Sunday, May 24, 2009 | When Mayor Jerry Sanders announced a much-ballyhooed set of compensations cuts to address the city’s financial woes, changes to the city’s controversial deferred retirement program were a major part of the mix.

But shortly after the new terms were approved, the San Diego City Employees’ Retirement System contacted city officials and said the terms couldn’t go into effect unless employees voted to sign off on the changes.

That could wipe out some of the savings from this year’s labor decisions. It could also make it nearly impossible for the city to eliminate the Deferred Retirement Option Plan, which Sanders has advocated.

As part of this year’s labor negotiations, the mayor proposed — and the council unanimously ratified — changes meant to make DROP less attractive to employees. The council imposed contracts on police and blue-collar workers that would raise the eligibility age to enter DROP and eliminate the option to convert their DROP balances into an annuity. Elected officials also agreed to eliminate DROP for management employees who aren’t represented by unions.

But retirement system officials have pointed out that the city charter requires a majority of employees to approve a change that affects worker benefits. Unless city workers vote to curtail the benefits of themselves and their co-workers, which seems unlikely, the changes won’t go into effect.

That won’t affect the budget for the fiscal year starting July 1, when the city could face a nearly $120 million shortfall if the state raids the city’s coffers to balance its own budget. But Sanders has touted the savings the city will see in future years because of changes to DROP.

Through agreements with the unions, Sanders had already eliminated DROP for new employees and pushed unsuccessfully for it to be axed altogether. The city recently filed a lawsuit against the police union meant to determine if employees have a vested right to take part in DROP. The suit said getting rid of DROP for all employees could save the city upwards of $16 million a year and shrink the city’s pension deficit by up to $350 million.

But even if a court eventually rules in the city’s favor and says DROP can be eliminated through the bargaining process, the city charter could make it practically impossible. The decades-old provision states, “No ordinance amending the retirement system which affects the benefits of any employee under such retirement system shall be adopted without the approval of a majority vote of the members of said system.”

The news that the DROP changes apparently require a vote of the employees was news to Sanders’ office, Chief Operating Officer Jay Goldstone said in an interview last week.

“It was a bombshell that was dropped after the fact,” Goldstone said. “I’m not necessarily suggesting we would have taken a different position, but we would have known going in that the imposition was only step one of a two-step process.”

Goldstone said it “would have been nice” if Goldsmith’s office had told city officials about the requirement beforehand. He added, “I will tell you candidly, they will claim they told us and told our lawyers at least, our negotiators, but we (in the Mayor’s Office) were not aware up here.”

Several hours later, after a reporter called for comment from the city attorney, Goldstone called back to offer a different version of events, saying a conversation with the city attorney had refreshed his memory about the situation.

Goldstone said that the city’s outside attorneys from the firm Burke Williams & Sorensen had talked to SDCERS officials during negotiations and, based on those conversations, had advised that the city had a “very strong argument” that the provision of the city charter requiring a vote didn’t apply to the changes the city was seeking to make to DROP.

The City Attorney’s Office, Goldstone said, never told city officials or even strongly suggested that changing DROP required an employee vote.

Goldsmith wouldn’t comment on whether his office weighed in on the issue and wouldn’t say what Burke Williams & Sorensen — which is also handling the city’s DROP lawsuit — said about the issue. Bill Kay, an attorney with the firm, said he couldn’t comment on what advice his firm gave the city because of attorney-client confidentiality.

But SDCERS’ administrator and CEO, David Wescoe, said his staff never talked to the city or its outside attorneys about the issue during the bargaining process.

“We never advised them or gave them any advice during meet and confer at all,” he said.

Retirement system officials say they gave fair warning to city officials about the city charter provision back in 2006, when Wescoe sent a letter to the mayor saying SDCERS couldn’t implement the results of the 2005 bargaining process without an employee vote.

City officials said they knew about that requirement but didn’t believe it applied to DROP because they considered DROP workers to be retirees, not active employees. Wescoe pointed out that the municipal code makes clear that DROP employees are considered active employees. In any case, the recently approved changes apply to employees who haven’t entered DROP.

“It’s crystal clear,” Wescoe said, “which is why I’m surprised that they’re surprised.”

The retirement system’s general counsel recently sent a letter to Deputy City Attorney Joan Dawson indicating that Dawson agreed with the conclusion that the DROP changes require a vote. Dawson declined to comment.

Goldsmith said he’ll be discussing the issue with the mayor and City Council in closed session in the next few weeks. He wouldn’t discuss the city’s options, or if they included a lawsuit against the retirement system — a hallmark of former City Attorney Mike Aguirre’s term that Goldsmith has criticized.

“We’re hoping to see if these issues can be resolved,” Goldsmith said. “I have no interest in having litigation between CERS and the city if we can avoid it.”

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