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Monday, January 09, 2006 | Pre-trial hearings in the district attorney’s corruption case against six former retirement trustees resume Monday, three days after the grand jury handed down criminal fraud charges related to the same controversial pension deal that sent the city of San Diego into unprecedented political and financial chaos.
Three of those defendants returning to court were charged by the federal government Friday along with two other retirement officials.
The federal case relies on the oblique charges of “honest services” fraud, a federal statute used to prosecute public officials the government believes have deprived the public of the right of honest governmental services.
Although the district attorney’s case revolves around the same deal, known as Manager’s Proposal 2, its case is fundamentally different. And a judge will decide in the coming weeks if the district attorney’s merits a full jury trial or if the charges will flatly be thrown out.
However, the state case that resumes Monday zeroes in on a much more precise state law known as California Government Code 1090, which forbids public officials from enacting a contract in which they have a personal economic interest. And, judging from the length and complexity of the first weeks of the pre-trail hearing, the case isn’t clear cut.
“A lot of people think this hearing is the cure-all to all the city’s problems. It’s not,” said Superior Court Judge Frederic Link, who is presiding over the case.
In 2002, the city faced the prospect of having to inject a large lump-sum payment into its pension system as investment losses revealed a deepening deficit. Rather than make the payment, city officials instead asked the pension board – populated largely by union officials and city management representatives – to allow it to restructure its payments. At the same time, the city offered unions significant benefit enhancements as part of the deal.
Prosecutors say the deal is criminal, as the six trustees of the San Diego City Employees’ Retirement System voted on a deal that gave them enhanced pension benefits.
For Link to send the conflict-of-interest case to trial, he said he would have to believe that a crime was committed and that the six trustees committed it.
While other trustees on the 2002 SDCERS board as well as a few city administrators have testified that they believed in 2002 that the benefit increases were tied to the underfunding agreement, defense attorneys have attempted to refute the notion that a crime was committed.
The defense lawyers offer a number of explanations: that their clients didn’t necessarily profit from Manager’s Proposal 2, that the SDCERS board’s inclusion of city workers as laid out in the city’s laws makes the conflict inevitable, and that voting on one’s own pensions and salaries can’t be considered a conflict-of-interest under state law.
The former SDCERS trustees facing state conflict-of-interest charges are firefighters union president Ron Saathoff; white-collar union vice president and police fingerprint examiner John Torres; former Treasurer Mary Vattimo; former Human Resources Director Cathy Lexin; former Assistant Auditor Terri Webster; and Sharon Wilkinson, a management analyst for the city.
Saathoff, Lexin and Webster were also named in Friday’s federal corruption indictments, along with former SDCERS Administrator Larry Grissom and the system’s in-house attorney Lori Chapin. An arraignment in the federal case has not yet been scheduled.
The District Attorney’s Office finished its preliminary prosecution Dec. 14, and the defense will begin calling witnesses Monday. A witness list was unavailable as of press time, but attorneys for the defendants are expected to call about 10 witnesses.
None of that Matters?
While the retirement system’s managers boast that the plan’s investment portfolio is one of the best in the nation, SDCERS has a funding shortfall of at least $1.37 billion. The fund has only $2 to pay for every $3 it owes.
The pension deficit’s effect on the city has been harsh, straining its budget as its annual obligations to the pension fund have grown exponentially in recent years. Errors in the city’s financial disclosures relating to the pension system’s funding methods prompted a separate set of investigations and led outside auditors to hold off on certifying the city’s books. The government’s credit rating has been shot as a result, barring the city from the public bond markets.
Although financial impact of Manager’s Proposal 2 has been discussed during the hearing, it doesn’t pertain to the case, Link said.
By contrast, federal prosecutors specifically cited the deal’s negative financial impacts on both the retirement system and the city.
Prosecutor Stephen Robinson has called witnesses ranging in expertise, but he has focused centrally on one issue: if witnesses believed the benefits extended to defendants were contingent upon the pension trustees’ approval of payment relief for the city.
Overwhelmingly, witnesses have testified that they were aware of the connection, and have noted that none of the defendants ever disclosed that they had a financial interest in approving the deal.
The Defense’s Possible Outs
“In every previous case, the financial interest to the criminally accused was not the securing of an employment benefit, generally available to a large class of employees, but rather related to a narrow business opportunity, uniquely obtained by the public official who assisted in the making of the contract,” defense attorneys stated in a brief they filed with the court Friday.
The judge has also raised concerns about the composition of the SDCERS board as prescribed in the City Charter. According to the law, a certain number of city administrators and employees are required to serve on the board overseeing the retirement system. Voters changed the board’s composition in 2004, but seats are still reserved for civty workers today.
Union attorneys have said the make-up of the board made the conflict inherent.
Plantiffs’ attorney Michael Conger, who has successfully sued the city and the retirement board over the 2002 deal, said the pact became illegal once employee benefits became involved.
It is not the board’s duty to set benefit levels, he said.
Link has acknowledged that pursuing criminal charges with that legal argument will be more difficult than using it as a civil complaint.
Defense attorneys have also argued that the benefits granted by the City Council in 2002 did not necessarily boost the future pension checks of the case’s defendants.
The formulas approved that year by the City Council included a higher “multiplier” for general city workers. Retirement checks in defined-benefit plans such as San Diego’s are calculated using a formula that multiplies an employees’ highest annual salary, amount of years worked and a set percentage known as the multiplier.
Although the 2002 deal increased the multiplier, the council and unions agreed to cap an employee’s pension at 90 percent of the employee’s salary.
Attorneys for Webster and Vattimo said the two could earn more in pension pay formulas other than the one created in 2002 because those formulas don’t have caps. Although the 90-percent cap was lifted in cases such as Webster’s, a limit still exists as to what percentage of her salary she can earn in pension checks.
Webster’s attorney, Frank Vecchione, said last month that his client could make about 108 percent of her highest year’s salary if she retired at 60 years old under a pre-2002 formula. At the same age, her pension payments would likely be capped at nearly 94 percent of her highest year’s salary under the 2002 arrangement, according to a Voice analysis.
Vecchione and Jane Hahn, who represents Vattimo, argued that the District Attorney’s Office only asked staff at the pension system to calculate the financial benefit for the defendants assuming they would retire with at age 55 or with 20 years of service, whichever came later. The scenarios were skewing the argument in favor of the prosecution, the defense attorneys said.
The judge asked a staff member at the pension system to return with other scenarios.
Conger argues that it doesn’t matter if the schedule approved in 2002 is a better or worse payoff than the ones already in place. He said that the very idea that Webster and Vattimo have another option to choose from gives them an illegal financial interest.
“If the option doesn’t have a value for them, why did the unions negotiate for it?” Conger said. “At the very least, they have another option that could potentially be fairly lucrative for them.”
The judge said at least one trustee, police union representative Tom Rhodes, who was also a pensioner, spotted the conflict of interest right away and voted against the apparent underfunding-for-benefits deal because “he wore two hats.” The judge said he is concerned about evidence showing that defendants acted as union representatives or city administrators when conducting retirement business – something that would be a breach of their responsibilities to the pension system.
Hearings for the case resume Monday at 9 a.m. in Department 26 of the Superior Court.
Please contact Evan McLaughlin directly at