Saturday, July 09, 2005 | The City Attorney’s Office set the groundwork for placing the city’s troubled pension system under the control of a court-appointed receiver Friday as it continued its legal bombardment of the system’s multibillion deficit.
Such a move, designed to save mismanaged entities, would place the pension system under the control of an expert who could, among other things, free-up long-guarded pension documents central to ongoing audits and investigations, and serve as a venue for rolling back pension benefit increases at the heart of a pension deficit of at least $1.37 billion.
The move comes a day after the office initiated separate actions to repeal pension benefit increases granted in 1996 and 2002 on allegations that eight current and former city officials misused their positions as part of a fraud – one that resulted in a deficit that jeopardizes city finances.
Friday’s suit goes after these benefits on many of the same grounds as Thursday’s suit, but goes further, charging that the creation of the benefits violates local and state laws that forbid the creation of unfunded expenses.
If successful, the lawsuits would repeal the benefits of approximately 11,000 city workers and 800 to 900 employees back to pre-1997 configurations.
“This is the start of what will be a continuous, growing, ever more powerful legal assertion of all the rights of the taxpayers and the city of San Diego,” said Aguirre, who has set the foundation of the legal challenge through a series of public reports. “You can expect that there will be several more litigations filed. This is a problem that will not be going away soon.”
Lawsuits against third-party advisors to the pension system such as actuaries, lawyers and consultants are expected to follow.
The city attorney acknowledged his plan is “a rather extraordinary set of proposed solutions to this problem that are fairly dramatic and, we realize, very high-risk.”
Friday’s suit was filed as a cross-complaint to a suit filed earlier this year by the pension board attempting to block Aguirre from taking over as its attorney.
Pension officials deferred comment, but said a response could be out as soon as Monday.
Until then-City Attorney Casey Gwinn authored a memorandum in 1998 creating two full-time legal positions within the pension system, the city attorney had served as its legal advisor.
The same is done in San Francisco, Los Angeles, Sacramento and Anaheim, said Don McGrath, assistant executive city attorney. When Aguirre took office, he revoked Gwinn’s memo and tried to assume the role of the system’s legal advisor.
The cross-complaint accuses the current and former board members and administration of the system of breach of trust, breach of fiduciary duty, fraud, neglect, misrepresentation, concealment, negligence and conspiracy.
It lays out a number of legal arguments as to why the pension benefits should be repealed, from their allegedly corrupt creation to the violation of laws barring debt. It also seeks to reinstate the city attorney as the pension system’s legal counsel.
One of the proposed remedies to the myriad misdoings outlined by Aguirre and McGrath: sending the pension system into receivership.
McGrath called it an option, but said he would wait until the City Council returned from legislative recess July 19 before asking that a receiver be appointed. He said he wants the council’s blessing first.
Both McGrath and Aguirre said they expect the council to recommend receivership, though Aguirre appeared to be more convinced that it was the only option.
The suit was filed Friday because a key vote was taken by the pension board on July 11, 2002, and Aguirre said the statute of limitations for the 2002 benefit package could have expired after Monday.
The pension system is at the center of the city’s myriad legal and financial woes. Council members have been swayed in recent weeks as to the importance of receivership after the pension board has repeatedly refused to waive its attorney-client privilege in connection with documents sought by the city’s outside auditor, the Securities and Exchange Commission and U.S. Attorney’s Office.
The SEC is investigating errors and omissions in bond disclosures to potential investors, while the U.S. Attorney and the FBI are probing possible political corruption.
Additionally, outside auditors need access to the pension documents in order to certify the city’s long-delayed fiscal year 2003 audit. Without the audit, the city remains frozen from the public bond market without the funds to do the things cities do – fix roads, build fire stations and replace sewer pipes.
Under receivership, the court-appointed expert would be able to waive the attorney-client privilege. It also gives Aguirre another venue in which to challenge the 1996 and 2002 pension benefits, which were granted as part of a deal that allowed the city to annually contribute less than recommended into its pension system.
“The receiver would seek, potentially, to set aside those agreements,” Aguirre said.
Union officials have promised a vigorous confrontation and could be receiving assistance from state and international union affiliates. Although San Diego is steeped in many problems at the moment, other municipalities around the country face multibillion pension gaps and Aguirre’s case could become a bellwether.
The benefits are legal and cannot be repealed, union leaders say. Additionally, outside labor and government attorneys expressed doubt of more than one of Aguirre’s arguments in the Thursday case.
All sides agree five years could pass before a resolution.
In a memo Friday, city Auditor John Torell said he is preparing an analysis of the cost savings if the benefits were to be rolled back upon a request by Aguirre, who has estimated a reduction of $700 million to $800 million in the pension deficit.
“We have to recognize that the city of San Diego is in the financial hospital and it’s going to be a long stay,” Aguirre said.
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