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Friday, June 9, 2006 | City officials and a former city worker forged a tentative settlement Thursday that would allow the city to use borrowed money to make up for nearly a decade’s worth of pension underfunding.
The settlement allows borrowing plans already in the works at City Hall to cover most – or all – of the $173 million that former city worker William McGuigan claimed the city shortchanged its employee pension fund from 1996 to 2005. For the city, the arrangement would eliminate the prospect of the having to make a budget-busting cash payment to the pension system should it have lost the case – as it was nearly forced to do just weeks ago.
“This is a very advantageous resolution to both sides,” City Attorney Mike Aguirre said. “Most importantly the city will never again be sued for any underfunding issue that has been raised previously.”
The City Council is expected to finalize the deal Tuesday.
The $100 million tobacco-securitization borrowing package already approved by council in April and headed soon to market would cover more than one half of the McGuigan lawsuit. The remaining $73 million would be paid off over the next five years, with interest added. The city and McGuigan’s attorney, Michael Conger, will select pieces of real estate from the city’s land holdings to be used as collateral to ensure that the city makes payment.
Losing the case in court, which was nearly a reality for the city after a Superior Court judge threatened a default judgment just weeks ago, could have forced an immediate payment. While the Mayor’s Office believes money from the tobacco borrowing plan will be available to pay into the retirement plan this month, a court order to immediately pay $173 million into the fund would have significantly strained the spending plan Mayor Jerry Sanders signed into law Wednesday.
“The prospect was paying $173 million tomorrow, which I think would have presented a significant cash-flow issue,” Council President Scott Peters said. “This was a much better way to address the problem than through the courts.”
However, Critics said the outcome of the McGuigan lawsuit resembled another lawsuit Conger filed that forced the city to pay more into its pension system on a yearly basis, but less than what experts said should be paid to make the fund whole.
“It’s another Band-Aid to put over a very massive wound,” said pension whistleblower Diann Shipione. “It won’t fix the problem. It’s just another lawsuit with more money for Mike Conger.”
The city’s pension system is strapped with a deficit that’s estimated to be at least $1.4 billion, brought about largely by a series of benefit boosts and arrangements that allowed the city to annually pay into the pension system less than was due.
The McGuigan case, which was filed last July, sought to make the city true up on the amount it had underfunded the pension system dating back to 1996.
The pension enhancements that were created during that span of time are being challenged by Aguirre on the grounds that they were created in illegal and corrupt deals. A legal judgment in that case, which has been the hallmark of Aguirre’s tenure, will be made by Judge Jeffrey Barton on June 26.
But Conger used some of the arguments of that litigation, other pension-related lawsuits and Aguirre’s own investigative reports to make his arguments in the McGuigan lawsuit.
Conger cut and pasted many of claims from the city attorney’s own documents and tried to use them as fact in the lawsuit, but when he asked Aguirre to admit or deny the 35 claims that bolstered the pensioner’s case, the city attorney evaded the question until the court demanded answers on May 25.
McGuigan’s attorney wanted the city to agree that it had underfunded its pension system for the past decade, breached its fiduciary duty, hid its actual pension deficit from the public, and lured the retirement board to go along with the underfunding by increasing employee benefits.
Judge Richard Strauss has fined Aguirre $20,665 for not complying with Conger’s requests, saying the city attorney’s handling of the case was “unconvincing and verges on carelessness.” If Aguirre did not comply with the court order, the city would have had to forfeit the case, the judge ruled.
McGuigan’s requests for admission presented a conundrum for Aguirre and the city. If Aguirre admitted the statements as fact, the city was more likely to lose the McGuigan lawsuit, which would have forced a mammoth pension payment in addition to the $162 million the city will pay as its regular annual payment in the next fiscal year, which begins July 1.
If the city attorney denied the claims, it would have discredited key pieces of his primary legal challenge to halve the city’s $1.4 billion pension deficit.
Last Tuesday, the City Council hired the Latham & Watkins law firm to represent the city, relieving Aguirre from the conflict. The outside law firm responded to Conger’s request for admissions by admitting to five statements and denying the remaining 30. The admissions are all related to what city law mandates, while the denials are more subjective and deal with opinions on whether the city’s past practices violated those laws.
Tuesday’s tentative deal between the city and McGuigan was signed by Conger, Sanders, Aguirre and Peters after the two parties met in closed-door mediation with retired Judge Larry Irving. The full council is expected to decide whether to ratify the settlement in a closed session meeting next Tuesday. Peters said he expected his council colleagues to approve the deal.
To pay for the deal, the city will mostly rely on borrowing.
Unable to reach Wall Street by traditional means because of a suspended credit rating, the city is prepared to sell to investors $10.1 million of its tobacco settlement revenues for about the next two decades in exchange for $100 million upfront. It’s unknown how much money the deal will save the city, and officials admit they were forced to float the loan in order to comply with the provisions of labor contracts.
The other $73 million could also be taken care of with a loan. Sanders has plans to borrow another $574 million for the pension system over the next two years, but the plan faces a number of challenges. City Hall cannot borrow money on the public bond markets until it regains its credit rating, and Aguirre has said he will not sign off on any new pension bonds until questions surrounding the legality of the pension benefits are answered in court.
The city could also spread the $73 million tab out over five years, a move that could force in cuts to city services and programs if the government’s revenues do not keep pace.
“This amount could be paid at once, or at any point over the five years,” Mayor Jerry Sanders said. “Because we just settled on an agreement this morning, I do not know how we’ll settle this obligation.”