Aguirre says pension ills weren't revealed (Probe Into San Diego Mayor Murphy)

San Diego Union-Tribune ^ | January 15, 2005 | Philip J. LaVelle

[nickcarraway]

Hinting of a cover-up, City Attorney Michael Aguirre said yesterday that he is investigating whether Mayor Dick Murphy knew about the deteriorating state of San Diego's pension system three years ago but kept it quiet.

Aguirre, speaking at a downtown news conference, said a 2002 report by Murphy's Blue Ribbon Committee on City Finances failed to disclose deepening troubles with the $3.2 billion San Diego City Employees Retirement System, which today has a $1.2 billion deficit.

Aguirre's news conference didn't live up to its billing – a report on "possible abuse, fraud and illegal acts" by city officials – but it kicked over a hornet's nest of reaction. It also renewed criticism, which Aguirre rejects, that he is overstepping his bounds by investigating officials he is supposed to represent.

Murphy declined to be interviewed, but his office issued a strongly worded statement: "I categorically reject Mr. Aguirre's insinuation of wrongdoing by me. It is untrue, reckless and irresponsible."

Aguirre also repeated his contention that unless the city takes strong action to fix the pension mess, San Diego is headed toward bankruptcy.

City Manager Lamont Ewell flatly rejected that possibility, adding: "I'm a little tired of this sideshow."

Aguirre also said he took custody yesterday of 10 more boxes of documents from city bureaucrats that he said had been subpoenaed by the Securities and Exchange Commission but not turned over.

On Tuesday, Aguirre sent investigators to seize 15 boxes from acting city Auditor Terri Webster, a pension trustee. A lawyer representing the pension system has demanded that Aguirre return materials relating to attorney-client communications from his firm to the pension board, which he said were part of the Webster seizure.

Webster did not return a phone call. Her lawyer, Jerry Coughlan, had tough words for Aguirre's hardball methods.

"I was a federal prosecutor for 11 years," Coughlan said. "I've always viewed it as irresponsible for anybody with prosecutorial authority to be issuing any form of interim press announcements before all the facts are in and evaluated and they have decided whether or not this is something that is chargeable."

Aguirre said at the news conference that his comments as well as the interim report on his pension probe were appropriate. He said his report was expected by KPMG, the city's outside auditor, and that KPMG's requests for an investigation of city finances are the reason he's conducting an inquiry.

Aguirre also announced that SEC officials told him during a meeting Thursday in Los Angeles that the agency wants to interview Murphy and individual City Council members under oath.

Aguirre said he will advise the mayor and council – except newly elected 4th District Councilman Tony Young – to seek private legal representation.

Retired veteran municipal lawyer John Kaheny, who spent nearly 23 years in the San Diego City Attorney's Office and more than six as Chula Vista city attorney, said Aguirre's actions "make no sense."

"He's slowly but surely working himself into the position where he's not going to be able to represent either the city or any of its high officials because the ethical rule for a lawyer is that you're not supposed to do your client harm," said Kaheny, who supported Aguirre opponent Leslie Devaney in the Nov. 2 election.

"He's clearly harming his clients' ability to either defend themselves or to cooperate with this investigation."

In addition to the SEC probe, the city is under investigation by the FBI and the Justice Department.

"Mr. Kaheny has never gotten over the election," Aguirre said. "Mr. Kaheny's philosophy was rejected by the voters. . . . I represent the city and the people of San Diego. I don't represent any individuals right now."

The bulk of Aguirre's news conference yesterday was aimed at Webster, the acting auditor, and relied on previously disclosed information.

He noted that in an e-mail uncovered by Vinson & Elkins, a law firm hired to represent the city in talks with the SEC, Webster told another top bureaucrat in October 2001 of an alarming drop in the pension fund's investment earnings.

Webster's memo was titled "EEEK" and raised the specter that San Diego might have to make a balloon payment, later estimated at hundreds of millions of dollars, to boost pension fund assets. The city has underfunded the pension since 1996.

This information never made it into the Blue Ribbon committee report, issued in late February 2002. Neither did an actuarial report noting the pension fund slide. Webster was on the committee, as was her boss, then-Auditor Ed Ryan.

Ryan resigned unexpectedly a year ago, shortly before the city disclosed errors and omissions in financial statements provided to prospective investors in San Diego's bond portfolio.

These admissions sparked bond rating agency downgrades and the federal investigations, hobbling the city's ability to borrow money.

The mayor and council majority dodged the balloon payment by enacting another pension underfunding method while boosting benefits in late 2002.

Aguirre said his report is "clear and convincing proof" that city auditors knew that the plan's assets had "dropped precipitously" as early as June 2001.

"Instead of the mayor's blue ribbon committee bringing that information to the attention of the people of San Diego . . . that information was concealed," he said.

Asked if this was illegal, Aguirre said: "I am not prepared to say that yet."

For now, he would call it only a "knowing misrepresentation of a material fact . . . and this was done by the Mayor's Blue Ribbon committee . . . "

He added that "this has been a pattern" and that his next report will identify city officials and employees "responsible for the false statements and omitted material facts."

Richard Vortmann, president of the National Steel & Shipbuilding Co. and the author of the pension section of the blue ribbon committee report, took exception to Aguirre's comments.

"We were using whatever information the retirement system personnel gave us to work with," he said.

Linc Ward, a retired Pacific Bell vice president who also served on the committee, said there was no effort to mislead the City Council.

"We said there are a lot of things about the city that are fiscally sound, but you've got a couple of real problems you better damn well look at – deferred maintenance and the liability problem in the pension fund," he said.

"Everything we got, we got through staff," said April Boling, another former committee member. "We were at their mercy."

Aguirre's talk of bankruptcy continued to rattle. But that threat remained unclear.

David Kupetz, a Los Angeles lawyer experienced in municipal bankruptcies, said cities must prove insolvency before gaining protection under federal Chapter 9 bankruptcy.

"Insolvent means . . . financial conditions such that the municipality is not paying its debts when they become due, or unable to pay its debts as they come due," he said.

Aguirre said the pension imbalance meets that test. But Ewell said, "The city is not in that position."

The city has a $1 billion investment pool that could be tapped in emergencies, Ewell said, as well as a steady stream of tax revenue and the ability, if needed, to "streamline the organization."

"The city has never, ever, defaulted on any payments," he added. "We've never defaulted on a paycheck. . . . We've never defaulted on a vendor paycheck, and I don't anticipate that we'll ever be in that position."

[John Jorsett]

Why don't we turn San Diego over to the mafia? At least we'd have competent criminals running it then.