Pension funds fear prosecution, seek rule change

SAN FRANCISCO — The state Supreme Court was told yesterday that public pension systems are delaying contracts, fearing prosecution under an appellate court ruling in a San Diego conflict-of-interest lawsuit.

Six former San Diego pension board members are accused of lowering the city’s annual pension payment in connection with a pension benefit increase for themselves and other city employees.

Prosecutors said one of the board members, Ronald Saathoff, a fire captain and union president “who ran the show,” received a pension increase that “might literally net him an additional million dollars over the course of his retirement.”

The board lowered the city pension payments below the actuarially required amount in 1966 and then, in the alleged conflict, delayed payment in 2002 of a $25 million “balloon” payment coming due under the old agreement.

The years of deliberate underfunding led to a pension debt estimated at $1.7 billion at one point, severe city budget cuts that included layoffs and reductions in services, and nearly two years in which the city could not issue bonds.

Pension systems that filed briefs with the high court, including CalPERS, are not taking sides in the San Diego dispute. But they fear that a two-year-old appellate court ruling in the suit could allow conflict-of-interest charges for routine board actions.

“Many retirement boards have simply delayed entering into important contracts or they have required their board members to recuse (disqualify) themselves,” attorney Ashley Dunning told the court yesterday (Nov. 4).

Dunning represents more than a dozen public employee retirement systems. She said that when members disqualify themselves the boards often lack a quorum, which delays action on the issue.

A brief on behalf of the giant California Public Employees Retirement System was filed with the high court by the office of state Attorney General Jerry Brown.

“If allowed to stand, the decision could dramatically curtail the participation of employee board members and board staff in retirement system administration,” wrote Mark Beckington, deputy attorney general.

The attorneys representing the six defendants in the suit (S157341 – Lexin v. S.C. The People) said the threat to public employees from the appellate court’s “novel interpretation” of conflict-of-interest law goes beyond retirement systems.

The ruling “raises the specter of future criminal prosecutions for any public employees who serve on pension boards or engage in collective bargaining statewide whenever they make decisions affecting broad groups of employees,” said the brief.. “Consequently, the decision has thrown California pension systems and municipalities into chaos.”

The defendants’ attorneys bolstered their argument by citing a brief from three organizations concerned about “felony liability” for elected officials and managers who negotiate with employees.

The groups are the California State Association of Counties, the League of California Cities, and the Association of California Water Agencies. The defendants’ attorneys also cited a brief from a labor group, the California Professional Firefighters.

During the hearing, Justice Joyce Kennard asked the San Diego deputy district attorney, William La Fond, about the defense argument that the pension increase was a benefit for a broad group of employees, not just the six board members.

La Fond said “normal operations” of the pension board remain protected from conflict-of-interest charges. He said the board’s failure as fiduciaries to protect pension funds in connection with a benefit increase was “outside the scope” of normal operations.

An attorney for the defendants, Theodore Boutrous, said the board members only voted to lower the city’s pension contribution. He said the increase in pension benefits was a separate action by the city council.

Chief Justice Ron George asked for a clarification about whether Saathoff’s pension benefit was different from the other increases.

La Fond said in his brief that seven of the 13 retirement board members testified that they were unaware that Saathoff, who pushed to lower the city pension payment, would get a $2,531 a month increase in his lifetime pension.

Boutrous said Saathoff had a separate agreement with the city that also would apply to future union presidents. The attorney said Saathoff’s pension increase was not part of the general benefit increase for city employees.

“It’s a separate issue and really has no place in this case,” said Boutrous.

La Fond said the pension benefit increase was a “lure” and a “carrot” used to get the retirement board to delay a $25 million city pension payment. He said the retirement board was “bought off.”

Justice Marvin Baxter asked if that meant “bribe” and La Fond said, “yes.” Then, Baxter said, it sounds like the city council participated in a bribe.

La Fond said there were “gatekeepers” and decisions to be made about how best to proceed with the prosecution.

“The prosecution has chosen to go after some of the co-conspirators and not others,” said Justice Carol Corrigan.

The court usually makes a decision within 90 days after a hearing. If the court overturns the appellate court ruling, the district attorney may not be able to proceed with a trial of the board members on conflict-of-interest charges.

“My suggestion to the court is a narrow ruling dealing with the facts of this case,” said La Fond.

Federal prosecutors have filed several fraud charges against the six board members — Saathoff, Cathy Lexin, John Torres, Mary Vattimo, Teresa Webster and Sharon Wilkinson — and two other persons, Loraine Chapin and Lawrence Grissom.

If the state high court upholds the appellate ruling and its impact has not been exaggerated, that could be a boost for the reformers who say public pension boards should not have members who work for government.

For example, a consulting firm hired by San Jose argues that retirement boards dominated by “stakeholders” representing labor and management are an outdated model that have some of the built-in conflicts that surfaced in San Diego.

The consultants say modern public pension boards should have independent members with expertise in investments.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 5 Nov 09

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