Friday, October 07, 2005 | Perhaps the most enduring mystery of San Diego’s pension drama has always surrounded one man: the pension system’s outside fiduciary counsel, Bob Blum.
When first presented with the pension deal that now stands at the heart of numerous investigations and the city’s financial crisis, Blum deemed it “awful.” A number of months and a few minor changes later, Blum wrote a final opinion blessing the deal and applauded the board for its diligence.
The written opinion came Nov. 18, 2002, three days after the pension board had already approved the deal.
Internal e-mails culled from the 60,000 pages of pension documents made public this week and other public records indicate that Blum went from an early opponent of the deal known as Manager’s Proposal 2 to an active advocate – and, for the first time, why he did so.
Correspondence between the pension system’s in-house attorneys written March 24, 2003 gives a simple explanation for Blum’s much-analyzed shift: He was told what to do by retirement administrator Larry Grissom.
“He said that his June letter (against the deal) was written because Larry told him to ‘kill the Manager’s Proposal,’” wrote Sheila Leone, an in-house pension attorney recalling Blum’s 2003 statements to attorneys. “For whatever reason, Larry changed his mind. Then, according to Blum, there was enormous pressure to ‘make it happen.’”
Indeed, the records show that the San Francisco attorney went from deal breaker to deal maker in a matter of months. He first told the board the deal didn’t pass elementary analysis, but later was begging officials for a shot to negotiate a deal.
He also authored, at the behest of Grissom, a hesitant actuary’s final opinion on the agreement.
The deal is now the focus of intense scrutiny, as civil and criminal investigators have swarmed to a system awash in a deficit of more than $1.4 billion. Six current and former pension board members face felony conflict-of-interest charges from the District Attorney’s Office.
City Attorney Mike Aguirre has filed suit to undo the 2002 deal, as well as a similar one in 1996, in order to lift the burden of hundreds of millions of dollars of benefits that he says are illegal.
The Securities and Exchange Commission, U.S. Attorney’s Office and FBI have been investigating since February 2004.
What has attracted them is the deal known as Manager’s Proposal 2.
In 2002, the city faced the prospect of having to pump between $25 million and $500 million into its pension system. Already in tight budget times, officials looked for a way to avoid the payment.
Union representatives and city management controlled a majority of the seats on the pension board. City officials went to the pension board, first in May 2002, asking the board to let it out of the large cash payment and restructure a payment plan. In exchange, unions would receive benefit enhancements.
In the end, the deal was completed. The city was allowed to continue its history of underfunding the pension system, while city workers – including six pension board members – enjoyed a new level of benefits.
But without the blessing of the board’s fiduciary counsel or actuary, the deal never could have gone through.
Originally, Blum authored a June 12, 2002 draft opinion stating that the deal “would not pass elementary actuarial requirements.”
City officials fine-tuned the plan, never altering it substantially. But sometime after the June opinion, the San Francisco attorney changed his tune. Months later, Leone wrote that Blum was pressured by Grissom, the retirement administrator, to do so.
“Blum’s opinion changed because it’s what Larry wanted – not- by the way a solid legal defense,” Leone wrote to fellow pension attorneys Lori Chapin and Roxanne Parks.
Leone was paraphrasing Blum’s testimony to outside attorneys brought in to defend the San Diego City Employees’ Retirement System against a lawsuit that challenged the 2002 deal and the way in which the city funded its pension system.
Internal e-mails show that Grissom and Blum had more than simply a professional relationship. They exchanged jokes about women and liked to discuss cars and fishing.
The administrator couldn’t be reached for comment Thursday night when the e-mails were located. Why Grissom changed his mind on the deal remains unknown.
Weeks after Blum’s first opinion against Manager’s Proposal 2 was submitted, Grissom received a 3-percent pay raise on July 1, 2002, according to city payroll records.
Additionally, an internal memo from then-board President Frederick W. Pierce IV shows that Grissom was then made eligible for a 15-percent pay increase in July 2002. The raise was to be based on incentives and given incrementally.
City payroll records show that Grissom then received a 7.3-percent pay increase on Jan. 4, 2003.
In an interview conducted in June, Grissom said his pay increases had nothing to do with work related to Manager’s Proposal 2. He said he was a resource in the deal, acting as a conduit between the unions, city and pension board.
By October 2002, Blum was fully engaged in the negotiations. Public records show that he met repeatedly in the summer and fall of 2002 with attorneys on the city’s side and consistently with former Deputy City Manager Bruce Herring – regarded by those involved as the architect of Manager’s Proposal 2.
In an Oct. 23, 2002 e-mail, Blum begged for the authorization to continue negotiating with Deputy City Attorney Mike Rivo, who handled pension and labor contract issues.
Blum wrote, “please, please oh please unleash me in the next go round w/ rivo. i want him to know that if the city continues to raise the ante, we will do the same.” Rivo now has immunity from the U.S. Attorney’s Office.
Leone’s March 2003 e-mail also says that Blum authored actuary Rick Roeder’s final opinion on the deal at Grissom’s behest, something she calls “frankly disturbing.” Roeder confirmed that Blum had authored his final letter analyzing the agreement.
Roeder, who had originally expressed misgivings toward the agreement, signed the letter that Blum authored. He called it a “neutral” document.
Blum wrote about the importance of Roeder’s opinion in a Nov. 5, 2002 e-mail: “he (Roeder) tends to get a bit wiggly about this letter and we need him signed and sealed. we can talk later about the choreography of the board meeting.”
The board meeting was Nov. 15, 2002, when the pension board would finalize the agreement. The City Council finalized the deal three days later.
In later interviews and during the board meeting, Blum argued that the board had done its diligence in approving the deal. He said that a number of interpretations of the board’s previous contract with the city were ambiguous and that if it hadn’t made the deal, it would likely have been forced into lengthy litigation with the city to try and force payment into the system.
According to a later analysis by pension attorneys, Blum never ultimately addressed the long list of the original concerns contained in the June 12, 2002 negative opinion.
The city and pension system were quickly sued following the completion of the deal.
The law firm of Seltzer Caplan McMahon Vitek was hired by the pension board to defend the system in the suit. Its attorneys stated in 2003 and 2004 that the board had breached its fiduciary duty to the pension system and that the deals were likely illegal.
They also stated that the board broke the state’s conflict-of-interest laws because certain board members had a financial interest in the contract. If they, as members of the pension board, had voted against the city’s funding plan, they wouldn’t have received their benefits.
As part of its research into the suit, attorneys from Seltzer Caplan interviewed Blum.
According to Leone’s e-mail, Grissom called ahead and warned Blum that Seltzer Caplan was looking to sue Blum for malpractice.
Leone was incredulous. “I cannot understand why Larry did this. It’s a real betrayal of the System,” she wrote.
By calling ahead, Grissom would’ve tipped off Blum, and thereby potentially damaging a malpractice suit that could bring millions into the underfunded pension system.
During the meeting between Blum and Seltzer Caplan attorneys, Blum was told about a special benefit bestowed upon firefighter union president Ron Saathoff. At the time, Saathoff saw the deal from two sides. He sat on the pension board and also at the negotiating table as union president.
As part of the deal, he received the “presidential leave” benefit that allowed him to count both his union and city salaries in his pension formula. Saathoff is one of the six charged in the district attorney’s case.
“Bob was shown Ron’s ‘presidential leave’ benefit. He called it ‘absolutely breathtaking,’” Leone wrote, “said he had no knowledge of it and concluded the existence of the benefit could invalidate the entire manager’s proposal. This, obviously, is huge.”
Leone continued, explaining a later conversation between Grissom and Seltzer Caplan attorney Reg Vitek at a pension board meeting: “After the meeting Larry told him ‘there’s a lot more side deals’ than that concocted by Ron. Reg was adamant – he needs to know what Larry is talking about.”
Vitek told the pension board in March 2003 that its deal was likely illegal and that board members had served themselves, their unions and the city at a cost to the pension system. He advised that the pension board adopt the same strategy as the lawsuit brought against them, which was to force the city to pay for the benefits it had promised to workers.
The board should sue the city and labor unions alleging a conspiracy to cause board members to breach their fiduciary duties, Vitek wrote. The board could also nullify the entire deal to make the fund sound, he advised.
The board chose not to follow this advice. Instead, it contested the lawsuit for more than a year. Pierce, the board president, continued to maintain in paid advertisements that the deal was completely legal, despite his private knowledge of the attorney’s opinions.
“We are not only ignoring advice, we have taken active steps to damage our client’s position,” Leone finished her March 24, 2003 e-mail.
The pension system did eventually sue Blum for malpractice after he was sued by retirees. They recently reached a $15 million settlement.
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