San Diego Pension Trustees Charged
May 18, 2005 | Leave a Comment
Six current and former trustees of San Diego’s underfunded pension system were charged yesterday with felony violations of California’s conflict of interest law, the first in a possible wave of criminal cases to flow from a scandal that has crippled city finances and pushed a mayor from office.
The charges were announced at a news conference by District Attorney Bonnie Dumanis, who said the six received benefit boosts as a result of their votes in 2002. She said investigations are ongoing and more charges may follow.
“We believe this is the first step in restoring public trust in our government institutions,” said Dumanis, who declined to take questions.
Her office alleges that a pension board majority voted in 2002 to endorse City Hall’s continued underfunding of the pension, in exchange for work-force benefit increases approved by the City Council.
The deal was structured to include special benefits tailored for two board members. Some board members complained that they had been put in an untenable position – asked to bless underfunding, with the city putting in their hands the fate of healthy benefit increases.
A criminal complaint filed by Dumanis’ office in Superior Court named Ron Saathoff, president of San Diego City Firefighters Local 145; John Torres, vice president of the Municipal Employees Association; former Human Resources Director Cathy Lexin; former Treasurer Mary Vattimo; former acting Auditor Terri Webster; and management analyst Sharon Wilkinson.
Dumanis said her office opened its investigation in June 2004.
“This prosecution will send a message that the District Attorney’s Office is watching, and no one – let me repeat, no one – is above the law,” she said.
The six are scheduled for arraignment today in Superior Court.
Of them, only Torres currently serves on the board of trustees of the $3.6 billion San Diego City Employees Retirement System.
The pension system has a deficit of at least $1.4 billion, attributable to underfunding by the city approved in 1996 and 2002, benefit increases and investment losses in 2000-02.
The deficit has sparked multiple investigations and deep financial and political crises in California’s second-largest city.
The Securities and Exchange Commission is investigating whether officials committed securities fraud. And a federal grand jury continues to review evidence gathered by FBI agents in fraud and public-corruption investigations overseen by the U.S. Attorney’s Office.
None of those who were charged could be reached for comment.
Webster lawyer Frank Vecchione told a news conference that his client was doing her job under the City Charter. “These charges are not only surprising, they’re extremely disappointing to Terri and her family,” he said.
In an e-mail to her membership, Judie Italiano, president of the Municipal Employees Association, said: “None of the Employee Reps broke any laws, and this witch hunt on our City is an attack on us all.”
Federal investigations have been under way since mid-February 2004, spurred by city officials’ admissions that financial documents – used by investors in hundreds of millions of dollars of San Diego municipal bonds – contained “errors and omissions.”
Among the omissions: mention of the slide in pension-system assets, as well as unfunded retiree health care costs in excess of $500 million.
These admissions came two weeks after veteran city Auditor Ed Ryan announced his unexpected resignation in January 2004. By that March, City Manager Michael Uberuaga, who personally urged the retirement board to approve the underfunding, announced his resignation.
Investigations and resulting downgrades in the city’s bond ratings have hobbled City Hall’s ability to sell bonds to raise cash for large civic projects and forced the new city manager, Lamont Ewell, to seek special short-term financing from Bank of America for daily cash needs.
Ewell says the city is not in danger of having to file for protection under Chapter 9 of the U.S. Bankruptcy Code, reserved for distressed municipalities, which some pundits say is inevitable.
The strains of the crisis led Mayor Dick Murphy to announce last month that he will resign from office effective July 15 – less than eight months into his second term. A special election is set for July 26, with a runoff, if needed, in the fall.
Murphy was not available for interviews yesterday.
His office issued a prepared statement that said: “As I’ve said in the past, if someone did something illegal they should be held accountable. However, as a former judge I believe that people should not rush to judgment. I trust the judicial system will do the right thing.”
Ewell’s office also issued a prepared statement: “It’s imperative that we allow the judicial process to take its course. This is a painful and difficult time for the City. I feel for the individuals involved, as well as their families.”
Lexin, an architect of the city’s underfunding arrangements, faces two felony counts. The others face three felony counts each.
Lexin resigned Monday, along with Vattimo and former financial management director Patricia Frazier, who was not charged yesterday.
Webster was placed on administrative leave Friday for alleged failure to hand over documents demanded by the federal grand jury.
Violations of the state conflict-of-interest law are punishable upon conviction by a maximum sentence of three years in state prison, per count, and a $1,000 fine.
If the six are convicted, the benefit increases granted in 2002 could be voided.
The complaint alleges that the defendants voted July 11, 2002, to give the green light to a city proposal allowing continued underfunding of the pension system. In exchange for retirement board approval, the city agreed to increase benefits for the work force.
The council voted for benefit increases Nov. 18, 2002, with Donna Frye voting “no” after pension trustee Diann Shipione warned that the overall deal was possibly corrupt. Also that day, Frye joined a unanimous council in voting for underfunding, which was on the council’s consent agenda, with no public debate.
A quid pro quo was suggested in a report by District Attorney’s Office investigator Vincent Giaime that said: “The city’s labor negotiators informed the unions . . . that the enhanced retirement benefits were contingent upon the (retirement board) approving” the underfunding package.
At the time, the city faced a huge balloon payment required under terms of the 1996 deal. That agreement called for the city to make the payment into the retirement system if its funded level – a measure of assets vs. liabilities – fell below 82.3 percent.
In 2002, with pension assets spiraling downward, city officials estimated the balloon payment at between $25 million and $75 million – easily enough to overwhelm the city’s general fund budget. It has later been estimated at $500 million or more.
Saathoff, who would later become a political ally of Murphy’s, received a special benefit as a union president. Webster received a special benefit allowing her compensation to exceed a 90 percent salary cap because her employment with the city began before age 24, according to Giaime’s report.
A chart in his report showed how each of the defendants’ monthly retirement compensation rose as a result of their vote to bless the city’s underfunding request.
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