Monday, Dec. 18, 2006 | The city of San Diego’s pension dealings captured the attention of the local citizenry and national headline writers alike as news of their devastating impact on the city’s finances seeped out of City Hall over the past few years.

Over the last year, legal attacks against those past pension decisions have charged ahead. Last January, state and federal prosecutions against former retirement system officials were sent to trial. City Attorney Mike Aguirre’s litigation to cancel the benefits the deals created stayed alive despite fierce resistance from opposing groups.

But the momentum that Aguirre and prosecutors, backed by public furor, had built up in the three largest pension cases has been significantly scaled back in the last three weeks as judges’ stances stirred up new questions about whether the deals that have garnered so much negative attention and led to a $1.4 billion pension deficit are legal issues at all.

“If the city had been able to fund the unfunded liability, wouldn’t everyone be happy about this?” U.S. District Judge Roger Benitez said during last Wednesday’s hearing on the Justice Department’s prosecution of five former pension officials.

The recent opinions issued by Benitez and other judges indicate that the legal attacks against the past pension agreements are losing steam, a sign that the city and retirement system’s decisions of the past might have to be dealt by the agencies’ leaders – not the courts.

On Nov. 29, three months before a trial was slated to begin, the California Supreme Court jeopardized District Attorney Bonnie Dumanis’ criminal case against six former retirement trustees when it ruled that prosecutors must convince the state Court of Appeal why the case should move forward.

Benitez has lobbed stinging criticisms at the U.S. Attorney’s Office in each of the last three hearings in the federal case. He said last Wednesday that he was inclined to trim the indictment to make it clearer and to delay the May trial date until the state appellate court hands down its decision in the district attorney’s case, although he did not formally rule on the matters.

One day later, the stakes of Aguirre’s case were slashed to a negligible fraction of the $900 million he sought to void in his 17-month-long legal challenge because a judge decided that previous legal settlements block the city attorney from pursuing the bulk of his case. If that ruling, which Aguirre hopes to appeal as early as this week, is upheld, only pennies on the dollar will be left in the city attorney’s civil case.

After years of speculation, critics of those cases say the recent news shows that the retribution for those past pension deals, which have contributed heavily to a $1.4 billion pension deficit for the city, might not come in a court of law at all.

The defendants say they sense a turning point in the ongoing fracas.

“The dominoes are set up, let’s see what happens,” said Frank Vecchione, an attorney for former retirement trustee Terri Webster, a defendant in the federal and state criminal cases.

Accusing attorneys have labeled the pension agreements at issue in the cases as being illegal. City and pension officials improperly hinged their decisions to OK allowing the city to shortchange the retirement fund in 1996 and 2002 on the benefit boosts for employees – and themselves – that resulted from the deals, the attorneys said.

But the courts aren’t as certain that the law was violated when those pension deals were struck.

The state Supreme Court’s decision to grant the defendants’ request is exceptionally rare, appellate experts said. Such a move, which was agreed to unanimously by the high court, signals that serious concerns exist in the prosecution’s legal theory, attorneys said.

“There are times when there is an important issue and, as a practical matter, it doesn’t make sense to move ahead with a trial until this matter of abstract law is resolved,” said Los Angeles-based appellate lawyer Bruce Adelstein. “They essentially said, ‘Let’s look at it now so we can do the trial right.’”

The state Supreme Court granted the defendants’ request based on their major disagreement with the prosecution: The contention that the trustees’ approval of the 2002 deal is not a violation of the state conflict-of-interest law because retirement benefits are a form of salary, thereby exempting the trustees from prosecution.

The jury trial that was ordered after a lengthy preliminary hearing 12 months ago will be delayed until the Court of Appeal hears the matter, and the District Attorney’s Office will have the burden of proof to move the case past this newest hurdle.

The state Supreme Court’s decision caught the attention of Judge Benitez, who said he favored holding off on a trial in the federal case until the appellate court was done in the state matter. He held off on ruling on the postponement and on a proposal to pare down the indictment until February.

In Aguirre’s civil lawsuit, the judge sliced the amount of pension enhancements he is allowed to challenge, a move that will drastically alter the stakes of the city attorney’s landmark case.

Employee groups, including the city’s labor unions, successfully argued that past legal settlements involving the city prevent Aguirre from pursuing the high-dollar savings he was seeking in the case. The city waived its right to attack most of the benefits because it did not raise the arguments for nullifying them during the past lawsuits, Superior Court Judge Jeffrey Barton said.

The blow to Aguirre’s case came before he could even prove the nuts and bolts of his case – that trustees on the San Diego City Employees’ Retirement System board had a conflict of interest in their approval of the 1996 and 2002 deals. Even if he were to reach that stage, some attorneys believe the court would delay the trial until the pension-exemption issue was resolved in the district attorney’s case.

Critics of the legal challenges say the recent events embolden their claims that a remedy to the city’s pension past will not be fashioned by a judge, but by the city’s politicians and financiers.

“Anytime there are 10 or 11 lawyers in a courtroom to solve an issue and you’re paying for all of them to be there, I can tell you that is not the way to go,” said plaintiffs attorney Michael Conger, who represented pensioners in past legal settlements with the city.

Conger has been skeptical of Aguirre’s handling of the litigation, and said other city leaders should urge him to drop his plans to appeal.

“Clearly these were bonehead decisions by the City Council at best, and maybe they were illegal and corrupt, but it’s not worth ripping the city apart over,” Conger said. “It’s time to move on.”

The city government has already seen the political and financial fallout of the pension debacle. Several city officers, including former Mayor Dick Murphy, resigned under the weight of the scandal, and pension costs dominate recent and future budgets.

Council President Scott Peters wants Aguirre to end his litigation because of mounting lawyer fees and continued strain on the rest of the city attorney’s budget. Peters claims that the 2002 pension pact that he approved was a political calculation that seems unpopular now, but is correctable through tough decisions.

“We have pension and health care costs challenging cities, states, counties and companies across the country. The city may be in a narrow financial position, but we have the tax base and the economy and the financial resources to recover over time,” Peters said. “It’s a financial issue, not a legal issue.”

Mayor Jerry Sanders believes the city can make ends meet through layoffs and cuts, even without Aguirre ultimately prevailing in the case. But Sanders supports Aguirre’s appeal.

Aguirre has a starker view of the city’s finances. He said that the city will need to file for municipal bankruptcy if the appeal’s court holds firm to Thursday’s ruling.

Additionally, he argued that the legal system was the best way to reconcile the pension problem because it was the court’s job to protect the best interests of the public when a dispute exists.

Said Aguirre, “It’s not just a question of enforcing the law, but it’s a question that fundamentally puts the entire judicial system at issue.”

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