CA: (San diego) Pension board told of improper acts in '03

Private attorneys hired by San Diego's pension system determined that the pension board violated the trust of current and future retirees by allowing the City Council to continue delaying full payment of money it owed the fund.

The attorneys, in a March 5, 2003, legal opinion made public yesterday, said pension board members placed their needs above those of the retirement fund and its beneficiaries when they agreed to a 2002 city proposal to underfund the pension system by temporarily reducing the annual payment into it.

The arrangement, which also cleared the way for the city to increase employee pension benefits, should have been nullified, an attorney from the San Diego firm Seltzer Caplan McMahon Vitek advised officials from the San Diego City Employees Retirement System.

The advice wasn't taken. Ultimately, the part of the pact that allowed the underfunding was set aside by a legal settlement, but the benefits have remained in place. Those factors, and to a lesser extent stock market losses, have led to a pension deficit of at least $1.4 billion.

The pension system released the Seltzer Caplan letter along with thousands of documents in response to Public Records Act requests filed by The San Diego Union-Tribune and other media outlets.

The letter is one of the many e-mail messages, memos, reports and files the pension system turned over to federal investigators and city consultants in September. That action came after a months-long standoff with the city over board members' refusal to set aside attorney-client privilege governing subpoenaed documents.

The 20-page Seltzer Caplan letter also suggested that the pension system sue the city and its unions and accused city and union officials of conspiring to coerce the board into breaching its fiduciary duties. The retirement fund, the attorneys argued, "was backed into a corner by the city."

Board members "subordinated SDCERS' interests to the interests of themselves, their unions and the city," the firm concluded.

City Attorney Michael Aguirre, who has accused city and union leaders of such a conspiracy, said the document could be "the ultimate smoking gun" in probes by the U.S. Attorney's Office, the Securities and Exchange Commission and the FBI into San Diego's financial practices.

Aguirre, who began investigating the pension system after taking office in December, said the system's lawyers "reached the same conclusion we had, essentially. The very things we have been saying are true."

Deputy Mayor Toni Atkins, in a statement, said conclusions should not be drawn based on the Seltzer Caplan opinion alone.

"The documents need to be viewed ultimately in the larger context of the overall investigation," she said.

Pension board President Peter Preovolos echoed that sentiment. He said he has only seen excerpts of the Seltzer Caplan letter, added that no legal opinion appears to exist to counter its conclusions.

Michael Conger, the lawyer whose lawsuit, filed on behalf of retirees, ended the underfunding practice last year, said the letter shows that the pension board learned the truth yet ignored it.

"The document shows the retirement board was told early on that it had broken its fiduciary duty in adopting the 2002 underfunding plan," Conger said. "But (the retirement system) spent the next two years fighting us tooth and nail in our case, preventing the pension fund from receiving more funding."

Judie Italiano, president of the city's largest union, the 6,000-member Municipal Employees Association, declined comment. Ann Smith, the union's attorney, did not return a phone call.

The city last year acknowledged making errors and omissions in bond disclosures dating to 1996. Allegations of conflict of interest also have dogged the city officials and pension board members who prepared or approved plans to underfund the system while increasing benefits.

Six current and former city employees face conflict-of-interest charges stemming from their 2002 votes to allow the underfunding to continue. The board comprised employees, political appointees and retirees until its composition changed in April to allow non-employees to dominate the panel.

District Attorney Bonnie Dumanis filed charges against Cathy Lexin, Ron Saathoff, John Torres, Mary Vattimo, Terri Webster and Sharon Wilkinson. Only Torres remains on the board.

Among the others on the board in 2002 are Frederick Pierce IV, John Casey, David Crow, Ray Garnica, Diann Shipione and Richard Vortmann.

The pension board, after months of talks, voted to approve the underfunding plan in November 2002. The City Council took up the issue days later.

Shipione, troubled by the board's decision, told council members that she feared the underfunding plan could lead to substantial financial difficulties, even bankruptcy, for the city, and that it could be corrupt.

The council approved the plan despite her warnings. At the time, the city was said to be avoiding a required payment of $75 million to bolster the pension system. It has since been estimated that $500 million would have been needed.

The City Manager's Office assigned Lexin, then director of the human resources department, to report on Shipione's allegations. Those allegations were dismissed, and Shipione's account was said to be riddled with omissions and misrepresentations.

Lexin's report, along with a document from City Manager Lamont Ewell, then an assistant to former City Manager Michael Uberuaga, are being sought by federal investigators, according to subpoenas released by Aguirre. The materials must be turned over by Thursday.

Shipione said she had not seen the March 2003 Seltzer Caplan letter until yesterday. "We're the entity that hired them," she said. "It's a little weird they wouldn't send it to the trustees."

Shipione said she believes some trustees may have been shown the letter while she was kept out of the loop.

"One reason that I went down there in 2002 (to the council) was that I owed it to the beneficiaries of the trust to try to stop this deal," she said. "It makes no sense to have a retirement system that takes in money each year to turn it down. It was clearly upside down to me."

Since Shipione raised her concerns, the city has faced two years of budget cuts and has been all but shut out of the municipal bond market because of the high interest rates San Diego has endured as its credit ratings continue to sink.

The Seltzer Caplan opinion, signed by attorney Reg A. Vitek, was a response to Conger's lawsuit, known as the Gleason case. To prepare it, the firm reviewed Gleason documents, along with other legal correspondence and city and pension system reports, minutes and transcripts.

According to the letter, any argument that the pension system could benefit by accepting reduced city contributions "is difficult to accept," particularly because the 2002 deal also "locked in a significant reduction in contributions over the following eight years."

A pension board member must weigh the needs of retirees and the employer, it continued, but if there are conflicts, "the duty to participants and beneficiaries takes precedence over any other duty."

The letter also cited a July 2002 memo from Uberuaga that said the city had made benefit increases, agreed to in negotiations with employee unions, dependent on the board's willingness to allow the underfunding to continue.

The letter says that in response to a pension board member's challenge to that contingency, a city official denied the retirement fund had been placed in the middle of labor negotiations. An official addressed another question about whether the city would be able to afford "much higher pension costs in the future."

"It will not be easier nor desirous, just necessary," the letter quotes a city official as saying.

This just out.

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Aguirre to sue city union leaders, pension panel members

http://www.signonsandiego.com/news/metro/pension/20051004-1423-bn04aguirre.html

UNION-TRIBUNE BREAKING NEWS TEAM

2:23 p.m. October 4, 2005

SAN DIEGO – City Attorney Michael Aguirre on Tuesday said he planned to file a lawsuit against leaders of the city's employee unions, pension board members and unnamed city officials – possibly including City Council members.

He said the new lawsuit, which he expects to file in the next two weeks, will allege that officials engaged in a conspiracy that resulted in the pension board breaching its fiduciary duty to pensioners.

"We are in the process of preparing that litigation," Aguirre said at a morning news conference. "It very well may name members of the City Council. It will name the heads of the various unions, and we will be proceeding.

"And I'm sorry I didn't do it before. I should have done this before."

Aguirre said his plans for a new lawsuit stem from seeing the March 5, 2003, legal opinion that was made public Monday, which he called "an explosive smoking gun."

That document showed that private attorneys hired by San Diego's pension system determined the pension board had violated the trust of current and future retirees by letting the City Council continue to delay paying the full amount of money it owed the pension fund.

In the legal opinion, an attorney from the San Diego law firm Seltzer Caplan McMahon Vitek advised officials of the San Diego City Employees Retirement System to nullify the 2002 agreement that allowed the city to temporarily reduce its annual payments into the fund. That advice was not taken.

The legal opinion was one of 60,000 documents made public this week by the pension system in response to state Public Records Act requests filed by The San Diego Union-Tribune and other media outlets.

Aguirre said 18 investigators and legal assistants in his office are reviewing the documents.

Aguirre earlier filed a lawsuit against eight defendants, including current and former pension board members, asking a court to eliminate pension benefits he contends are illegal. That lawsuit claimed the defendants had conflicts of interest that should have invalidated their votes approving pension benefit increases in 1996 and 2002. That lawsuit was thrown out last week.

Aguirre said he now wishes he would have widened the focus of that lawsuit.

"The fact is, I underestimated the conspiracy," he said.

Aguirre said he plans to ask Superior Court Judge S. Charles Wickersham to review the 2003 letter and reconsider his dismissal of the lawsuit.

The city's pension system has a deficit of at least $1.4 billion and is under investigations by the U.S. Attorney's Office, the Securities and Exchange Commission and the FBI.

The financial crisis has forced the city to make budget cuts and has resulted in the downgrading of its credit ratings, making it virtually impossible for the city to borrow money in the municipal bond market.

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