Tuesday, Aug. 29, 2006 | With more than a dozen lawsuits hanging overhead, the city of San Diego’s attempts to revive the downtown ballpark project appeared stagnant in 2002.

The city had only months to find a financier to put up the $169.7 million that was needed for its share of a project that was to be a jewel of downtown redevelopment. With the usual lenders spooked by the well-known prospect of litigation that could jeopardize the bonds, the city looked to a familiar source for extra cash: its employees’ pension fund.

That January, the city approached the officials who oversaw the multibillion-dollar employee pension fund to pitch them on buying the bonds to construct Petco Park – a legally shaky move that would have resulted in a hefty investment for the pension fund and a ready solution to the ballpark dilemma for the scrambling city government.

“We were looking at everything,” said John Kern, who served as chief of staff to then-Mayor Dick Murphy. He added that the city also approached the county of San Diego to consider loaning the ballpark money.

“People were bouncing ideas off us weekly … the retirement board was just one of those,” Kern said.

Despite misgivings, pension officials never said no to city officials. The city eventually found an outside buyer for the bonds, allowing the stalled project to resume construction. The San Diego City Employees’ Retirement System never had to loan the city the money.

But City Hall’s attempt to borrow money from the pension plan illustrates two of the overarching themes in its financial demise: officials’ zeal to get the downtown stadium built, as well as their view of the pension plan as a funding source that it could tap into in order to get pet projects done.

Months later, city officials would again look to the pension fund for financial relief, crafting a plan to avoid a budget-busting pension payment of tens – or hundreds – of millions of dollars. The decision has led to criminal prosecutions in state and federal courts and is considered a key point in the city’s financial demise. For nearly a decade, the city knowingly skipped paying its complete pension bills in avoid hefty costs that it would rather spend on keeping its everyday budget afloat to maintain basic city services, such as library hours, and big projects, such as the 1996 Republican National Convention.

And the city’s determination to proceed with the ballpark’s construction was so strong that, in addition to seeking a loan from the pension system, officials allegedly worked to conceal the city’s fiscal health from prospective investors. An investigation released this month by private consultants from Kroll Inc. found that the city both delayed and watered-down an internal report saying “serious problems” existed in order to present a cheery face to potential investors.

According to internal e-mails and interviews, pension system attorneys were skeptical of the deal, but pension officials never had to officially deny the city once Merrill Lynch signed up.

“The bottom line is that these types of transactions [are] not viewed as arm’s-length transactions,” said SDCERS Chief Investment Officer Doug McCalla, referring to the existing relationship between the city and the pension system.

The chaotic climate surrounding the ballpark, which has played home field to the San Diego Padres since 2004, stuck the city with a costly loan with high interest rates, officials say. Before the city lost its credit rating in 2004, officials had plans to refinance the loans at a savings of about $3 million a year.

The city hopes to announce a plan for refinancing the ballpark bonds in the coming weeks, Sanders spokesman Fred Sainz said.

Today, the city’s pension deficit totals $1.4 billion. The practice of underfunding the pension plan to buoy past spending plans now threatens to chew up ever-growing chunks of the budget for years to come.

The Push

The city’s push to use pension plan assets to finance Petco Park’s construction began as early as January 2002. On Jan. 14 of that year, then Deputy City Manager Bruce Herring – the city’s top administrator for the ballpark project who had also previously served as a pension trustee – met with retirement Administrator Larry Grissom and pension board President Frederick Pierce to talk about the investment strategy, according to a copy of Grissom’s calendar.

E-mails, official calendars and interviews show that Grissom and Pierce appeared reluctant to provide the loan, but never ruled out the investment opportunity until after Merrill Lynch purchased the bonds that February.

Before and after the meeting, Grissom exchanged e-mails discussing the proposal with the pension system’s outside attorney, Bob Blum.

“If the fund wishes our firm to do some due diligence of the bond deal, we would need to review the bond documents … I would also think that a litigator would need to look into the ongoing litigation to determine risks there,” Blum passed along in a Jan. 9 e-mail. The passage appears to come from another attorney with Blum’s firm who specialized in bond law.

The litigation the e-mail refers to: the bevy of lawsuits against the city. The suits contained claims of everything from illegal cost overruns to attempts to void the ballpark plan altogether because a former councilwoman faced conflict-of-interest charges relating to the stadium’s approval.

Further, the city was concerned that the tax-exempt status of the ballpark bonds could be challenged. The prospect that the tax-free nature of the bonds was in jeopardy worried potential investors.

As long as the bonds were nontaxable, the interest rate would be low because the investor wouldn’t have to pay tax on the profits. But if the bonds were later deemed taxable, investors would be stuck paying a surcharge on an investment that was already yielding very little.

That risk proved daunting for the city, which knew the litigation was clouding its chances of getting a decent interest rate on its loan, according to a Merrill Lynch spokesman. The firm seemed to flinch at the litigation that swirled around the ballpark loan.

“Anything unusual about a bond makes it more unattractive to investors,” said spokesman Bill Halldin.

In an interview that was conducted before he was indicted for his alleged role in the 2002 pension funding scheme, Grissom said that there were problems with the arrangement that Herring proposed.

Foremost, he said, federal tax law prohibited the retirement trust from buying bonds from the very entity that provides it with a large share of its money. The arrangement would’ve had the retirement system playing creditor to the city twice – once as the keeper of the city’s retirement trust and once as an investor in the city.

Pierce, in an interview last week, agreed that there were problems “at first blush.” He said he thought the nearly $170 million bond package was probably way too much money to spend on one investment, as the assets of retirement fund portfolios are typically spread out over many investments.

“Staff was directed to review the proposal to see if it was consistent with the system’s investment policies,” Pierce said. “I fully anticipated that it would not be consistent and that the transaction was way too large.”

Grissom and Blum continued to have conversations about the city’s proposal in January and February. Blum’s firm ended up billing SDCERS about $35,000 for its analysis of the ballpark deal, according to an e-mail Grissom sent Lori Chapin, the retirement system’s in-house legal advisor.

The size of the bill apparently caught pension officials by surprise.

“HOLY SOMKES (sic)!!” Grissom wrote.

When Merrill Lynch purchased the bonds on Feb. 15, the event was detailed in a local newspaper the following day. Grissom wrote Pierce about the news.

“No doubt you saw in the paper that Merrill has bought the bonds for the ballpark. Think we need to do anything? I think the adage about sleeping dogs has merit,” Grissom stated in the e-mail.

Pierce replied, “As far as I’m concerned, that saga is behind us. You might want to contact Bruce and congratulate him and contact Bob Blum and make sure they aren’t doing any more work. Nice to have dodged another bullet.”

Consultants at Kroll Inc., who recently released the findings of their probe into the city’s financial practices, asked Pierce to interpret his conversation. In a summary of the interview, Kroll paraphrased Pierce to say that “there was a sense of relief because SDCERS no longer had to formally decline the investment opportunity.”

The city’s ballpark proposal never made it before the board. Although Grissom’s e-mails show that he continued to discuss it up until the Merrill Lynch purchase, McCalla, the retirement system’s chief investment officer, said that the proposal never made it past the “round file” – or trash can.

McCalla said that all of the pension plan’s investment decisions are based on the allocation strategy that the SDCERS board draws up. Outside investment advisors weigh investment opportunities against that strategy before purchasing real estate, securities or other assets for the SDCERS portfolio, he said.

McCalla said his office is seldom presented with investment opportunities.

But at least one other ballpark-related project sought the pension fund’s cash. A mortgage broker representing JMI Realty approached the retirement board with a pitch to invest in the Omni Hotel, which is adjacent to Petco Park, McCalla said. JMI is owned by the Padres owner John Moores.

Pierce was also paraphrased in his Kroll interview as saying that Herring approached SDCERS about the Omni investment, but he told voiceofsandiego.org that the Omni never came up in his conversations with Herring. Herring, who now works for Elite Racing, did not return repeated calls made to his office.

McCalla said the goal of the retirement system is to invest money in order to fund the benefits that will be paid to its members, not to be used for the city’s pet projects.

“Maybe somebody politely allowed them to open the gate, but they never made it into the house,” he said.

Voice staff writer Andrew Donohue contributed to this report.

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