Wednesday, February 01, 2006 | Three years ago the county of San Diego worried that it would have to cut jobs and services unless the board that handled its pension system gave it a break on a big bill that was coming due.
The pension board agreed and Monday a state appellate court said that was legal.
The precedent could be far reaching for not only the county, but across town at City Hall, where the government has been embroiled in controversy and legal actions after its retirement system allowed the city to similarly escape payment on a massive bill headed its way.
The ruling by the 4th District Court of Appeals does not deal with the conflict-of-interest charges prosecutors have filed against former city pension officials, but the court’s support of the county board’s decision in 2003 may give retirement trustees more flexibility in cutting cities and counties slack on their pension bills.
The ruling rejected two county retirees’ complaint that the San Diego County Employees Retirement Association allowed the Board of Supervisors to underfund the pension when it allowed the county to used rosier numbers when calculating its pension bill. The new figures allowed the pension board to count $550 million the county had raised months earlier through pension bonds. They also allowed the SDCERA board to cut the county’s pension bill by $75 million that year, said attorney Michael Conger, who represented the retirees.
The county’s pension bill had increased substantially that year after the Board of Supervisors had earlier agreed to boost the pensions of county employees. The move pushed the county pension system from the surplus it had maintained for years into a large deficit.
Because the county used a snapshot of the retirement fund’s fiscal health that included the new pension bond money, the SDCERA board was fulfilling its fiduciary duty to its members because the county said it would have to layoff 1,500 workers if the forecast with the larger deficit was used, the court said.
County employees and retirees make up the retirement plan’s membership, and allowing the county relief from its bill prevented layoffs. This is essentially in the retirement plan’s best interest, the court said.
“Even in assuming appellants are correct in asserting that the Board’s sole duty is to protect members’ interests as beneficiaries, the pension of a member who loses his job will be dramatically affected by that job loss,” the court said in its ruling. “Thus, a member’s interests as an employee are clearly related to his interest as a pension beneficiary.”
Conger had argued to the court that using the new snapshot of the fund’s health was not in the interests of the plan, which has $4 for every $5 it owes. He did not, however, convince the judges that that the switch violated the state constitution. Calls placed to SDCERA and an attorney representing the county were not returned Tuesday.
The county owes $2.5 billion in its retirement debts when payments on its pension obligation bonds are included.
The county isn’t the only local government to avoid its pension obligations in order to stave off budget cuts. The county’s layoff warnings to the SDCERA board arrived one year after officials across town at the city approached their retirement board seeking relief to avoid service cuts and job losses.
In 2002, the city’s pension board approved Manager’s Proposal 2, which allowed the city to skirt its annual bill while granting new benefits to city workers, including many of the trustees. The deal is now the focus of corruption cases filed by federal and state prosecutors.
The county’s system hasn’t been subject to such investigative scrutiny. But to some, the court’s ruling validates the rationale some city and pension officials said they used when helping approve the arrangement now central to the city’s fiscal crisis.
Ann Smith, the attorney for the 6,000-member Municipal Employees Association, said the threat of layoffs had been discussed throughout the budget and labor hearings in 2002. The loss of revenue from the state and the prospects of making a multimillion dollar pension payment amounted to “a big yet undefined hit that would result in layoffs,” she said.
Retirement trustees should be able to consider the effects layoffs have on pensioners, Smith said.
“I thought the court hit the nail on the head,” she said.
City Attorney Mike Aguirre said the decision was wrong, but would have no bearing on how the city paid down its pension deficit or on his lawsuits. He seeks to have the benefits granted in 1996 and 2002 rolled back, arguing their creation violated numerous state and local laws.
Only some pension beneficiaries are active employees, and combining the two as one was a misunderstanding of what the duties of a retirement board are, he said.
“This betrays the fundamental realities of a pension system,” Aguirre said. “Possible job loss as it relates to paying the bill is totally irrelevant to the pension-funding issue and should be totally separate. The best way to prevent job losses is to not give new benefits without finding funding for them.”
Conger said he was worried that ruling could allow retirement boards to relax the funding requirements for employers such as the county as long as that governmental agency complained that a full payment would lead to layoffs.
“That’s a loophole that every underfunding decision can be driven through,” he said. “We don’t believe pension boards have the duty to protect future employment, just already-earned pensions.”
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