DA Strikes First at Pension Deal

Tuesday, November 29, 2005 | Prosecutors finally began arguing that a controversial pension deal was criminal in nature on Monday after speculation surrounding the agreement, which underfunded the retirement system while increasing employees’ future retirement checks, has swirled for three years.

But while the U.S. Attorney’s Office effectively wrapped up its case against a local House member who Monday admitted to taking millions in bribes from defense contractors before even going to trial, the corruption allegations tied to pension dealings do not appear to be as easily resolved.

The preliminary hearing of the pension case began Monday. The court heard not just opening arguments about whether the case should proceed to trial, but also the testimony of the well-known whistleblower who finally had her day in court.

“There will be many matters brought up in this preliminary hearing that make it much like a trial,” Superior Court Judge Frederic Link said.

Just across Broadway from Cunningham’s guilty plea and tearful resignation, prosecutors from the District Attorney’s Office began laying out their criminal case against six former pension board members who approved an agreement known as Manager’s Proposal 2.

In 2002, with the city facing a lump-sum payment into its pension system in the tens of millions of dollars, city and pension officials struck a deal that allowed the city to forgo its payment and push the funding burden to future years. At the same time, city officials granted union members pension benefit increases contingent upon the funding relief.

At the time, city management and union representatives controlled a majority of the pension board.

The agreement has proved devastating for the city, as a growing pension liability crowds annual budgets and a civil settlement agreed to last year has forced the city and its employees to contribute significantly more to San Diego City Employees’ Retirement System.

The city government’s higher payments have strained the city’s day-to-day budget, resulting in fewer library hours, less maintenance at parks and beaches, and the postponement of much-needed upgrades to the city’s public safety equipment and infrastructure. Questions about the pension deal have also been raised by the city’s auditors, who have withheld their certification of the last three years worth of financial statements, barring the city from a credit rating and access from the municipal bond markets.

Diann Shipione, the former pension trustee who first raised questions about Manager’s Proposal 2, was the first witness prosecutor Stephen Robinson called on.

Robinson spent a sizable chunk of his time questioning Shipione on whether it was known that pension enhancements were conditioned on the board’s approval of relieving the city of its obligation to pay a lump sum required by an earlier funding plan.

She said the first presentations of Manager’s Proposal 2 made by then-City Manager Michael Uberuaga and then-Deputy City Manager Bruce Herring clearly indicated that the new benefits were contingent upon the underfunding.

The strain of not requiring the larger payment coupled with the granting of new benefits convinced her that Manager’s Proposal 2 could become “a giant problem,” Shipione said.

“I felt this proposal was very dangerous based on common sense,” said Shipione, whose dissidence often drew the ire of her former board colleagues, especially those sitting just feet away from her in Link’s cramped courtroom. The renegade board member was the subject of a public relations campaign mocking her alarms and an aborted citizen arrest by some of her board colleagues.

“For a financial system to remain sound, it made no sense to refuse that money,” she said, referring to estimates that a “balloon” payment of between $25 million and $75 million would have to be made by the city in addition to its annual contribution to the fund.

The 1997 deal, known as Manager’s Proposal 1, said a balloon payment was necessary if the funding ratio – the money the system has compared to what it owes – dropped below 82.3 percent. Manager’s Proposal 2 would have allowed the fund to drop to 75 percent before a lump-sum contribution was required.

Shipione explained that others, such as pension actuary Rick Roeder and fellow trustee Dick Vortmann, originally shared the same concerns as her, but eventually backed off. She also described attempts by the board to railroad Manager’s Proposal 2 through the SDCERS board and their disinterest in the questions she was raising.

Finally, after the proposal passed muster at the SDCERS board, Shipione said her appearance at the Nov. 18, 2002 City Council meeting was her last plea before the agreement was codified.

Shipione will take the witness stand at least one more day to answer cross-examinations by the defense attorneys.

An attorney for one of the six defendants argued that the Manager’s Proposal 2 only included relieving the city of having to honor a 1996 agreement.

The 2002 deal between the city and SDCERS did not approve pension benefit increases, although the new benefits created by a coinciding collective bargaining agreement were contingent upon stripping the 1996 funding requirement, attorney Frank Vecchione said.

Vecchione, the attorney representing former Assistant Auditor Terri Webster, said Manager’s Proposal 2 was vetted by several attorneys from the City Attorney’s Office, the retirement system and three council members who were previously lawyers before holding elected office.

“This prosecution is such a reach, is so far out of the 1090 law, that none of these attorneys saw a reason to deal with it,” Vecchione said in his opening statement.

Government Code 1090 is the state conflict-of-interest law prosecutors allege was broken. The statute forbids public officials from voting on contracts in which they have a personal financial interest.

Additionally, attorneys representing defendant John Torres accused the District Attorney’s Office of violating the state’s penal code by not sharing grand jury testimony the prosecutors obtained from a deputy district attorney who is investigating the 2002 pension dealings on behalf of the U.S. Attorney’s Office. The defense is seeking access to any grand jury transcripts and exhibits that the District Attorney’s Office has obtained because of the deputy’s involvement in the federal probe.

Link said he will review the motion made Monday.

Along with Webster and Torres, vice president of the Municipal Employees Association, four others face criminal charges in the pension case. City Firefighters Local 145 president Ron Saathoff, former city treasurer Mary Vattimo, former human resources director Cathy Lexin and management analyst Sharon Wilkinson were also charged in May. An effort by the defendants to have the case dismissed was denied by Link in August.

The judge also estimated the proceedings to last about three to four weeks, but said it was possible the case could drag on for as long as eight weeks.

Please contact Evan McLaughlin directly at