Financial Crisis, Felony Violations Rock San Diego

Published July 1, 2005

Six current and former officials of San Diego’s nearly bankrupt pension fund have been charged with felony violations of California’s conflict-of-interest law for inflating pensions for themselves and others, one in a string of financial crises to rock the city.

In some cases, those involved gave themselves pension benefit increases totaling thousands of dollars a month.

The criminal charges were announced May 17 at a news conference by District Attorney Bonnie Dumanis. Charges were filed against 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.

‘Step Toward Trust’ Taken

“We believe this is the first step in restoring public trust in our government institutions,” said Dumanis, who declined to answer questions from reporters.

Dumanis said the investigation continues and more charges may come.

The charges stem from a pension board vote in 2002. The board members gave themselves benefit increases without any increase in funding, approving City Hall’s continued underfunding of the pension in exchange for their own benefit increases. The city’s pension plan is about $1.5 billion underfunded and has thrown the city into financial crisis.

Judie Italiano, president of the Municipal Employees Association, defended the pension fund and the city. In an email to association members, Italiano wrote, “None of the Employee Reps broke any laws, and this witch hunt on our City is an attack on us all.”

‘Members Helped Themselves’

One day after the Dumanis news conference, San Diego City Attorney Mike Aguirre held a news conference at his office and told reporters, “The pension fund has been used as a slush fund … in which council members have not only helped themselves but increased their retroactive benefits substantially.”

“They set it up so they would receive thousands and thousands of dollars of taxpayer funds without complying with the rules for creating pension benefits,” said Aguirre, quoted by San Diego Union-Tribune reporter Gregory Alan Gross for a May 18 article.

According to Gross, Aguirre said the scam actually began in 2000. He accused his predecessor, City Attorney Casey Gwinn, of receiving benefits “while he was supposed to be advising the city not to engage in such behavior.”

Retroactive Benefit Hikes

Later, in January 2002, the council approved retroactive benefit increases to all previous council members, which hiked the pension payments to several retired council members by thousands of dollars per year.

According to Gross, Aguirre said the retroactive benefit hikes were made with no additional funding to pay for the higher costs.

Aguirre credited whistleblowers with informing him of the activities.

“This was brought to our attention by people inside the pension system, [otherwise] we never would have discovered it,” Aguirre told reporters.

Federal Grand Jury Called

The arrests, Aguirre’s allegations, and the huge unfunded pension liability have thrown San Diego into turmoil. Several high-profile officials have unexpectedly resigned over the past two years, and a federal grand jury has been seated to hear evidence gathered by FBI agents under the direction of the U.S. Attorney’s Office.

The pension situation is not San Diego’s only financial crisis. Since February 2004 the Securities and Exchange Commission (SEC) has been investigating whether city officials committed securities fraud. That investigation stems from financial documents the city released to investors who purchased hundreds of millions of dollars of San Diego municipal bonds.

Those documents included “errors and omissions,” including no mention of declines in pension fund assets or of unfunded retiree health care costs reaching more than $500 million.

City officials admitted the errors and omissions two weeks after the surprise resignation of City Auditor Ed Ryan in January 2004. One month after the SEC investigation began, City Manager Michael Uberuaga announced his resignation.

Financial Situation Desperate

The city’s financial situation is so desperate officials are considering selling buildings and land, including the 372.5-acre Fairbanks Ranch Country Club, to raise millions of dollars to shore up the pension and city budget.

On June 3 Mayor Dick Murphy tried to schedule a closed-door City Council meeting to discuss whether to sell the land, but Aguirre blocked the meeting, according to a June 4 article by Union-Tribune reporters Ronald W. Powell and Jennifer Vigil.

“If the mayor and the council want to sell off the jewels of the city, then they have to have a public hearing so the public can comment,” Aguirre told the reporters. “They can’t sneak it through the back door.”

City Attorney Criticized

Powell and Vigil also reported that Aguirre accused Murphy of “having secretly worked since January on a land sale plan with the city’s top real estate official, a charge Murphy vehemently denied at a news conference later in the day.”

They said Murphy accused Aguirre of telling “a preposterous lie.”

“The issue is it’s time for the press and the public to question Mr. Aguirre’s credibility,” Murphy told reporters. “How many times is he going to get caught red-handed with a big lie and have nobody challenge him?”

Attorney Stands Firm

Aguirre has used his power as city attorney to block other City Council actions related to the pension financing situation.

The City Council recently approved an ordinance to authorize wage freezes and larger employee contributions to the pension fund to shrink the amount of unfunded pension liability. Aguirre refuses to sign the ordinance, blocking it from being enacted.

“We cannot sign off on any payment of liabilities associated with illegal benefits,” he told reporters.

Steve Stanek ([email protected]) is managing editor of Budget & Tax News.