McLaughlin contributed to this report.

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