Tuesday, January 31, 2006 | The two former pension staff members indicted this month on corruption charges will not have their legal defense paid for by the city’s retirement system, as a motion to do so failed during a pension board hearing Monday.

During the same hearing, the board formed a special committee to study recommendations made in an investigative report released by private consultants less than two weeks ago. The report found several deals made between the city and the pension board in the last two decades to have been illegal and to have jeopardized the soundness of the fund.

The report also recommended the pension system prepare for the possibility that the city goes into bankruptcy, how it should properly be governed and that the board evaluate a number of accounting methods consultants found to be questionable.

The committee, made up of four trustees, will also examine reforms that might in effect add to the city’s current pension debt, which is currently $2 billion, by evaluating whether reserve funds, accounting methods and existing agreements are being carried out properly.

“What I would recommend, quite frankly, is we need to make sure we don’t look like were just doing another study. I would ask the committee to work with a focus on where we’re going and how we’re going to get there,” said Steve Meyer, an employee representative on the board.

A majority of the trustees present voted in favor of the request for legal funding, but a shorthanded board was unable to garner enough support to grant indemnity to former Administrator Larry Grissom and former in-house attorney Lori Chapin. Only eight trustees attended the board meeting Monday, as four spots are vacant and another trustee was absent.

Seven affirmative votes are necessary to approve official action. Five trustees voted in favor of the deal, while two dissented and one abstained.

Grissom, Chapin and three former pension trustees – firefighters union President Ron Saathoff, former Assistant Auditor Terri Webster and former Human Resources Director Cathy Lexin – were indicted on fraud and conspiracy charges Jan. 6 for allegedly enacting a pension-funding arrangement in 2002 that effectively boosted their future retirement pay.

The five defendants are expected to be arraigned in federal court on Wednesday at 1:30 p.m.

The 2002 deal, known as Manager’s Proposal 2, allowed the city to skirt its pension bill and granted new benefits to employees – a connection that defense attorneys deny and prosecutors contend is criminal. The deal is at the heart of the city’s pension troubles, as the fund has only $2 for every $3 it owes. City officials estimate that one-third of next year’s general-use budget will go toward paying down the system’s nearly $2 billion deficit.

While the trustees involved in Manager’s Proposal 2 have either stepped down or been removed from the board in the last year, Grissom and Chapin remained in their positions until just before their indictments, providing legal and institution advice to the current board.

Members on both sides of the fence said their recent ties to the two San Diego City Employees’ Retirement System staffers did not have a bearing on their decision.

“Did I vote for it because it was Larry and Lori? No,” said SDCERS board President Peter Preovolos, who voted to approve the legal defense expenses.

The requests for legal funds were brought by Grissom and Chapin and their attorneys said they might return to the board to seek funding again.

The retirement system provided lawyer fees for Grissom and Chapin while they were witnesses and targets in the U.S Attorney’s Office investigation, but the SDCERS board cut off the two former senior staffers after they were named along in a grand jury indictment.

Before voting, the board’s retirement outside fiduciary attorney Harvey Leiderman instructed the trustees that state law allowed them to make the decision themselves. Leiderman also noted that trustees should believe in four criteria if they decided to indemnify Grissom or Chapin: That the action they were charged for was within the scope of their job, that providing a defense was in the best interests of the system and that they acted in good faith and in the best interests of the system.

Preovolos said he thought that a vote against Chapin and Grissom would send a signal to the public that they had committed illegal acts even though that was not the board’s task at hand Monday.

“The thing that made the decision today difficult was that, no matter which way you went, you were in effect expressing in the court of opinion if they were guilty or not,” Preovolos said. “For me to opine on that, to express an opinion on the indictment, that would cross the line.”

Trustee Joe Flynn, who represents retirees on the board, said that he thought his no vote was consistent with the board’s decisions to stop defending pension officials once they were charged criminally. The retirement board has also stopped paying the legal fees for six former board members when they were charged by the District Attorney’s Office with conflict-of-interest allegations last May. Three of trustees charged in the federal case have also been charged in the district attorney’s case.

Flynn said that, as staff members, Grissom and Chapin should have better alerted the trustees who ultimately voted to approve a plan that let the city skirt its pension bill that year.

“The board is a volunteer, part-time board which causes us to rely heavily on staff,” Flynn said. “We don’t just rely on them to be there to answer questions, but they should be telling us things we don’t want to hear too.”

City Attorney Mike Aguirre, who lobbied hard at the meeting for the board to not provide defense, said he didn’t expect the Chapin and Grissom to change the way they will plea at arraignment Wednesday, but that the denial of legal defense allowed pensioners the relief of knowing their retirement fund money is not being used to pay attorneys’ fees.

“The spigot to fund the cover-up has finally been turned off,” Aguirre said.

Trustees Meyer, Preovolos, Bill Sheffler, Mark Sullivan and George Murray voted in favor of the indemnification. Flynn and Thomas Hebrank voted against it, while Richard Kipperman abstained. Firefighter representative John Thomson was asbent.

The ad hoc committee formed Monday the panel is expected within four months to suggest improvements to the pension fund’s actuarial soundness, how it should be governed and what steps should be taken to protect the fund in case the city government files bankruptcy.

As the pension board grapples with its independence, the group will also look at its relationship with the city. Evaluating laws that govern the independence of trusts, transferring city services such as the auditor in-house, or how trustees are chosen were some of the suggestions made by trustee Sullivan, the panel’s chair.

Please contact Evan McLaughlin directly at

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