CA: Pension report finds laws were violated (San Diego Pension Crisis)

Pension system administrators and board members engaged in a cozy relationship with San Diego city officials that paved the way for agreements to underfund the retirement system, moves that contributed to a deficit of at least $1.4 billion.

The deals, in 1996 and 2002, violated state and federal laws as well as the state constitution's ban on "political interference" with a pension fund's administration and funding, independent investigators concluded in a report released yesterday by the city's retirement board.

Pension officials had a duty to safeguard retiree benefits and investments, but their decisions, which allowed the city to withhold funds from the system and, at the same time, increase benefits to future retirees, breached that trust, the investigators concluded.

Board actions also ran afoul of Internal Revenue Service regulations, particularly those that provided a special benefit for the president of the city's firefighters union and funding for retiree health care plans.

Those provisions could have resulted in the loss of the retirement fund's special tax status. Under IRS rules, a designation as a "tax-qualified plan" offers significant tax benefits to an employer – in this case, the city – and employees.

Board President Peter Preovolos called the results of the investigation, by Navigant Consulting Inc., a Chicago-based forensic accounting firm, "a very sobering presentation," but said he would withhold further comment until he could read the full 270-page report.

Mayor Jerry Sanders, who set out last week to force Preovolos and five other city appointees from the 13-member board, returned to that theme yesterday.

Only one of the targeted members has complied with Sanders' request, though Preovolos said he will consider resigning in the future. The six members were named pension trustees more than two years after the final underfunding deal was approved.

"I think the fact that today's report is critical of the way things have been done in the past shows that we need to have a new board in place," Sanders said.

The tax issues particularly alarmed Sanders, but Roxanne Story Parks, the pension fund's interim general counsel, said the system is addressing them. The board sought entry into a voluntary compliance program with the IRS last year, a process she said could be completed by December.

City Attorney Michael Aguirre, a nemesis of Preovolos and his board colleagues, called the report a "whitewash," the same way he described work produced by the law firm of Vinson & Elkins, which conducted a similar independent investigation for the city.

"It looks to me that they used the same paint . . . to whitewash certain aspects of their report," said Aguirre, who maintains that benefit increases linked to the underfunding were illegal and should be eliminated.

An Aguirre foe, Judie Italiano, president of the city's 6,000-member Municipal Employees Association, defended the report.

"I don't think there's any sugarcoating here at all," she said. "I think the city's poor way of handling its finances is finally coming home to bite everybody."

Aguirre also pointed to a passage in the report that "identified limited involvement" by the pension system's former general counsel, Loraine Chapin, in the 2002 agreement.

Chapin was among five former pension board members and officials who were indicted two weeks ago by a federal grand jury on conspiracy and fraud charges.

According to court filings, Chapin conspired with the others to devise plans that connected underfunding and benefit increases, and "fraudulently concealed material information" to ensure they were approved.

Amanda Massucci, one of the Navigant consultants, said her firm did review the prosecutors' allegations, but based on "what we saw" did not find that Chapin was a primary player in the 2002 deal. Massucci said, however, that "there could be additional information out there that we haven't seen."

Navigant conducted the probe with Reish, Luftman, Reicher & Cohen, a Los Angeles law firm that represents the pension board and drew legal conclusions based on Navigant's findings.

Investigators were instructed to report to the system's attorneys – and not pension officials – to protect the integrity of the report.

The pension board went so far as to refuse early delivery of Navigant's work, the custom before most public meetings. Members received copies of the report at 10:30 a.m. yesterday, the same time the thick volumes were distributed to the public at the board meeting. The audience was filled with about 50 city officials, union representatives and retirees.

The consultants and attorneys spoke to almost 50 witnesses and scanned 134,000 documents to produce the report, comprised of Navigant's results and the law firm's legal analysis. The consultants' investigation took four months at a cost of $2.7 million.

Those who agreed to be interviewed include former Mayor Susan Golding – the underfunding policy began under her watch – City Council members Toni Atkins, Jim Madaffer and Scott Peters, and 11 current and former pension board members.

Former Mayor Dick Murphy did not respond to requests for an interview. Nor did former board members Ron Saathoff and Terri Webster, who were indicted along with Chapin.

Sanders said he was contacted during the mayoral campaign last year but didn't schedule an interview. He waited for the consultants to follow up, but yesterday he said they never did.

Navigant lists him as one of 20 witnesses who rebuffed interview requests. Massucci said she had contact only with Sanders' representatives and would have to check her records to confirm whether he declined.

In the report's legal analysis, the attorneys wrote that a pension board must be "attentive to the task of making sure that thousands of people are able to retire with all the benefits promised to them when they started to work," while also abiding by the law. Past boards "did not live up to these standards," they concluded.

Massucci, another Navigant consultant and one of the system's attorneys outlined their findings in a 70-minute presentation to the board. They determined that:

The city had been trying to find ways to avoid its pension obligations – thereby increasing its own cash on hand – since 1991. The 1996 and 2002 underfunding deals, however, "did not make economic . . . sense."

Despite a declining funded ratio – a measure of the system's assets compared with its liabilities – the system has "sufficient assets to pay benefits due to all current retirees."

Diann Shipione, the former pension board member who warned the city more than three years ago of the dangers of continuing to underfund the pension system while increasing benefits, blasted that bit of good news.

"So what?" she wrote in an e-mail yesterday. "It's like saying a bank has enough money to pay all the checks it got in today. The bank owes lots of other people lots of money and framing the announcement this way gives a false sense of security when none is deserved."

Navigant is the second of three firms that have been hired to interpret the events that led to a pension deficit Sanders has suggested is as high as $2 billion.

The fallout from the crisis has been devastating. City and pension officials have battled allegations of corruption and dereliction of duty, while the city of San Diego's credit ratings have continuously slipped – and in one case been suspended – since February 2004.

Three federal agencies launched investigations at the same time, including a look at whether the city intentionally hid its mushrooming pension obligations from Wall Street investors.

The city has enlisted two groups, a Houston law firm and a New York risk-management firm, to conduct inquiries similar to the one released by the pension system. The city's probes could cost taxpayers $30 million, according to the latest estimates, far outpacing the cost of the pension system's probe.

The investigation by Vinson & Elkins, which no longer works for the city, suggested there was widespread financial mismanagement at City Hall, but it stopped short of accusing officials of criminal activities.

Aguirre and other critics pounced, accusing the firm of failing to conduct a thorough probe because its attorneys also represented the city before the Securities and Exchange Commission, one of the federal agencies investigating the city's financial practices.

A group from Kroll Inc., the risk-management firm, has been at work for one year. Though initially charged only with reconciling Aguirre's reports with those done by Vinson & Elkins, Kroll has directed the city's independent inquiry for months.

City officials have argued for more than a year that the independent inquiries are necessary to satisfy the SEC and KPMG, the accounting firm auditing San Diego's long-delayed 2003 financial statements.

Troy Dahlberg, a Kroll managing partner, said he and his colleagues will review the Navigant report as early as next week. He said he did not know how it would affect the inquiry.

In addition to the federal case, six former pension board members face state charges that they improperly benefited from their votes to allow the city to underfund the pension system.

http://www.voiceofsandiego.org/site/apps/nl/content2.asp?c=euLTJbMUKvH&b=312470&ct=1750099

Voice of San Diego Jan 3, 2006 Scott Lewis

Working for the city of San Diego must be very dangerous.

Fourteen of every 1,000 people employed by the city end up applying for
a disability retirement. Compare that to the rest of the nation, where
0.5 of every 1,000 workers applies for the benefit.

Either working for the city is 28 times more dangerous than other gigs
or something's askew.

How about this: More than 22 percent of the city's retirees are
collecting a disability retirement. That means they've abruptly stopped
working and started collecting at least half of their salary for the
rest of their lives -- an outcome of their service that the city did
not plan for and that costs millions.

One more? Fully 35 percent of all public safety employees who have
retired from the city did so with a disability retirement. To retire on
disability from the city, all you have to do is prove that you can't do
your job anymore and that the reason you can't do your job anymore is
because you hurt yourself on the job. It doesn't matter how long you
actually did the job.

Compare these statistics to the rest of the country: Among U.S.
residents aged 25-64, only 11.7 percent have a "work disability,"
according to the U.S. Census Bureau.

Voice of San Diego recently obtained the final report of a committee
that was formed last year to review the city's disability retirement
system. Other findings in that report -- in addition to the ones above
-- have apparently sparked a vigorous reform effort by the city's
pension system at a time when that system's reputation for vigorous
reform is, well, not so strong.

These numbers on disability retirements, however, are apparently just
too astonishing to ignore.

Like this one: It costs the city's pension system nearly $30 million a
year to pay all the employees who have retired earlier than anticipated
because of their disability.

City law allows employees to apply for a disability retirement that
immediately begins paying them half of their highest salary for the
rest of their lives or whatever retirement benefit they are already
eligible for -- whichever is higher. And, as we mentioned, there is a
tax benefit.

In fact, the disability committee found that a "large percentage" of
people who are collecting disability retirements applied for them after
they applied to become part of the controversial Deferred Retirement
Option Program. That means they are already retiring from the city, so
the only reason to apply for a disability benefit is to get a pension
that is largely tax free.

That makes it an "attractive" benefit, the committee found.

Yes, it's officially "attractive" to claim a disability if you're a
city worker. And that's made the system ripe for fraud.

"The disability retirement should be a safety net for truly injured
workers; it should not be an enabling tool for employees to collect
their retirement benefits 50 percent tax exempt nor should it enable
workers, if they are disabled, to collect additional income from
employment elsewhere," concluded the City Manager's Committee to Review
the Disability Retirement System in its final report April 14.

In case you don't have your special "City of San Diego Speak to English
Dictionary" let me explain. This means, of course, that the disability
retirement benefit has indeed enabled employees to collect their
retirement benefits with tax advantages they may not deserve. And
because of the way the system works, the committee concluded, people
are finding ways to collect disability from the city while at the same
time working jobs -- where, apparently, they are not disabled.

Here's some more of that classic city language usage:

"The committee was near unanimous in its desire to stop fraud and
'double dipping' by recipients," reads a memorandum from Sheila M.
Jacobs, a lawyer for the retirement system.

Howzat?!

"Near unanimous in its desire to stop fraud and 'double dipping'?" Why
not unanimous? Who the hell were the dissenting votes in that one?

The committee met in virtual secrecy most likely to avoid these types
of questions. And then it gave its final report to former City Manager
Lamont Ewell nine months ago without bothering to do a pesky
presentation to the public.

The committee also found that the city and the retirement system have
not investigated people who take the disability retirement. In fact,
its first recommendation was that the retirement system needed to
implement "fraud provisions" and a policy to refer questionable cases
to the district attorney's economic fraud unit.

Because, apparently, the board that oversees the city's pension system
never thought about that. Remember, there's still an element in this
group that doesn't want to be part of a unanimous stance against
"fraud" and "double dipping."

So who was on the committee? A representative of the city manager, Greg
Bych; David Dugan, from the law firm Dugan and Rader; Anne Stephenson,
a vice president at Sharp Healthcare; Debra Hollingsworth, a deputy
city attorney.

And then there were three others who are, by now, very familiar to
those who have followed the city's pension chaos over the last few
years: Retirement System Administrator Larry Grissom, Retirement System
General Counsel Lori Chapin and Dick Vortmann, the president of the
National Steel and Shipbuilding Co. Vortmann had previously sat on the
pension reform committee, which had recommended that the city form the
disability review committee.

The problem with that is the pension reform committee should have also
recommended that the city and retirement system actually implement the
reforms this new committee presented. The city has always been happy to
study problems. It's just never wanted to do anything with the results
of those studies.

The only group to act, so far, has been the retirement system, which
has formed a -- you guessed it -- committee to study the problem.

That gets us to the final point. These ideas for reform -- like the one
that says that a person already eligible to retire shouldn't be able to
get a "disability retirement" and collect half his pension tax free --
are not new ideas.

Every time they come up, they're scuttled in the city's negotiation
process with its employee unions.

"While the (disability) benefit as originally designed by the city,
provided for income offsets and other mechanisms to deter fraudulent
claims or to otherwise make the benefit less desirable, 'meet and
confer' agreements made in the mid and late 1980s eliminated virtually
all protections of SDCERS and its members," reads the memo from Jacobs.

My bilingual dictionary translates this sentence to mean "the city and
retirement system wanted to protect itself from fraud and other abuses
of the disability benefit but then it bowed to pressures from its
employee unions."

And what are the city's employee unions focusing on when it comes to
disability reform?

The police officers had a suggestion: The issue the police officers
cite as the most problematic is the "excessive delay" for the
retirement system to make decisions on disability retirements.

Maybe they could speed the process up by cutting down on the number of
applicants for a disability retirement.

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