Wednesday, October 05, 2005 | The pension board probably violated the state’s conflict-of-interest laws in approving the 2002 agreement between the city and the board, according to a 2004 opinion authored by the board’s outside attorneys.
Because a number of the pension board members stood to benefit financially from the controversial Manager’s Proposal 2 deal in 2002, a court could void the deal that is central to a number of ongoing investigations and the city’s legal and political woes, the pension system attorney wrote.
The May 13, 2004 opinion was authored by outside attorneys advising the board in settlement talks on a lawsuit challenging the manner in which the city funded its pension system. It was found among the 60,000 pages of documents released to the media this week by the city’s audit committee, which obtained the documents from the pension system last month as part of its investigation into City Hall.
The analysis by Michael Leone of Seltzer Caplan McMahon Vitek found that the agreement struck between city and pension officials – which allowed the city to continue to underfund its pension system and granted union members increased benefits – violated state and local laws and could be found void in court. However, the opinion found it unlikely that a court would invalidate the deal as a whole, instead predicting the court would force the city to inject funds into the system to compensate for past underfunding.
Specifically, the opinion found that the pension agreement, and a similar one struck in 1996, violated California Government Code 1090. The statute forbids public officials from participating in a contract in which they have a financial interest.
“It is probable the Court would conclude the Board’s vote to adopt Manager’s Proposal II violated Government Code section 1090, thereby invalidating the vote,” Leone wrote.
In early 2002, the city faced the prospect of having to inject a lump sum payment in the tens of millions of dollars into the pension system. To avoid the payment, the city offered unions enhanced benefits contingent upon a pension board vote to restructure its payments.
The board majority consisted of union representatives and city management. They approved the deal, as did the City Council, in November 2002. Six board members saw an increase in their future pensions as a result, and the burden of pension costs were pushed past 2008.
Despite being more than a year old, the pension memo is pertinent to current events.
The District Attorney’s Office in May charged six current and former pension board members with felony violations of the conflict-of-interest law referenced by the pension attorneys, known as California Government Code 1090. A preliminary hearing is set for Oct. 26.
However, the criminal case would need to meet a higher burden of proof than in the 2004 civil analysis.
City Attorney Mike Aguirre also claims similar civil violations in a suit filed in July that seeks to void pension benefit enhancements granted in the 1996 and 2002 deals.
In this effort, Aguirre hopes to shave about $700 million from a pension deficit that’s estimated to be more than $1.4 billion and threatens to dominate the city’s annual budget for years to come.
The Securities and Exchange Commission and the U.S. Attorney’s Office, which first sought access to the pension archives last year as part of their ongoing investigations into City Hall, received the documents last month.
The pension board had refused to turn over the documents until a federal judge threatened to hold them in contempt of court.
The analysis found that Cathy Lexin, former human resources director; Mary Vattimo, former treasurer; and former Auditor Terri Webster – all pension board members at the time of the 2002 vote – had minimal financial interest in the contract. However, because they didn’t disclose the fact that they would benefit from the contract, they likely violated the law, Leone found.
Although a court could question the financial interest of the three representatives from city management, a benefit bestowed upon pension board member and firefighter union president Ron Saathoff “presents a significantly more probable basis for invalidation of the agreement under this statute,” Leone wrote.
In addition to sitting on the pension board, Saathoff also sat at the negotiating table for the firefighters. He received the “presidential leave” benefit as part of Manager’s Proposal 2.
The benefit allowed him to count both his union and city salaries in calculating his pension. According to court papers filed in the district attorney’s case, Saathoff’s future pension increased by more than $2,000 a month because of Manager’s Proposal 2.
The memo doesn’t further analyze individual culpability because the suit was against the board as an entity, not the individual trustees.
Current pension trustee John Torres and former trustee Sharon Wilkinson were also charged in the district attorney’s case. They represented the Municipal Employees Association, the city’s largest union, on the board and are city employees.
The representative for the Police Officers Association voted against the deal and the union didn’t agree to a labor contract in 2002. Local 127, the union representing blue-collar workers, didn’t have a representative on the pension board.
Ann Smith, an MEA attorney, said that there was no illegal conflict of interest because the state’s two main laws governing the subject have exceptions for public employees dealing with their own salaries.
The opinion also found no record that the board’s attorneys at the time, Bob Blum and Constance Hiatt, ever analyzed the conflict-of-interest laws “caused by the link between benefit enhancement and contribution reduction.”
The city and pension board eventually settled the Gleason lawsuit. The settlement altered half of the Manager’s Proposal 2 agreement, forcing the city to pay more annually into the pension system. It didn’t address the benefit side of the agreement, which is what is being challenged by Aguirre.
Additionally, the pension board and retirees eventually sued Blum and Hiatt for malpractice. That case recently settled for nearly $15 million.
Contributing Writer Scott Lewis contributed to this report.
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