Tuesday, October 04, 2005 | Members of the city of San Diego’s pension board shirked their fiduciary obligations in agreeing to a controversial 2002 deal that has further imperiled the beleaguered pension system and instead served only the interests of themselves, their unions and the city, according to a 2003 legal opinion by the system’s outside attorneys that was made public Monday.
The 20-page opinion provides a measured validation, from the system’s own outside legal counsel, of some of the precise allegations of impropriety that have dogged the pension system since pension whistleblower Diann Shipione went public with concerns in November 2002.
Turned over as part of a massive 60,000-page document dump by pension officials, the opinion also appears to buttress arguments that the 2002 agreement in question is illegal. District Attorney Bonnie Dumanis has leveled felony charges against pension officials who voted on the deal – known as Manager’s Proposal 2 – and City Attorney Mike Aguirre has filed two legal challenges in an effort to invalidate the pension benefit enhancements that were a part of it.
The San Diego City Employees’ Retirement System currently faces a shortfall of more than $1.4 billion – the majority of which is the result of pension benefit increases for city employees over the last decade.
Additionally, the opinion brings into question later public claims by pension officials that the 2002 actions were appropriate, instead demonstrating that as early as March 2003, at least some pension officials knew the deal finalized in November 2002 was legally questionable.
As part of Manager’s Proposal 2, which is now the focus of several local and federal investigations, the city granted increased pension benefits to employee unions that were contingent upon the pension board – comprised largely of union representatives and city management – allowing the city to continue to annually underfund the pension system.
In the 20-page opinion, attorney Reg A. Vitek of Seltzer Caplan McMahon Vitek concluded that:
– Individual pension trustees breached their fiduciary duty by allowing the city to pay less than recommended into the pension system while increasing liabilities in the form of pension enhancements. They did this without questioning whether the city had the means to fulfill ballooning payments envisioned in the latter years of the deal, specifically 2008 and 2009.
– Pension trustees subordinated the interests of the pension system in favor of the interests of themselves, their unions and the city.
He also recommended that the board:
– File suit against the city and labor unions “whose leadership voted for the ’02 Proposal, alleging a conspiracy between the City and Unions to cause the Board members to breach their fiduciary duties to SDCERS’ members and their beneficiaries.”
– Nullify the November 2002 deal and attempt to force the city to infuse a lump sum of tens of millions of dollars into the system, as the city would’ve had to if not for the 2002 deal.
Vitek authored the opinion to assist the board in its legal strategy in response to a lawsuit filed in January 2003 challenging the pension system’s funding methods. The class action suit, filed on behalf of retirees and known as the Gleason suit, claimed that the city and pension trustees violated the City Charter and Municipal Code by allowing the city to inadequately fund the system.
In the opinion, Vitek contemplates filing a cross complaint against the city and the unions “based on information that indicates certain union representatives obtained benefits for themselves and co-members of their union as part of the negotiation process over adoption of the modified ’02 Manager’s Proposal,” the opinion states.
No such suit was ever filed by the board. Instead, pension officials continued to defend the deal publicly, saying the sluggish stock market of 2000-2002 was to blame for the growing pension deficit.
As a result of Manager’s Proposal 2, six pension trustees who were also city employees saw their future pensions increase by about 11 percent annually. Two of these six saw additional pension boosts not available to general employees.
Dumanis filed criminal charges against those six. Lawyers for the pension officials say the city’s laws call for city employees to sit on the pension board, therefore their conflict was inherent and natural.
Aguirre, the city attorney, has also filed two civil suits seeking to repeal benefit increases granted in 1996 and 2002 on the grounds that their creation violated laws governing public officials, sound pension systems and the creation of expenses without a funding source.
A previous opinion written in February of this year by Luce Forward Hamilton and Scripps LLP found the 2002 deal, and a similar 1996 arrangement, to be vulnerable in court as well.
However, Michael Conger, the plaintiffs’ attorney in the Gleason suit, said that the only decision that truly matters is that of a judge.
“I think that it’s a correct legal analysis and it substantiates what we’ve been saying for the last two years,” he said of Vitek’s opinion. “But, ultimately, the only decision that matters is the decision of a lawyer who wears a robe and neither I nor Reg Vitek do.”
In August, a federal judge threatened to find pension officials in contempt of court if they failed to comply with the subpoenas. A week later, trustees voted to turn over the documents, previously protected by the attorney-client privilege, to the investigating authorities and the city’s audit committee.
The audit committee, which is investigating allegations of wrongdoing at City Hall, made the documents public Monday following formal requests filed by the Voice of San Diego and other media outlets under the California Public Records Act. The approximately 60,000 documents filled six compact discs.
“The fact that the documents are only now being released speaks to the ongoing attempt by SDCERS and the city to hide what was clearly a quid pro quo,” said April Boling, the former chairwoman of the San Diego County Taxpayers Association, which sued the pension system in early 2005 in an attempt to void the 2002 benefit enhancements. “Quid pro quo” is a Latin term meaning “something for something.”
Aguirre seized on the opinion as a smoking gun in the pension crisis.
“This shows that what we’ve been saying from the beginning is more correct than we knew: That there’s been a massive cover-up by the pension board, by city officials, by the outside law firm,” he said.
Pension Board President Peter Preovolos disagreed. Preovolos, who was not on the board at the time of the 2002 agreement, said that it was important to put Vitek’s commentary into “proper date perspective.”
The opinion that the board had breached its fiduciary duty came after the board had already acted, he said.
And, he said, he still held to his view that nothing illegal had happened.
“You can only violate your fiduciary obligation if you know you’re doing something wrong,” Preovolos said. “At the time they voted they had no clue they had done anything to violate their fiduciary obligation and that view was supported by their legal counsel.”
That excuse, however, may not be enough to protect board members, according to the newly released memo. Attorney Robert Blum, who was the fiduciary counsel for the pension board, did sign off on the now notorious 2002 agreement. But months before he approved it, he expressed significant doubts about the arrangement.
As cited in the newly released documents, Blum had warned the board that there was “material risk” in approving an early draft of the agreement. And “… a court would hold that the decision was not a proper exercise of the Board’s fiduciary responsibilities based upon the facts before the Board.”
Blum then changed his mind for inexplicable reasons, Vitek’s opinion states.
“The absence of clear and specific facts supporting this turnabout leads us to conclude Mr. Blum’s final opinion letter may be insufficient to protect SDCERS Board members from a finding that they breached their fiduciary duty,” Vitek wrote.
Despite Vitek’s letter to the pension board, the board, led by then President Frederick W. Pierce, continued to bitterly contest the lawsuit in question. The board did not settle the case brought against them until June 2004.
“They were fighting us tooth and nail on this lawsuit. After receiving this advice – from their own lawyers – they spent millions of dollars trying to protect their own individual benefits that were part of the deal,” Conger said.
Larry Grissom, retirement administrator, didn’t return calls for comment. Attempts to reach union officials were unsuccessful.
Shipione, a member of the pension board at the time, said she’d never seen the legal opinion before Monday. But she said it embodied the culture in the pension system.
“All these guys have always known what they were doing was wrong. The lawyers told them, I told them. It didn’t matter, they just did what they wanted to anyway,” she said.
Preovolos said that taxpayers should also be reassured that the city and retirement board will never again enter into arrangements like the 2002 deal.
A ballot initiative passed last year prohibits the retirement system from entering into any deals to underfund the pension again. Another initiative changed the composition of the pension board, taking the board majority away from city employees.
“No board in the future can ever again even entertain the thought of sitting down saying to the city: let’s talk,” Preovolos said.
Please contact the reporters directly at