Criminal Charges Against Former Pension Board Members Dismissed
Friday, April 9, 2010
A federal judge dismisses criminal charges against five former San Diego pension board officials. And, a state judge recently ruled that the city doesn't have to make an additional $177 million payment to the pension fund. What do both legal rulings mean for San Diego?
GLORIA PENNER (Host): I’m Gloria Penner. I’m joined by the editors at the roundtable These Days in San Diego. Today we’ll analyze this week’s developments in San Diego’s pension benefits problems and we’ll look into the land deal that pushes expansion of the San Diego Convention Center to the next level, also San Diego’s reinvigorated housing market and how Sunday’s earthquake prepares us for the next one. The editors with me today are Scott Lewis, CEO of voiceofsandiego.org. I can’t tell you how delightful it is to see you, Scott.
SCOTT LEWIS (CEO, voiceofsandiego.org): Always a pleasure, Gloria. Thank you so much.
PENNER: Tom York is with us. He’s contributing editor for San Diego Business Journal. Tom, I’m so glad you could be with us as well.
TOM YORK (Contributing Editor, San Diego Business Journal): I am happy to be here. Thanks for inviting me.
PENNER: Of, of course. And Kent Davy, editor of the North County Times who came all the way down from North County down to San Diego State. Thank you so much, Kent.
KENT DAVY (Editor, North County Times): You’re welcome. Happy to be here.
PENNER: Our call-in number is 1-888-895-KPBS, it’s 895-5727. Well, two major developments this week in the ongoing saga of the City of San Diego’s pension fund. First, federal criminal charges were dismissed against five former San Diego City and pension system officials for an alleged deal to underfund the pension system in exchange for increased pension benefits. And then second, a state court ruled that San Diego doesn’t have to pay another $177 million into the pension system. I’m going to start with you, Scott. Let’s start with that $177 million. What was that payment all about?
LEWIS: Well, you’ll remember that in the past, a few years ago, the City of San Diego faced a problem in which it couldn’t or was scared to face down the debts it had accrued in its pension system and so it made a deal with employees. It said, look, if you agree to increase your benefit – if you agree to let us off the hook of some of these payments that we have to make, we’ll agree in exchange to increase your benefits, so not only will we not pay in what we feel like we’re afraid to pay in but we’ll actually increase the amount we eventually owe. And those deals put in motion the notorious pension scandal, of course, that we’ve all been dealing with. This particular issue was about the pension system having gotten a new group of leadership and said, well, you know, you shouldn’t have underfunded us the way you did, and arguing that case to the court. And this is a city, of course, that rejoices when it doesn’t have to pay its liabilities off and so this is a big win but it doesn’t mean that we’ve saved any money, it doesn’t mean that we’ve not lost any money, it just means that we don’t have to pay our longterm liabilities off.
PENNER: Just very quickly, City Attorney Jan Goldsmith said the City is not required to pay twice for the same benefits. What is the rationale there? I mean, have we paid the 177? Have we paid for those benefits already?
LEWIS: I’m not quite sure what he’s referring to. I’m sorry. I do know that, look, when an employee works he accrues benefits over time and we’ve only saved a portion of what we need to do to pay him or her off eventually with their longterm pension. This was a legal argument that we owed more to it. It does not mean, though, that anything’s been solved or anything’s been made better. It just means that the city itself can keep treading water for a few months.
PENNER: Do we have an extra $177 million to play with now?
PENNER: We didn’t have it in the first place, did we?
LEWIS: No, and there was a lot of worry about whether that would be one more nail in the coffin of the City’s solvency.
PENNER: Okay, well, on to the charges against the pension officials and the city officials. The federal court dismissed criminal charges against the five officials. Why did that happen? I mean, were – have they created no problems? Is there nothing there that kind of makes us concerned about their behaviors? What do you think, Tom?
YORK: Well, I think the federal prosecutors looked at this and said, well, it’s a case of incompetence rather than criminality. Or probably the defendants could’ve argued that. And so I think that that’s very difficult to prove these things, especially when they’re done behind closed doors and I think that the prosecutors just decided to move on to better targets.
PENNER: Have you been following this at all from North County, Kent? I mean, so now are these five off the hook, is that it? It’s over?
DAVY: I can’t comment on those five particularly. What – But I would like to talk for a minute about the legal theory. There is a Supreme – there are several cases in front of the U.S. Supreme Court that touch on this subject, and it’s an issue of when you’re an official and accused of fraud but it is an honest dealing kind of situation where you’ve received no personal gain, you’ve simply made a decision that was something perhaps deceptive about it, is that really fraud or not? Conrad Black, the Canadian newspaperman, his case is in front of the Supreme Court, Jeffrey Skilling from Enron is in front of the Supreme Court with the same kind of issue. There’s another case that I’ve forgotten the name of. And this follows in that kind of trend of that question of should this kind of vagueness in the law create a criminal liability.
PENNER: Yeah, and I think the judge very specifically referred to that, that the law was really too vague on…
DAVY: That’s right.
PENNER: …that issue. And don’t you also have to prove intent?
DAVY: Well, that’s part of the problem. If you don’t really intend to commit fraud and you’re making just, say, a bad decision, which is arguably what happened in the pension case, was it really fraud or was it just really, really stupid?
LEWIS: But basically the argument is, is that you’re required to provide honest services as a public or a representative official and that people like – This was used against Duke Cunningham, this was used against the San Diego City Council people, Michael Zucchet and Ralph Inzunza. And I think that, you know, it’s a law that we’ve reviewed and that others, and are worried that might get completely struck down by a Supreme Court led by Antonin Scalia, who looks at it and says what is this law? What is illegal? What is legal? Basically, you’re declaring what they’re saying is normal politics to be illegal where you get a campaign donation and you end up deciding to do something that may be in favor of that person. Did you actually get a bribe? No, because they would charge you with bribery. And so there’s – so it’s very nebulous and nobody’s quite understood it and now it’s starting to get chipped away and it looks like it may end up being completely scrapped. Now, does that end up freeing somebody like Duke Cunningham? Does it end up lessening his sentence? Obviously, he was under a lot of other charges as well but a lot of these other people weren’t. And, you know, Ralph Inzunza in particular, Michael Zucchet, his prosecution for the so-called ‘Strippergate,’ has been thrown out. All these issues, it’s very interesting to watch.
PENNER: All right. Now that brings me again to the question: Are the five of them off the hook now? Or are there other levels of a jurisdiction that might come into play?
LEWIS: Oh, well, yeah. Tom said the prosecutors are giving up. I don’t think so. I mean, Carol Lam, who originally brought this suit, is no longer there. Maybe they decide not to further appeal it but they – it would be more difficult, no doubt and they’d have to be really passionate about prosecuting. What is very interesting is that of all the notoriety that the pension scandal in San Diego’s gotten, the only one currently facing criminal charges remains the former firefighter union president, Ron Saathoff, who is still facing criminal state charges for that conflict of interest, that he should not have been trying to negotiate with the City at the same time that his own benefits were being dealt with.
PENNER: I can’t let this go without asking who’s paying for all this litigation for both sides? Prosecution? Defense? Who’s paying for this, Tom?
YORK: Well, I think we all have to look in the mirror and say it’s us. You know, the taxpayer is paying for this and…
PENNER: We’re talking about millions of dollars…
PENNER: …I mean, in all these court cases and we actually, through our taxes, are paying for this.
YORK: Right. And, you know, we’ll probably continue to pay hundreds of thousands if not millions more until this is all settled. One of the issues about the pension scandal, of course, is that, you know, the City of San Diego is not alone in this in terms of facing unfunded liabilities or underfunded liabilities. There was a report this week in Sacramento which said that basically the state pension system is underfunded by half a trillion dollars, so it’s an issue that’s all over the state. It’s actually all over the country. And this is just one little piece of what we’re dealing with here so…
PENNER: It’s like a house of cards, isn’t it?
PENNER: Except these are the houses of cards throughout the nation.
PENNER: And if these pension systems all collapse, I mean, what fallout will that have for the country?
YORK: Well, that’s the question I have is that basically the courts have ruled that if you agree to a pension or to, you know, to a benefit, you have to pay it. So if the cities, like San Diego, come to the point they can’t pay it, does that mean the city has to increase taxes to the point where they can pay it? Does that put an undue burden on taxpayers? There are all questions that I have…
PENNER: They are – This is a very important subject…
YORK: …from a general – yeah.
PENNER: …and I hate to cut it short but we are running out of time because we’re got three other subjects to cover. So, Kent, was there something…
PENNER: …imperative? Go ahead.
DAVY: Just that this pension issue will fuel a lot of elections, both this June and next November of election of…
PENNER: Give me an example.
DAVY: For instance in Carlsbad, that mayoral race will be – have as a major topic the unfunded pension issue or the pension issue for public safety workers there.
PENNER: I’m glad you alerted me to that because that’s going to be interesting to watch, how much the pension issue does really play into the elections that are coming up. All right, let’s move on.