SD COASTAL ALLIANCE

MISSION

POLITICS

ETHICS QUESTIONS?

SCORECARDS
How did Council Vote?

ISSUES

NEWS

SCHOOLS

REDEVELOPMENT
ABUSE

ENVIRONMENTAL "Fs"

AIRPORT

STRIP CLUB TRIAL

COMMENTARY

LINKS/CONTACTS

Archives:
PENSION COVER-UP

MAYOR RACE '05"

PAST POLITICS

Don't Connect the Dots
By Don Bauder, September 7, 2006 San Diego Reader,
Excerpt: 'Mother, this town is so corrupt/ May I probe why it rots?"/ "Yes, my darling daughter/ But don't connect the dots.
  "The City of San Diego has paid more than $30 million to consultants like Navigant, Vinson and Elkins, and Kroll, and they all followed instructions: smudge the facts, skirt the trail, hide the bodies so we can keep the establishment's lackeys in their government posts. In short:
  Don't connect the dots.
  But the consultants couldn't erase all the clues. I have had the opportunity to view some things these firms ignored -- probably deliberately.
  It's clear San Diego's corruption is not confined to city hall. It's deeply embedded in the business community, mainstream media, and the courts.
Full Story: http://www.sdreader.com/php/cityshow.php?id=1454
Hear The Whistle Blow
San Diego Reader Letter, 9/16/06
 How wonderful that Don Bauder defended Donna Frye against the bad guys in city hall ("Don't Connect the Dots," "City Lights," September 7). She has always stood her ground, despite having almost no support from her neighbors on the tenth floor.
  The very nasty editorial in the August 17 Union-Tribune (see page 6 of the September 7 Reader) was an enormous lie. And as to the left-handed compliment ("To their partial credit, council members Frye and George Stevens voted against the motion"), it was a snide slur at two people who did not have their heads in the sand.
  Donna had been blowing the whistle loud and clear, but a lot of folks who should have heard it were holding their hands over their ears.
  Donna shines a light in a cave full of crooks. She is the lone vote against many shady propositions. She is dogged in her pursuit of truth and devoted to the needs of her constituents.Go, Donna!
Catherine A. Strohlein Housing Elementium

Officials Could Lose Thousands If Benefits Judged Illegal
By EVAN McLAUGHLIN, Voice Staff Writer. Aug. 26, 2005
 Former Mayor Dick Murphy and two ex-councilmen who were convicted of corruption have registered as retirees with the city's embattled pension system and will draw upgraded benefits from the retirement plan at the heart of San Diego's legal and political troubles.
 Murphy will receive a gross payment of approximately $49,560 per year from the San Diego City Employees' Retirement System, which currently has a funding shortfall of at least $1.37 billion as a result of agreements that effectively enhanced benefits for workers but didn't provide the cash to fund them.
 Former Councilmen Michael Zucchet and Ralph Inzunza, who resigned last month after their federal corruption convictions, will receive in gross about $13,441 and $20,895 per year, respectively, from the pension plan. The 35-year-olds will receive about 60 percent of what they would have received annually had they waited until they were 55 to file for retirement.
 If City Attorney Mike Aguirre's legal efforts to declare more than a decades' worth of pension benefits illegal and void succeeds, the three former lawmakers won't get a dime from the pension system.
 Perhaps more at risk are their former colleagues, who still spend Mondays and Tuesdays in the council chambers. They -- along with City Manager Lamont Ewell and mayoral candidate Jerry Sanders, a former police chief -- each stand to lose several thousand dollars every year from future pension checks if a court affirms Aguirre's claim that certain benefits are illegal.
 The city attorney has already asked a court to repeal benefits born out of agreements in 1996 and 2002, but Aguirre said he also plans to challenge pension benefits enjoyed by elected officials that were crafted as long as 30 years ago.
 In June, Aguirre instructed the city auditor and comptroller to stop paying benefits that he believes were created illegally but to no avail. The city attorney has since won authorization from the City Council, albeit reluctantly, to challenge a sampling of those benefit enhancements in court.
 Aguirre said he will, in the coming months, challenge the legality of upgraded benefits and eased requirements that pertain specifically to elected officials -- specifically the mayor, council members and the city attorney. A separate challenge could also affect Ewell, who is slated to resign at the end of this calendar year.
 When he decides to file suit to repeal benefits for elected officials, Councilman Scott Peters said, Aguirre will have to secure the council's approval before proceeding.
 "I think the city charter is clear that the city attorney needs permission of the City Council to file a lawsuit," said Peters, an attorney.
 Aguirre disagrees, pointing to a judge's ruling on Tuesday that he claims allows him to bring litigation on his own, such as his lawsuit seeking to turn SDCERS over to a court-appointed receiver.
 The possibility remains, however, that council members would have sway over a lawsuit that could squeeze their own personal pensions. Aguirre, while qualifying for a pension at the end of his four-year term under the current rules, has decided not to join the plan, SDCERS spokeswoman Rebecca Wilson said.
 Peters said he felt that rolling back benefits from elected officials' pensions would make it more difficult to attract qualified people to run for office.
 "These conditions make it difficult to find good people to run for office, since they have to take a timeout from their career and potentially take a pay cut," he said.
 And take a pay cut Peters and his colleagues would if Aguirre were to succeed in all of his challenges. More than $20,000 could theoretically be shaved off of Deputy Mayor Toni Atkins' annual gross pension pay, according to an analysis of figures provided by SDCERS. The same applies to Councilman Jim Madaffer.
 Several officials wouldn't qualify for a pension at all.
 The two candidates running in the Nov. 8 mayoral election said it's the only way to resolve the legal and financial troubles stemming from the deficit-ridden retirement system.
  "I'd try not to have it interfere (with workers' pensions), but I'd rather have a solution that works in the best interest of the public," Councilwoman Donna Frye said.
  "It has to be in the best interest of the community to get a ruling on those benefits," Sanders said. "Whether I lose a percentage point or not is not important compared to the city's financial viability."
 To qualify for a pension as an elected official -- and thereby receive a higher benefit than general city employees -- the lawmaker must hold office for four years. Everyday city employees must accrue 10 years of service to qualify for a pension.
 Aguirre has issued opinions stating that the city charter orders that the same 10-year standard for vesting pension benefits must be applied to elected officials too, regardless of a 1971 council decision to ease the requirement.
 Rolling back the four-year rule for legislators would altogether eliminate the pension rights of five council members -- Frye, Peters, Brian Maienschein and Tony Young. Zucchet is also vulnerable under that hypothetical scenario.
 Murphy and Inzunza would still qualify under the 10-year vesting rule because they purchased service credits that put them over the hump. Buying service credits allows municipal workers to add years to their tenure with the city of San Diego, which in effect boosts their future pension checks. Murphy and Inzunza would only qualify for a 10-year stint with the city because of service credits they have purchased.
 However, Aguirre also plans to challenge the legality of the service credits because employees and officials were allowed to purchase them at a rate heavily subsidized by the city.
 Separately, he interprets the city charter to state that these credits cannot be put toward the 10-year vesting standard. Such an interpretation would override a 2002 council vote that changed the municipal code to allow that investment strategy.
 Atkins and Madaffer were council aides for almost seven years each, and both reached their 10-year plateaus with the city without the help of service credits during their first term on council. Therefore, neither would be affected by these legal challenges.
 Frye and Maienschein have both purchased service credits, but not enough to surpass the 10 years needed to gain pension rights if Aguirre wins his challenge. Young and Peters have not purchased service credits, according to SDCERS records.
 In a lawsuit already filed in Superior Court, Aguirre seeks the rollback of between $700 million and $800 million worth of pension benefits by targeting upgrades that were created in 1996 and 2002. He claims it is the only solution for dealing with a deficit that threatens to dominate the city's annual budget.

Service credits
Murphy, Inzunza and Zucchet, as well as every current council member -- excluding Peters and Young -- stand to lose thousands every year in lost pension benefits if the service credit purchases are rolled back.
For example, Madaffer is set to receive about $47,248 annually in gross pension benefits, assuming he finishes his current council term. That figure would be reduced to about $34,056 per year -- a difference of more than $13,000 -- if Aguirre successfully voids the five years of service Madaffer bought while the rest of the benefits stood.
 Ewell is in the process of completing his service credit purchase, retirement officials said.
 At least three officials -- Ewell, Atkins and Frye -- have asked the retirement system whether they need to pay more for their credits or if they should be refunded. Aguirre said he doesn't believe the cash-starved pension fund can sustain any service credit purchases.
 Multiplier for general service and public safety members
Workers' pension checks are calculated using a formula that multiplies an employees' highest annual salary, years worked and a contractually-mandated figure known as "the multiplier."
 The 1996 and 2002 benefit upgrades raised the multiplier for general employees -- from 1.45 percent to 2 percent in 1996, and from 2 percent to 2.5 percent in 2002.
 For public safety employees such as Sanders, the 1996 agreement boosted the multiplier from 2.22 percent to 2.5 percent. Sanders had already retired before the 2002 agreement, and his pension was not affected by that increase.
 Aguirre argues that these benefits were created illegally because money was not set aside to pay for the increases and that pension trustees that approved the upgrades had a conflict of interest because they were also beneficiaries. The accused trustees and their attorneys reiterate that their role on the SDCERS board was necessary under the charter and that state law protects them from conflict of interest charges because their pension votes count as decisions on salary.
 Atkins, Madaffer, Young, Zucchet, Inzunza and Sanders all stand to lose thousands of dollars if the multiplier for general and public safety members is rolled back.
 For example, Atkins' annual gross pension checks will amount to about $47,768 if she completes her current term on council. If a court decides to discontinue the 2002 benefits increase, Atkins' annual pension would drop to $45,175, a decrease of more than $2,500. If both the 1996 and 2002 benefit increases were rolled back, Atkins would theoretically draw $42,322 annually, a decrease of about $5,000.
 Aguirre said that the benefits outlined in the elected officials' retirement plan will be challenged in the months to come, and the implications for council members are significant.
 The city manager and police chief are not elected positions, and challenges to the elected officer benefits would not affect Ewell or Sanders.
 Also included in his planned lawsuit or lawsuits:
Elected officer multiplier increase
In2000, the City Council approved increasing the multiplier used in the pension formulas for legislators. The benefit was applied to the city attorney as well a year later. Aguirre claims that the increase was a charter violation because the council did not identify a founding source to offset the added cost.
 The multiplier, before 2000, was a complex formula that amounted to a figure between 3.12 percent and 3.17 percent for council members and the mayor. The result of the decision to increase benefits was a 3.5 percent multiplier, augmenting current council members' pension incomes by several thousand dollars a year. Murphy, Zucchet and Inzunza could all potentially be affected as well.
 For example, if all Maienschein's benefits remain at current levels, he will earn about $23,536 annually in gross benefits if he finishes his current council term. Repealing the increase in the pension multiplier would drop his annual gross pension to $21,244, a decrease of more than $2,000.
 The council approved applying the 3.5 percent multiplier to former council members in 2002, adding a new list of costs that the city attorney also wants to challenge. Details <http://www.voiceofsandiego.org/site/lookup.asp?c=euLTJbMUKvH&amp;b=693985> of how some former lawmakers benefited from this retroactive increase are available here

Pension Board to Seek Sacramento Help, Source Says
By SCOTT LEWIS, Voice Contributing Writer, July 29, 2005
  The city of San Diego's pension board is planning to send a request to the state's Legislative Audit Committee in Sacramento as part of an endeavor that may produce a waiver of its attorney-client privilege, according to a source close to the effort.
 If the move does end up in an official waiver of the pension board's attorney-client privilege, it could mean the end to a months-long standoff between the board and several federal and local investigators.
  "Since the legislature is not an entity that would be part of the pension board's attorney-client privilege, it appears that the documents in question would no longer be covered by the board's privilege if it goes this route," said the source, who agreed to confirm the report on the condition of anonymity. 
  The source said, however, that there was still some question as to when the actual waiver would take place.
 The city of San Diego has not issued an audit of how much it spent, collected and owed in fiscal years 2003 and 2004.
  Outside auditors and federal investigators have requested the waiver of the attorney-client privilege in order to gain documents that could be relevant to the pension system's financial state and alleged wrongdoing committed by officials. Outside auditors are refusing to sign off on the city's financial statements without first seeing the documents.
 Without the audit, the city remains with a suspended credit rating and without access to cash to complete projects such as road repair, sewer upgrades and fire station construction.
  To date, the pension board has refused to waive its attorney-client privilege over concerns that doing so could open up board trustees, and the system as a whole, to litigation.
  The Legislative Audit Committee, a bi-cameral commission with authority to pass audit requests on to the Bureau of State Audits, has an Aug. 3 deadline for audit requests. The legislature, on summer break now, resumes its session Aug. 15.
 William Herms, the lead consultant to the Legislative Audit Committee, refused to comment on or confirm any requests to the committee. He said such requests are confidential until officially filed by the committee. Herms said that the committee's members would not officially consider a request until its next hearing, Aug. 24.
  The Legislative Audit Committee is comprised of both state senators and members of the Assembly. Assemblywoman Nicole Parra, D-Bakersfield, chairs the committee.
 Any member of the Legislature can request an audit of an organization, agency or government. It is unclear who the pension board would have sponsor its request. Representatives of the retirement system did not respond to requests for comment on the issue.
  City Attorney Mike Aguirre has pushed for disintegration of the pension board following its refusal to release documents protected by the attorney-client privilege.
 Aguirre said Thursday that trying to involve the state legislature seemed unnecessary.
  "I don't know why they had to go to such extremes," he said.
  The U.S. Attorney's Office and outside experts hired to look into city finances and politics have also delivered letters requesting the documents. Only one pension trustee remains on the board from the period under investigation.

Aguirre seeks resignation of three officials
By KEVIN CHRISTENSEN, The Daily Transcript, July 27, 2005
 City Attorney Michael Aguirre called for the resignation of three city officials who oversee a portion of the city's pension plan for allegedly mismanaging more than $212 million in money transfers.
 Aguirre told reporters Wednesday that funds have been diverted from employees' personal 401(k)-style plans to pay for the purchase of service credits as part of a "Ponzi scheme."
 City Manager Lamont Ewell called Aguirre's claims and assertions reckless and ill researched.
 "He takes bits of information and runs around like a madman," Ewell said.
 Aguirre called for the resignations of three representatives of the Defined Contribution Plan Trustees Board, the group that oversees the financial status of the city's Supplemental Pension Savings Plan.
 The plan is voluntary and allows city employees to save money in addition to their city pension.
 Board members whom Aguirre targeted include Ron Saathoff, president of Local Firefighter's 145, who is facing felony charges from the San Diego County District Attorney; Bill Lopez, director of risk management; and Lawrence Grissom, administrator of the San Diego City Employees' Retirement System.
 Both Grissom and Lopez have recently been named as defendants in lawsuits filed by Aguirre.
 He charged that monies were diverted from the savings accounts to artificially inflate pension system financial statements at a time when its assets were falling due to years of underfunding by the San Diego City Council.
 The city has been paying less into the pension plan than what is required to keep it fully funded since 1996.
The pension is currently facing a deficit estimated at more than $1.37 billion.
 Lopez said that the funds from savings accounts were diverted -- with employee approval -- in order to purchase a pension benefit called "pension service credits."
 In 1996, the city made a deal with the pension board to allow city employees to buy pension credits -- which equate to years of service -- for a cost lower than what it will take to pay the benefits after retirement.
 The years of service purchased are compiled with the years an employee actually worked. This total is used in the pension multiplier formula, which calculates how much employees receive in their pension packages.
 Lopez told reporters that shifting the money from the savings accounts to pay for the credits was approved by the City Attorney's office and is a common practice.
 "I'm a little surprised that Mr. Aguirre is not aware of what his own employees are approving," Lopez said.
 Ewell agreed with Lopez's assessment.
 "He needs to turn inward to his own organization. These are the people that have advised the city on these decisions," Ewell said. "They are the ones that provided the legal advice and gave us the legal clearance to move forward with these."
 When asked if representatives of the city Attorney's office approved the transaction structure, Aguirre replied, "That's something that we are going to investigate."
 Transfers from the savings accounts to the pension system totaled more than $212 million between 2002 and 2005.
 Aguirre said he was looking into how much had been diverted between 1996 and 2002.
 Send your comments, thoughts or suggestions to kevin.christensen@sddt.com
 Caught in the middle of the mess and facing a possible recall, Mayor Dick Murphy -- who won the job last fall only after thousands of write-in ballots that would have elected Frye were thrown out -- resigned July 15.
 Days later, two councilmen -- including the guy chosen to take Murphy's place in the mayor's chair -- were suspended after a federal jury convicted them of accepting bribes from the owner of Cheetahs Totally Nude, a strip club north of town with a hot-pink roof visible for blocks. Seems the club's owner felt San Diego's ``no-touch'' nude-dancing law was crimping his lap-dance business and was hoping cozying up to the councilmen could help him overturn it.
 Meanwhile, residents watch the soap opera with a mix of befuddlement and disgust.
 ``It's a circus -- you pick up the paper each day and don't know what to expect,'' said Enrique Salvatierra, a 22-year employee of the city's water department who worries his own pension benefits could be cut as the mess heads for court. ``It bothers me that city workers are being made the scapegoats.''
 Some old-timers say they saw the debacle coming for years. Local historian Parker Jackson points out that San Diego has been beset by political sleaze and a lack of civic engagement since the 1950s, when World War II veterans settled here and started the city's boom. He said ``New York City, with 8 million residents, has more cohesiveness than San Diego. People here are rarely natives, so there's never been a unity like you'd find in cities back east.''
 That lack of a communal core has fueled decades of inefficient government, said Don Bauder, who for 30 years was a financial columnist in San Diego for Copley Newspapers. The city's ``been corrupt for years, run by real estate interests. The problem is people who live here are like tourists -- they like the sun, they like to play golf, but they don't take part in local government. They live in a fairyland, believing the hype that this is really `America's Finest City.'
 ``When the city agreed to both under-fund its pension and raise benefits at the same time, anyone with half a brain would have realized you'd end up in a black hole,'' he said.
 Filing for bankruptcy is one way out, although most mayoral candidates in Tuesday's election called instead for downsizing government to try to chip away at the deficit. For now, potholes are getting filled and police are responding to calls -- and the lap dancers at Cheetahs are doing plenty of touching, even though the no-touch ordinance was never overturned.
 Still, many voters say the city desperately needs a strong leader, and that the current upheaval may provide an historic opening.
 ``This has to be the beginning of a new era of fiscal accountability,'' said Dr. Q. Crews, standing outside a polling place in the upscale Point Loma neighborhood. ``Bankruptcy would mean the loss of our good name. Once you declare it, you live with that stigma for years.''
 Others weren't as hopeful.
 ``I don't know where we go from here,'' said historian Jackson, who calls himself a ``political agnostic.'' He blasts both major parties for putting up candidates without the expertise or moral fiber required to run a city of more than 1.2 million people.
 ``I haven't voted in 30 years,'' Jackson said, ``and I won't until they put `None of the above' on the ballot.''
Contact Patrick May at pmay@mercurynews.com or (408) 920-5689.

Pension board's budget held up S.D. council wants access to documents
By Jonathan Heller & Jennifer Vigil, UNION-TRIBUNE, 6/15/05
  The San Diego City Council adopted a get-tough stance with the city's pension board yesterday, withholding approval of the board's budget until next week, giving the board time to consider releasing documents deemed central to ongoing investigations.
  The council wants the board to allow auditors and investigators access to sensitive documents related to the pension deficit, which is at least $1.4 billion. The deficit is a key component of federal and local probes into the city's financial practices that have so far crippled its ability to borrow money on the municipal bond market.
  The city's independent auditor has said that the documents are crucial to completing overdue audits for 2003 and 2004 and finishing the investigations, which will allow the city to return to the bond market. If the board refuses to release the documents, city officials indicated, the next step could be to place the system in receivership – in which a judge would take control of the system's management.
  The board of directors for the San Diego City Retirement System might consider the matter in a closed session Friday. It has not yet responded to numerous requests from the city to produce the documents, which its members say are protected under attorney-client privilege. Steve Meyer, the board's president, said the board was well aware of the city's position. "We get their message loud and clear," Meyer said. "We're still trying to work through it." The council was scheduled to vote on the pension system's proposed $28 million budget for fiscal 2006 yesterday.  The budget pays for the system's administrative costs, but not the actual pensions paid to recipients.
  The council, at the urging of City Attorney Michael Aguirre, opted to delay that vote until Monday, when it resumes budget deliberations for next fiscal year. "I want to send a message to (the board) that your time has run out," Councilman Jim Madaffer said. "Either waive (attorney-client) privilege or some serious things will start happening Monday morning."
  Larry Grissom, the pension fund's top administrator, said the system can go on without the city's money. If the council withholds approval of the pension system's funding beyond the start of the fiscal year, July 1, Grissom said, "it then becomes a legal question." He would not elaborate.
  The council voted 8-1 to withhold approval of the budget. Councilman Michael Zucchet voted no, likening the action to extortion. "This is a very troubling road to go down," he said. Such a move perhaps would be improper under normal circumstances, but extraordinary times call for extraordinary measures, said Arthur Levitt, a member of the city's three-member Audit Committee.
  The committee consists of private consultants hired to coordinate the city's cooperation in the investigations and with the independent auditor, KPMG. Levitt said the city might have to consider, as a last resort, placing the pension system in receivership.
  In any event, delaying the release of the sought-after documents could harm the system's pension recipients by prolonging the city's financial turmoil, Levitt said. "This could interrupt the flow of funds that go into the system, and they would be the ultimate losers," he said. Meyer, the board president, said the board has a responsibility to protect the system's participants, and has asked staff members to study waiving attorney-client privilege.
  The newest member of the board, Richard Kipperman, was appointed by the council Monday on a 6-3 vote. He told the council before its vote that he hadn't yet decided how he would vote on waiving privilege.
  Two council members – Donna Frye and Toni Atkins – said they wouldn't approve of any candidate who would not pledge to waive privilege. The mayor and the council appoint the majority of the pension board's 13 members.
  But Mayor Dick Murphy said the previous city attorney, Casey Gwinn, advised him that the council can't appoint someone to the independent board on the condition that the appointee vote a certain way. "I tried to pick people who were truly independent of me," Murphy said. "I didn't pick my friends."
  Levitt, whose committee has talked to pension board members several times, said an "atmosphere of fear" exists on the board, and it's unwarranted. William Sheffler, a board member, said some members fear becoming the target of personal lawsuits. "I think that's partly correct, specifically that various members of the board feel that they would have personal liability for waiving privilege," he said.
  The City Council has voted to waive its own attorney-client privilege. The Securities and Exchange Commission, U.S. Attorney's Office and FBI are investigating possible disclosure violations and corruption concerning the pension deficit and decisions made by city officials that led to it. Six former and current pension board members are facing felony conflict-of-interest charges.
  District Attorney Bonnie Dumanis has accused them of collaborating with the council in 1996 and 2002 to allow the city to underfund the pension system in exchange for boosting employee retirement benefits.  The city opted to begin underfunding the pension system in 1996. Six years later the council voted to extend the plan, though increases in employee benefits and stock market losses were starting to threaten the fitness of the fund.
  Aguirre has pursued an internal investigation since he took office in December.

"96 memo details pension strategy
By Jennifer Vigil, Union Tribune, June 9, 2005
 The top administrator of San Diego's pension fund worked with the city manager nine years ago to develop the now infamous plan to underfund the employee retirement system, according to a 1996 draft memo released by the city attorney.
 City Attorney Michael Aguirre says the memo, which will be part of his sixth report on the pension crisis, shows that the administrator, Lawrence Grissom, played an improper role in helping shape the plan when he should have been "acting as an independent representative of the board."
  Grissom denied the allegation, as did other former city officials.
  The seven-page memo from Grissom to a former pension board president presents an early strategy to spare San Diego officials from having to spend millions of dollars from the operating budget on the city's share of pension contributions.
  The idea of granting increased benefits to employees while allowing the fund to shift to a more favorable accounting method is also detailed in the memo. Dated March 1, 1996, the document refers to a meeting between Grissom, former City Manager Jack McGrory and pension board President Keith Enerson, then one of the top brass at the Police Department.
   "What this demonstrates is a coherent, well-orchestrated plan, and that the administrator was acting more as a subordinate of McGrory," Aguirre said.
  He called it "a two-fisted fraud." "They diverted money illegally to create the deficit.
 Second, they increased benefits with no funding," he said.
  "They're defrauding the taxpayers and defrauding the employees."  Grissom said yesterday he never acted under McGrory's orders and that he was documenting proposals at the time for review by outside experts. "Actions like this are not something the board should do by itself," he said.
"We need to get third-party people to come in and advise." McGrory said Tuesday the memo represents one step in a lengthy series of negotiations between the city and the pension board, contact which he described as frequent. "It's bizarre not to expect that there weren't all kinds of meetings and discussions ongoing between city staff and representatives of the retirement system," McGrory said. "Those kinds of discussions happened all the time, every year."
  He added that city, pension and outside fiduciary advisers and attorneys reviewed the plans. "It was well vetted through every possible legal channel available to the city at the time," McGrory said.
  Three months after the memo, the pension board approved a revised version of the plan. John Kaheny, a former San Diego assistant city attorney, questioned Aguirre's evaluation of the memo. "I don't understand where he thinks there is fraud," said Kaheny, who supported Aguirre's opponent, Leslie Devaney, in November's runoff for city attorney.
  Michael Conger, an attorney who successfully sued the city to stop underfunding of the pension fund, said Grissom plays a minor role in other documents regarding the use of city pension contributions for operating expenses.
  The City Council extended the program in 2002. "In the scope of responsibility, he's a smaller player," Conger said. The memo also anticipates early legal and "perception" problems that could result from pension underfunding. "The negative perception should at least be partially offset by increasing benefits," Grissom wrote. He noted that he had no idea how outside legal counsel would respond to the plan but suggested that they "should consider this carefully and thoughtfully strategize (an) approach."
  Aguirre said that statement shows Grissom and the others were "thinking more like politicians than administrators."
  Grissom said he was trying to show that the city and board needed to have specifics to present to attorneys and fiduciary advisers for a thorough review of the plans.
  He said he did not try to deceive anyone. "Absolutely not," he said. "It's not my job, not my purpose, not my style of what I do." The memo, which is briefly cited in a 2004 report the city commissioned on the pension problem, recounts a Feb. 26, 1996, exchange between Grissom, McGrory and Enerson.
  It mentions Rick Roeder, the pension's actuary, and Ed Ryan, the city's former auditor, who resigned in January 2004, days before the city revealed errors and omissions in bond statements. Filled with pension jargon and often technical in language, the memo estimates the city would save $45 million over five years if it stabilized its contribution rates to the system.
  The plan also created a funding reserve to pay for employee perks such as a 13th pension check paid annually to retirees and insurance premium costs.
  The plan also would allow the city to take advantage of "tremendous earnings we are currently experiencing," an apparent reference to the surging stock market. In summary, Grissom wrote, "This is a good plan." Subsequent underfunding of the pension system, along with increases to employee benefits, have helped create an unfunded liability of at least $1.4 billion.
  The system is also saddled with at least $500 million in unfunded retiree health care costs. Losses on Wall Street also contributed to the deficit, but in 2002, two years after the stock market slump began, the City Council granted additional employee benefits and overrode a fail-safe in McGrory's plan. That clause would have required the city to make a balloon payment now estimated at $500 million if the pension fell below a funding threshold of 82.3 percent, a measure of assets compared to liabilities.
  Three years ago, the system was 89 percent funded. Now the figure has fallen to at least 65 percent, despite a $130 million payment from the city in the current fiscal year and a planned payment of $163 million next year.
  The pension crisis has prompted multiple investigations, including Aguirre's. He has so far released five reports accusing the City Council and others of mishandling city finances.
  District Attorney Bonnie Dumanis filed felony conflict-of-interest charges against five former and one current pension board members last month in connection with votes they made in 2002.
  The U.S. Attorney's Office and the FBI have launched probes about possible corruption linked to the pension, and the Securities and Exchange Commission is examining whether the city misled investors in bond offerings worth $2.3 billion, dating to 1996.
  The city also has not been able to complete audits of its last two years of financial statements, a development which has crippled its ability to enter the bond market and borrow at the favorable rates.

City manager accused of cover-up
San Diego Daily Transcript, October 3, 2005
San Diego City Attorney Michael Aguirre released documents Monday produced by two U.S. Grand Jury subpoenas, including a potentially damaging memo by City Manager Lamont Ewell regarding the city's pension crisis.
  Aguirre said the 2002 memo demonstrates an attempt by Ewell to cover up allegedly illegal acts. Aguirre stopped short of officially asking the city manager to resign.
 "I'm hoping that the council and the city manager will do what is responsible," Aguirre said. "At some point, the council members are going to be embarrassed into doing justice. Perhaps with this latest revelation, the tipping point will have been reached and we can move in another direction.
  "We will never make progress so long as we have the current person as our city manager. He is unable to make progress. We are now seeing a focusing in on his actions by the U.S. Attorney's office, by the grand jury, and I hope that we will see some remedial action taken."
 Ewell was out of town on a family emergency Monday and unable to respond to Aguirre's latest accusations.
 Ewell's Dec. 6, 2002, memo to then-Mayor Dick Murphy and City Council was in response to pension trustee Diann Shipione's opposition to increases proposed by the San Diego City Employees' Retirement System board. Aguirre said the memo contained at least 12 false statements.
 Aguirre suggested more indictments might be forthcoming as a result of the ongoing investigations by the U.S. Attorney's office and the Securities and Exchange Commission.
 "These people that have created the problem are proving every single day that they are ill equipped to be a part of the solution," Aguirre said. "And then when someone described the problem in detail to them, they came back and issued through the city manager a blatantly false document thinking they would never be held accountable."
 Ewell is being represented by the San Francisco law firm of Shartsis, Friese and Ginsburg. Grand Jury Subpoenas City Manager Documents
KFMB STATIONS: Local 8 | 100.7 JACK FM | 760 KFMB
OCTOBER 03, 2005 | SAN DIEGO, CA Last Updated: 5:37PM
 City Attorney Mike Aguirre says he cannot rule out criminal charges against City Manager Lamont Ewell. Aguirre released a federal grand jury subpoena Monday that demands documents related to Ewell's response to the pension crisis.
 The city attorney claims Ewell misled the public and the city council about details of the financial crisis back in 2002.
 Ewell is out of town on a family emergency, and did not respond to the accusations.

City's audit committee calls for new actuary
By KEVIN CHRISTENSEN, The Daily Transcript, June 7, 2005
  The audit committee of the city of San Diego suggested Tuesday that the actuary to the city's retirement system be replaced.
  Troy Dahlberg, a member of the audit committee, issued a letter to the board of the San Diego City Employees' Retirement System suggesting that "retention of a new actuary should be a priority for the board.
  "Rick Roeder, a partner with local firm Gabriel Roeder Smith, has served as the actuary for the system for more than a decade and has provided advice on the system's financial projections while the system's deficit increased to more than $1.37 billion."Our main concern stems from the belief that assumptions and professional judgment used by the actuary in the past raise substantial questions as to the soundness of future actuarial valuations," Dahlberg wrote.
  Dahlberg points out that Roeder on a number of occasions, most recently in the approval of the contentious Manager's Proposal I in 1996 and Manager's Proposal II agreements in 2002, expressed concerns over the agreements then accepted their implementation.
  "It appears that that actuary went against his own professional judgments," Dahlberg wrote.Larry Grissom, administrator for the retirement system, said the letter has been received and it will be distributed to the board at the next meeting.
  Neither Dahlberg nor Roeder were available for comment by press time.City Attorney Michael Aguirre said that the suggestion puts into serious question the validity of the salary ordinance currently before the San Diego City Council.
  The salary ordinance includes the four labor contracts recently approved by labor unions for three- and one-year contracts."It's a huge surprise because it knocks out the salary ordinance," Aguirre said. "There is no reliance on the meet and confer process that took place this year."
  Aguirre said the retirement board should hire a new independent auditor to complete a fresh calculation of the financial status of the pension system.
  "I hope to work in a cooperative way to move this through the crisis," Aguirre said.

Report finds legal violations in pension deal negotiations
By KEVIN CHRISTENSEN, The Daily Transcript, May 25, 2005
  A legal opinion released to the public Wednesday states that two agreements between the City Council and the city's retirement system board of administrators "arguably" violated state conflict of interest codes and two sets of city laws.The legal document was originally requested by the city to assist in an investigation into possible illegal acts and was kept under wraps under the attorney client privilege, which was waived in a late night Tuesday council meeting.
  Luce Forward Hamilton & Scripps provided the report to the city in February for $127,000.
  Specifically, Luce Forward examines legal issues surrounding two agreements between the council and retirement board -- called City Manager's I in 1996 and City Manager's II in 2002 -- where the city paid less than the system's actuary advised contribution to the pension and at the same time boosted retirement benefits.
  The report provides that "there is significant risk" that the city and
members of the SDCERS violated state conflict of laws and "arguably"
violated the city charter and municipal code when the bodies approved
underfunding the pension.Luce also concluded that paying benefits using the "waterfall" -- money earned from investments, such as interest received on bonds or cash dividends from stocks -- is not an actuarially approved method and "creates risk" that a court could find violates city codes.The report was released following a request by District Attorney Bonnie
Dumanis, who filed felony charges against one current and five former
members of the SDCERS.
  City Attorney Michael Aguirre said the report illustrates that the benefits that were created as part of the agreements are illegal."This is devastating for the City Council," Aguirre said. "The point is, the people of San Diego have to understand that the creation of the benefits in 1996 and 2002 were illegal and should be rescinded.
  "The benefits from the two agreements make up about 41 percent of the a pension deficit facing the city that is estimated at more than $1.37 billion, according to a city report released in September 2004.More concerning, Aguirre said, is the city was given the report in February and moved forward negotiating labor contracts with the city's five unions to pay for the benefits that are likely to be illegal.
  If the six board members charged by Dumanis are found to be guilty, the City Manager's II benefits could be repealed,  Aguirre said. However, if the new labor contracts are signed, that would, in effect, supply a funding source for the benefits and keep them on the books, Aguirre
said."To prevent that, I'm not going to sign those," he said.
  Bill Kay, lead labor negotiator for the city, said that if the defendants
are found guilty in Dumanis' case, the benefits could be rescinded, but the contracts would go directly back to negotiation. Aguirre said, however, in recent days that he and the City Council have had "communications" illustrating a willingness to challenge the increased
retirement benefits granted in two City Manager's agreements in court.
  "I already have the case written," Aguirre said.
  The Luce Forward report examines three legal facets of the agreements and depends largely on the work on Vinson and Elkins and depositions taken in a case filed against the retirement system.
  The report states that the city must fully fund the pension system to the
rate advised."[T]he retirement system established under the Charter [SDCERS] must be based on actuarial experience studies and valuations," the Luce Forward report said.
  The fact that the city voted not to fund to the full actuarial valued amount "arguably" violates the code.
  "The City did not contribute an amount that was specifically 'determined' by the SDCERS actuary based on the actuary's calculated rate," the Luce report said. "As a result, for fiscal years 1997 through 2004, the City contributed less to SDCERS than the City would have contributed if it applied the actuaries calculations.
  "The report also looks into possible violations of the State Government Code 1090, which states that elected or appointed public officials shall not be financially interested in any contract they make in their official capacity. If a conflict arises, they must recuse themselves or the conflict must be stated on the record.Luce Forward found that a conflict of interest violation may have occurred because the members of the retirement board did not disclose their financial benefits resulting from the agreement.
 The waterfall method of paying for certain retirement benefits potentially "violates the City Charter and Municipal Code because it creates a pension system that is not truly actuarially based, and further risk to the system is rendered," the report said.

Pension charges are just the beginning
By Lisa Briggs, Union Tribune, May 22, 2005
  The six current and former trustees of San Diego's underfunded retirement system and their attorneys appeared before Superior Court on Wednesday, one day after being charged with felony violations of the state's conflict-of-interest law.
 Yet another chapter in San Diego's fiscal crisis was written last week when District Attorney Bonnie Dumanis issued criminal charges for six current and former San Diego City Employees' Retirement System board members. The legal basis for these charges is California Government Code 1090 which prohibits certain actions by public employees/officials where there is a conflict of interest.
  So what is 1090 and why might it hold the key to resolving a portion of San Diego's pension crisis?
 Let's be clear: The individuals charged are innocent until proven guilty. While media coverage, city attorney reports and other documents now in the public view set the parameters of the case, proving a 1090 violation is not a simple matter. Also, while establishing that a 1090 violation exists would go a long way toward helping the city's fiscal mess, such a finding would not automatically cure all of San Diego's financial woes.
 These charges are the beginning of this story, not the end. 
 Government Code section 1090 states: "Members of the Legislature, state, county, district, judicial district, and city officers or employees shall not be financially interested in any contract made by them in their official capacity, or by any body or board of which they are members."
  In simple terms: if you are a public official/employee, you can't vote on a contract or deal that will grant you a financial benefit.
 There are exceptions, but on the whole, California courts have interpreted 1090 very broadly to include all but the most remote of financial interests. Where such a conflict is proven, Government Code 1092 states that any contract made in violation of Gov. Code 1090 "may be voided."
  The objective of these two statutes is not only to "void contracts which are actually obtained through fraud or dishonest conduct" but also to "remove or limit the possibility of any personal influence, either directly or indirectly, which might bear on an official's decision." (Finnegan v. Schrader (2001) 91 Cal.App.4th 572, 579-580.) Section 1090 is aimed at eliminating temptation. Section 1092 is aimed at curing the results of any violation.
  It is the symbiotic relationship of these two statutes that may offer some relief to San Diego's beleaguered pension system. If a 1090 violation can be proven, then the underlying contract – and the pension benefits it conferred – may be deemed "void." Thus, the financial obligations that these benefits currently impose on the retirement system would be eliminated.
  Before we can have that discussion, the district attorney must establish that there was a 1090 violation committed by any one of the six city employees who served on the San Diego City Employees' Retirement System boaard in 2002. The crux of the case is establishing a link between two events: 1) The SDCERS board agreeing to allow the city to underfund the pension and 2) the City Council granting enhanced retirement benefits.
  Certain facts are now well established. In the spring of 2002, the city negotiated labor agreements with three of the four unions representing city employees that contained enhanced retirement benefits. The benefits included an approximate 11 percent increase in the formula for calculating retirement benefits for general members. This increase was retroactive and resulted in general members receiving an approximately $150 million benefit.
 Two other retirement benefit enhancements also occurred. The cap that limited a retirement allowance to 90 percent of a member's highest one-year salary was waived for employees who began working for the city before age 24. Also, presidents of the city's recognized employee unions were permitted to have their salary earned from their respective unions included in their high one-year compensation. In addition, the pension board members requested that the city agree to indemnify them against liability, and the city agreed to do so.
  While the city was negotiating these benefits with the unions, city management also asked the SDCERS board to accept a "contribution deferral agreement" with the city. This agreement would allow the city to pay less than was actuarially required into the pension fund as well as avoid a balloon payment which was required under a previous contribution deferral agreement known as Manager's I. This 2002 underfunding request was referred to as "Manager's II" and was approved by the SDCERS board in the summer of 2002. On Nov. 18, 2002 – after the SDCERS board approved Manager's II – the City Council approved both Manager's II and the labor agreements with the pension benefit increases.
  The six individuals charged last week were on the SDCERS board in 2002 and voted in favor of allowing the city to underfund the pension. All are city employees who saw their pension benefits increase when the council approved the underfunding deal and salary ordinance in November 2002. In addition, one of those members was, and is, a union president. Another individual began working for the city before the age of 24.
 There is nothing unusual about employees serving on a pension board. In that role, it is appropriate and expected that those employees will make decisions that impact the pension fund, up to and including deciding what level of funding to demand from the fund sponsor – in this case, the city of San Diego. A 1090 danger arises when those decisions are linked to contracts or agreements that benefit the pension board members.
  In the case at hand, in order to establish a 1090 violation, the evidence must show that the city's adoption of the enhanced retirement benefits was contingent upon the board of SDCERS entering into an underfunding agreement with the city. The 2002 SDCERS board was within its rights to vote on the level of funding that the city was to contribute to the pension fund. (That the board agreed to underfunding is, arguably, a violation of the board members' fiduciary duty – but that's another story.) According to District Attorney Dumanis and others, the 1090 violation occurred because the city made enhanced retirement benefits contingent upon the SDCERS board's agreement to Managers II. This meant that six trustees had a substantial and direct financial interest in the contract entered into by the board.
  This action was extraordinary because retirement board members are authorized only to administer the pension trust fund – to collect contributions from employees and employers, invest the contributions prudently, pay pension benefits to those entitled to receive them, and defray the reasonable expenses of performing those administrative tasks. They have no responsibility to make decisions or contracts affecting the level of retirement benefits. Such decisions should be made solely by elected members of the City Council.
  This interpretation of the facts is not new nor is the district attorney the first to make these assertions. The current city attorney has put forward a series of reports that detail his theory that the 2002 benefits are tainted and should be eliminated. In January of this year, the board of the San Diego County Taxpayers Association filed a civil action alleging this same 1090 violation and requested that the court declare the 2002 benefits void. The association later withdrew that suit without prejudice at the request of the City Attorney's Office in order to allow the city to focus on release of certified 2003 accounting records. The board of the Taxpayers Association believed then and still contends that a 1090 violation occurred in 2002.
  With the charges filed by the DA's office, it will now be up to the court to determine whether these assessments of the facts are accurate and establish that approval of the benefit enhancements in the labor agreements were contingent upon the trustees of SDCERS approving the underfunding in Managers II. If that 1090 case is made, then San Diego can begin to ask the follow-up question of whether the benefits that flowed from a tainted process will stand. Despite the opinions and desires of various interests, the answer to that question also will be in the hands of the court. — Briggs is the president and CEO of the San Diego County Taxpayers Association. SDCTA is a nonprofit, nonpartisan organization that promotes cost-effective and efficient government and opposes unnecessary new taxes.

Trio linked to pension resign
San Diego Daily Transcript, May 16, 2005
 Three city employees whose names consistently popped up in reports to the City Council regarding alleged violations of federal disclosure laws have resigned from their posts at the city, according to a memo from City Manager Lamont Ewell.
 These employees include Patricia Frazier, former financial management director; Mary Vattimo, former treasurer and trustee of the San Diego City Employee Retirement System; and Cathy Lexin, former human resources director and also a former trustee of the retirement system. City Attorney Michael Aguirre said the resignations steps are in the right direction.
 "This is the beginning of the cleaning up of our financial reporting and
internal control system," Aguirre said. "That process is now gaining
momentum and setting the stage for a new day in which we will re-establish our financial standing with the credit agencies and the financial markets."
 The city has not completed it's overdue 2003 financial audit by accounting firm KPMG, and is currently under investigation by the SEC and the U.S. Attorney's Office.

Michael Aguirre and his approach to his office
Letters to the editor, Union Tribune, May 22, 2005:
Regarding "Aguirre's rattling of City Hall extends to members of his office"
Regarding "Aguirre's rattling of City Hall extends to members of his office" (News, May 14): In the past, the City Attorney's Office won awards more for its comfortable work environment than for its bottom line performance. Its willingness to throw the book at petty criminals while standing aside as special interests raided public assets finally caused citizens to act. Into this country club atmosphere came Mike Aguirre, raising standards and demanding an elite special forces style commitment toward the defense of public good. With such a change, it is natural to see people leave. After all, not everyone is ready or willing for such a commitment. Just ask a Navy SEAL or Marine drill instructor, who must be curious about your treatment of a kindred warrior, Michael Aguirre. — JOHN McNAB, SD, Letters to the editor, UT, May 22, 2005

I am one of the new deputy city attorneys hired by Mike Aguirre. I asked him to hire me because I care about San Diego and because I wanted to be part of the solution that I knew he would strive to accomplish. Bottom line, the deputy city attorneys working for Aguirre are hard- working, talented men and women who have set aside any differences they have with him because their desks are piled too high with work for them to concern themselves with office politics and the personnel matters of a few individuals and because they understand and appreciate his dedication to their clients, the people of San Diego. Yes, there was uncertainty and unrest at first. Yes, Aguirre does not have the tact of Sen. Dede Alpert or the humility of Mother Teresa. But he is respected. Aguirre told me, "Follow your moral compass. When in doubt, let your moral integrity guide you to do the right thing." Aguirre works to achieve the best for the people of San Diego. That is the kind of public servant for whom I want to work. —KAREN HEUMANN, Deputy city attorney, SD, Letters to the editor, Union Tribune, May 22, 2005

Regarding "Aguirre: Leader or bully?" by Robert J. Caldwell (Insight, May 15): The City Attorney's Office would not be in such tumult were it not in need of radical change after years of decay. Yes, some people will have to go. The same should be happening at the city and pension board, but is not, because this reform stuff is hard. To Mike Aguirre, don't get too concerned about the hurt feelings of your colleagues in the office. I had colleagues on the pension board who whined to the press while plotting diabolically to protect their own interests. Reform is a tough job. Neville Chamberlain and Winston Churchill were both British prime ministers. One was nice and got along with his colleagues. The other fought World War II and saved England. Which type do you want here? DIANN SHIPIONE La Jolla  SD,

Letters to the editor, Union Tribune, May 22, 2005As a friend and fan of City Attorney Michael Aguirre, I take exception to the negative tone of Caldwell's column. In particular, I am disturbed by the headline, which implies that he gave equal time to an examination of Aguirre's considerable leadership abilities. I have spent most of my 20-year career as a public sector attorney and have never worked at a job that I have enjoyed more or have been prouder of doing. These feelings I attribute to the inspirational leadership of Aguirre. Although both before and after he hired me as a deputy city attorney, we have at times disagreed about the way in which he has handled some matters and responded to some colleagues, I have never doubted his sincerity, honesty or affection for the people who work for him and the city for which he works. Admittedly, at times the staff experiences tension and anxiety. However, these reactions are not surprising given the changes that Aguirre is bringing to the office. In the recent past the city attorney has not accepted the proactive role in government that the city charter contemplates. The quality and scope of the work that the staff is now producing reflect Aguirre's desire to fully realize the extent to which the independently elected city attorney can be a constructive force in San Diego. His demands on staff for excellence and hard work – standards to which he holds himself – can understandably cause stress. However, this stress is tempered by his quickness to praise and to laugh. He has an open door policy for all employees and strives to achieve equality in the workplace. Based on my daily experiences, I believe that my colleagues are beginning to accept Aguirre's vigorous, hands-on and somewhat flamboyant management style, which is quite different from that of his predecessor. With certainty, I can tell you that Aguirre recognizes that his employees are highly competent professionals, dedicated to ensuring that the public receives the best possible service. I respect Aguirre's intelligence and the energy with which he approaches his job, but most of all I respect his desire to do what is best for his, and my, hometown. Because of his love for San Diego and its people, I am able to forgive the sometimes rough edges of his personality. I hope that others can join me in doing so.
MARILYN RILEY, SD, Letters to the editor, Union Tribune, May 22, 2005

Aguirre: Stop paying legal fees
San Diego Daily Transcript, May 19, 2005
 City Attorney Michael Aguirre on Thursday asked the board of administrators of the City Employees Retirement System to stop payment on legal fees for board members charged with criminal violations.
  District Attorney Bonnie Dumanis filed charges against five former and one current trustees of the retirement system. The defendants -- Ronald Saathoff, John Torres, Sharon Wilkinson, Cathy Lexin, Mary Vattimo and Teresa Webster -- have been charged with three felony counts of violating the state's conflict of interest laws. "A public entity such as  SDCERS is not required to pay for criminal defense counsel for board members charged with criminal violations of law," Aguirre wrote in a May 19 letter. Aguirre urged the retirement board to docket the item at its next meeting.

Aguirre Alleges Murphy, Several Council Members Committed Securities Fraud, Allegations stem from inaccurate bond disclosures approved by the council
By ANDREW DONOHUE, Voice Political Writer, 2/10/5
City Attorney Mike Aguirre traced the roots of the City of San Diego's Wall Street deceit all the way up to its highest branches Tuesday, accusing Mayor Dick Murphy and several former and current City Council members of civil securities fraud for allegedly failing to articulate the true depth of the city's financial problems in disclosures to prospective investors.
By authorizing bond offerings that contained information they allegedly knew to be false concerning the true status of the city's troubled pension plan and its effect on city finances, Murphy and the council members failed to take "steps to prevent the dissemination of materially false or misleading information" to the bond market, according to the 118-page report released late in the evening.
Aguirre, a securities fraud litigator by trade, didn't speak to reporters after the release of the report, titled "Interim Report No. 2 Regarding Possible Abuse, Illegal Acts or Fraud by City of San Diego Officials."
"Mr. Aguirre's allegations are untrue, irresponsible and defamatory… The City Council and I properly relied on the advice of the securities law experts," said Mayor Dick Murphy at a news conference. Murphy spoke from a prepared draft and didn't take questions from reporters.
The report uses documents collected largely during the last two weeks since the mayor and City Council waived their attorney-client privilege, upon the City Attorney Office's advice, in order to aid ongoing investigations by the Securities and Exchange Commission into errors and omissions in city bond disclosures and a Justice Department investigation into possible public corruption.
The documents show that Murphy and the council were made aware by city staff of the growing fiscal worries surrounding the pension plan as early as March 2002.
The report focuses on the now-controversial November 2002 action by City Council in which employee unions were offered a handsome set of benefits as long as the San Diego City Employees' Retirement System board, populated largely by union representatives and city staff, allowed the city to forgo a required $159 million payment into the troubled system. The move essentially exasperated the pension's growing deficit, adding more debt to the system while paying less than was advised. The pension plan's deficit was most recently measured at $1.37 billion.
The report then lists seven bond disclosures approved by the council between April 2002 and June 2003 in which they "failed to take reasonable steps to ensure proper disclosure." The disclosures, according to the report and an earlier investigation commissioned by the city, contained out-dated and sunnier pension details.
Because the mayor and council members were aware of the problems, the report alleges, they were ultimately responsible for insuring the authenticity of all bond documents. The disclosures are prepared by the City Auditor's Office.
Specifically, Aguirre finds Murphy and City Councilman Scott Peters especially at fault because of their economics and law degrees. He lists Council members Brian Maienschein, Jim Madaffer, Ralph Inzunza and Toni Atkins as involved in the fraud, as well as former Councilmen Byron Wear and George Stevens.
Absolved of guilt in the report are Councilman Tony Young because he took office in January, Councilman Michael Zucchet because he took office late in 2002 and Councilwoman Donna Frye because she voted against the benefit increase and the bond release to complete Petco Park.
As would be expected, the rebukes to Aguirre's accusations were strong. However, few, if any, council members were made available for questions from the press. Many pointed out that Aguirre isn't the SEC and shouldn't be interfering with its ongoing investigation.
"The bond offering documents were each hundreds of pages long and filled with thousands of pieces of information," Peters said in a press release. "We properly sought out and relied on experts."
Madaffer said in a press release that it was imperative for the city attorney and the council to work together to cooperate with investigators and KPMG. The firm is handling the city's delayed 2003 and 2004 fiscal year audits, which have been postponed because of the disclosure problems and ongoing investigations.
"Mr. Aguirre would better serve the people of San Diego by leaving investigations to the professionals - the SEC and the U.S. Attorney's Office - and concentrating on the clearly defined responsibilities of the office of the City Attorney," the statement said.
The report states that it was compiled to comply with KPMG requests that the city independently investigate the possibility of illegal acts by city officials through the bond disclosure process.
A report from the city's law firm, Vinson & Elkins, detailing how the pension and disclosure problems came about didn't satisfy KPMG, and the firm has since balked at releasing the overdue 2003 and 2004 audits. Finishing the audits is considered the first step in restoring the city's finances.
Civil securities fraud cannot alone result a prison sentence, however, such accusations can lead to criminal charges.
Please contact Andrew Donohue directly at andrew.donohue@voiceofsandiego.org with your thoughts, ideas, personal stories or tips.
Mike Aguirre issued a report yesterday, a copy of which is available on the City Attorney web site, reaching various conclusions regarding securities law issues.
Some people have suggested that the City Attorney has no business addressing federal legal issues. In the event that point bothers anyone, I think it worth noting that the State of California also has securities laws.
For those of you who might be interested, set out below are some of the provisions of the California Corporations Code that may be pertinent.
Corp. Code §25401. It is unlawful for any person to offer or sell a security in this state or buy or offer to buy a security in this state by means of any written or oral communication which includes an untrue statement of a material fact or omits to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.
Corp. Code §25402. It is unlawful for an issuer or any person who is an officer, director or controlling person of an issuer or any other person whose relationship to the issuer gives him access, directly or indirectly, to material information about the issuer not generally available to the public, to purchase or sell any security of the issuer in this state at a time when he knows material information about the issuer gained from such relationship which would significantly affect the market price of that security and which is not generally available to the public, and which he knows is not intended to be so available, unless he has reason to believe that the person selling to or buying from him is also in possession of the information.
Corp. Code §25403. (a) Every person who with knowledge directly or indirectly controls and induces any person to violate any provision of this division or any rule or order thereunder shall be deemed to be in violation of that provision, rule, or order to the same extent as the controlled and induced person.
(b) Any person that knowingly provides substantial assistance to another person in violation of any provision of this division or any rule or order thereunder shall be deemed to be in violation of that provision, rule, or order to the same extent as the person to whom the assistance was provided.
(c) It shall be unlawful for any person directly or indirectly to do any act or thing which would be unlawful for that person to do under any provision of this division or any rule or order thereunder through or by any other person.
(d) Nothing in this section shall be construed to limit the power of the state to punish any person for any conduct which constitutes a crime under any other statute.
Corp. Code §25540. (a) Except as provided for in subdivision (b), any person who willfully violates any provision of this division, or who willfully violates any rule or order under this division, shall upon conviction be fined not more than one million dollars ($1,000,000), or imprisoned in the state prison, or in a county jail for not more than one year, or be punished by both that fine and imprisonment; but no person may be imprisoned for the violation of any rule or order if he or she proves that he or she had no knowledge of the rule or order.
(b) Any person who willfully violates Section 25400, 25401, or 25402, or who willfully violates any rule or order under this division adopted pursuant to those provisions, shall upon conviction be fined not more than ten million dollars ($10,000,000), or imprisoned in the state prison for two, three, or five years, or be punished by both that fine and imprisonment.
(c) Any issuer, as defined in Section 2 of the Sarbanes-Oxley Act of 2002 (Public Law 107-204), who willfully violates Section 25400, 25401, or 25402, or who willfully violates any rule or order under this division adopted pursuant to those provisions, shall upon conviction be fined not more than twenty-five million dollars ($25,000,000), or imprisoned in the state prison for two, three, or five years, or be punished by both that fine and imprisonment.

Shining the light elsewhere at City
HallRUBEN NAVARRETTE JR., UNION-TRIBUNE, April 20, 2005
The city's pension scandal is a confusing mess, and I'm not sure I understand it all. And so I guess I should be thankful that San Diego City Manager Lamont Ewell recently took the time to meet with the Union-Tribune Editorial Board and break it down. It turns out the debacle is not as complicated as I thought. It amounts to five simple words: It's all Mike Aguirre's fault.
In a two-hour meeting, the city manager blasted the city attorney's remarks, temperament, professionalism and leadership style no less than 20 times. That's once every 6 minutes. Aguirre-bashing isn't new.
This week, Mayor Dick Murphy even seemed to blame Aguirre for Murphy being named one of the three worst mayors in the country by Time magazine. To hear Murphy explain it, there are San Diegans with contacts in New York (read: Aguirre) who'd like to see him embarrassed. Dear Mr. Mayor, here's a tip. If you're tired of being embarrassed, stop embarrassing yourself. Ewell blamed Aguirre for delays in finishing San Diego's financial audit for 2003, which now may not be released until next year. He blamed Aguirre for creating "false impressions" that city officials are guilty of wrongdoing, allegations which have to be investigated by the auditors. He blamed Aguirre for "undermining" the city's efforts to get beyond the scandal with hyperbole and accusations. And he blamed Aguirre for running to the press with "tantalizing" tidbits of incomplete information.
That didn't leave much time for Ewell to take on the real issues, chiefly: How did the San Diego City Employees Retirement System wind up with a deficit of at least $1.4 billion? Is it the result of sheer incompetence, or a shameful quid pro quo between city officials and municipal employees unions? And, most importantly, how do San Diegans get out of this ditch?
Ewell said that he has tried to work with Aguirre to come up with solutions, but that he has not gotten very far. And whose fault is that? Who do you think? "There doesn't seem to be this holistic, comprehensive approach to problem solving," he said of Aguirre. But there is, according to Ewell, a thirst for the limelight. The way the city manager sees it – along with the mayor and the City Council – the most dangerous place to be in San Diego is between Mike Aguirre and a television camera. I don't buy it. For one thing, Aguirre's harshest critics tend to be politicians and other public officials.
This is not a species that is adverse to press attention, especially when it's favorable.
They know how to get out their side of the story. Like asking to meet with editorial boards. That's what Ewell did. And once he sat down with editors and reporters, one of the first things he did was criticize Aguirre for calling press conferences. Apparently – and, even as a journalist, I didn't know this – there is a big difference between calling press conferences and calling an editorial board meeting.
Besides being hypocritical, Ewell was evasive. He had this tendency – whenever he had trouble with a question – to try to steer the conversation back toward Mike Aguirre. That was sneaky. Ewell knows that Aguirre has a penchant for loose talk and tantrums, and Ewell seemed to be trying to use this fact as a smoke screen to cloud what may have been his own role in mismanaging the city's financial future. After hearing Ewell go on and on about Aguirre, it was easy to forget your question – or to forget to ask a follow-up about why he hadn't answered it.
One question that Ewell seemed to have trouble answering in any half-believable way had to do with the shredding of documents by someone in his office last December. That was in the middle of a slew of federal investigations.
It was also around the same time that Aguirre took office.
Just a coincidence, Ewell would have us believe. What we should be worried about, he insisted, is the way that Mike Aguirre approaches every aspect of his investigation with "his grassy-knoll, everyone-in-the world-is-corrupt theory."
There's that name again. For the record, I don't think everyone in the world is corrupt. I don't even think everyone in San Diego city government is corrupt. But it should be pretty clear by now that Aguirre is a convenient foil for those who would prefer that these matters be sorted out just where they have always been sorted out, and where the deals involving the pension system were cut in the first place: behind closed doors.

'IT'S A BOMBSHELL', Ignored memo warns of pension danger—and Mayor Murphy knew
by Daniel Strumpf, City Beat, 2/2/05 Excerpt: Just 14 days after Mayor Dick Murphy’s 2002 Blue Ribbon Committee on Finances presented its final report on the city’s fiscal health to the City Council, a fax machine in the mayor’s office spit out a memo expressing one committee member’s “growing and daunting concern that we possibly did our city a disservice by not ringing a very loud bell.”
The memo, written by shipbuilding executive Richard Vortmann, was itself a call, one that Murphy’s staff ignored.

Council moves takes steps to complete finance audit
By KEVIN CHRISTENSEN, The Daily Transcript, March 8, 2005
The San Diego City Council approved a series of resolutions Tuesday in hopes of expediting the completion a long-awaited 2003 financial audit.
The council unanimously approved naming a recently hired team of accountants as the city's Audit Committee, responsible for analyzing information to shepherd the completion of the city's 2003 financial audit.
The council also approved signing a "letter of cooperation" between city officials that would direct all future complaints and allegations to the committee.
The council approved the measure 7-1, with Councilwoman Donna Frye opposing and Councilman Tony Young absent.
City Attorney Michael Aguirre also said he would not sign the letter.
The city and accountant KPMG are working to pass its 2003 financial audit. The city is also currently under a civil investigation by the U.S. Securities and Exchange Commission and a criminal query by the U.S. Attorney General into financial disclosure practices.
Lynn Turner, a former accountant for the SEC and new head of the Audit Committee, said in recent meetings KPMG and federal investigators have conveyed concern over the disclosure of documents and contentious relationships in the city. Specifically, the agencies noted the problems are having "a negative impact" on the investigation.
Officials of the SEC and KPMG met with City Manager Lamont Ewell, Aguirre, Mayor Dick Murphy and council members Scott Peters and Toni Atkins last week.
Approving the two resolutions would "send a very clear message to KPMG and two very important law enforcement agencies that we can put a process of cooperation in place that would allow us to have a successful completion to a very full and thorough investigation of the entire matter," Turner said.
The new Audit Committee includes Turner; Arthur Levitt, former chairman of the SEC; and Troy Dahlberg, formerly a partner in charge of the global investigations and dispute advisory practice for Ernst & Young LLP.
Concerning the second resolution, Frye and Aguirre voiced concern over potential impacts on their first amendment rights to speak out at public meetings.
The letter states that "the appropriate means of making any accusation of illegal conduct relating to the city's disclosure obligations, conduct of pension matters, or the city's financial condition is through the Audit Committee."
"The one area I think there is a potential problem," said Aguirre, "is the area of what I call managing the first amendment expressions of all of us. I think that is very restrictive."
Turner said KPMG and the SEC have expressed concerns over frequent allegations between city officials in the press. He asked that future allegations regarding city officials be reported to the Audit Committee.
KPMG and the SEC have expressed concern with inadequacy of document disclosures. Turner said investigators "do not believe that there has been satisfactory cooperation."
Frye said she would not sign or support a letter that potentially muzzles the ability to speak out.
"I do not feel comfortable in placing a semi-gag order on me," Frye said.
Councilman Brian Maienschein said he will sign the letter because, "It is my view that we need to put the best interest of the city in front of any selfish political interests."
The letter also sought a continuance on two lawsuits that have recently shared center stage in City Hall disputes.
The San Diego City Employees Retirement System filed a lawsuit against Aguirre and the city of San Diego arguing that the retirement system is legally a separate entity from the city, entitled to its own counsel and privacy privileges.
Also, the San Diego County Taxpayers Association has filed a lawsuit against the city seeking to repeal retirement benefits given as part of the now-infamous City Manager's II agreement made in 2002.

The pension mess, Excerpts from City Attorney Michael Aguirre's report
JOHN GASTALDO / Union-Tribune, February 20, 2005
During October 2004, KPMG requested that the City launch an independent investigation of potential illegal acts by City officials that led to the City's failure to discharge its financial disclosure obligations.
Thus, the Mayor's Blue Ribbon Committee Report on City of San Diego Finances contained a material false statement that the San Diego City Pension Plan's
funding ratio was 97% when in fact it was 89.9% funded as of 30 June 2001. The report also failed to disclose that by 11 October 2001 the audit staff of the City had determined that the investment portfolio of the City's pension plan had dropped significantly. Finally, the possible triggering of the City's duty to make a sizeable balloon payment to the plan was not mentioned.
This failure...raises serious questions of misconduct by City officials.
On 11 October 2001, Assistant City Auditor Terri Webster understood that the City of San Diego faced a probable pension funding crisis.
By 11 October 2001, Assistant City Auditor Webster had learned of a significant drop in the pension fund earnings for the first two months of fiscal year 2002. She knew that during July and August 2001, pension plan earnings had dropped 71% from the same period (in) fiscal year 2001. Because the losses pushed the City toward having to make balloon payments of several hundred million dollars, this development was ominous.
"EEEK"
An e-mail exchange (between Webster) with City of San Diego Human Resources Director Cathy Lexin entitled "EEEK"..."a 71% drop! BEFORE 9-11-01! It will be tight even to meet the base undistributed earnings distribution for FY '02" The pension plan's funding level fell from 97.3% as of 30 June 2000; to 89.9% as of 30 June 2001.4 In fiscal year 2002 it fell to 77.3% , in fiscal year 2003 to 67.2%, and in fiscal year 2004 to 65.8%.
...the City faced the prospect of having to contribute $159 million to the pension plan in order to restore its funding level to 82.3%. Clearly the growing problem with the pension plan's funding ratio created a financial crisis for the City.
The descending funding ratio would have required the City to pay the $159 million in 2004 and another $371 million in 2005.
This 1996 agreement violated the Charter provision requiring the City to fully fund the pension plan. The plan's fiduciary counsel permitted the 1996 agreement, which provided for the City to underfund its pension, only on the proviso that if the funding ratio fell below 82.3%, the City would pay the amount needed to restore the funding level to 82.3%
The Council, Mayor, City Auditors Ed Ryan and Terri Webster, City Treasurer Mary Vattimo, pension plan administrator Lawrence Grissom, pension plan board member and Blue Ribbon Committee member Richard Vortmann, pension board Chairman Fred Pierce, and other City and pension officials watched with consternation as the pension plan's financial condition deteriorated throughout fiscal year 2002. Together these officials decided not only to keep the people of San Diego in the dark about the situation, but also to withhold the adverse financial facts from investors in the City's bonds.
One month later, on 12 February 2002, Terri Webster wrote Auditor Ed Ryan about the full gravity of the financial disaster enveloping the pension plan. As documented in the most recent actuarial report, there was a swing of $486 million against the City.
On 28 February 2002, in light of the further slide of the funding ratio, auditors Ed Ryan and Terri Webster had a discussion with City officials involved in the employment negotiations with the unions representing City workers. The topic of this discussion was the need to include the effect of the trigger on the meet-and-confer labor negotiations.
"A fiscal time bomb"
On 26 April 2002, auditor Webster admonished Human Resources Coordinator Cathy Lexin not to discuss the funded ratio until they both could get their stories straight.
When City officials learned of the impending trigger and multi-million dollar balloon payments, they developed a plan to negate the trigger and avoid the payments. To induce the pension board to take these actions, the City extended new benefits to both City workers and to three union presidents. Thus City officials intended to increase benefits even though the pension plan was unable to pay for hundreds of millions of dollars in benefits already granted.
Richard Vortmann, President of National Steel and Shipbuilding Company (NASSCO), was assigned to be the committee's lead person on the Unfunded Pension Liability issue.
Mr. Vortmann faced substantial pressure not to reveal the whole truth about the pension funding crisis.
On 12 February 2002, Mr. Vortmann was notified that the pension plan funding ratio had dropped from 97.3% to 89.9%. Fifteen days later, on 27 February 2002, he presented the City Council Rules Committee with the Blue Ribbon Committee's report, which misrepresented the pension plan's funding ratio to be at 97.3%.
Despite the fact that the Committee Report was partially revised on 14 February 2002, it was not changed to show that the plan's funding ratio had dropped to 89%.
When the report was presented to the Rules Committee, Mayor Murphy made comments revealing his personal knowledge of some of the pension funding issues.
In the days following the report's release, Mr. Grissom joked with Ms. Webster about telling a San Diego Union-Tribune reporter that the City was failing to properly fund the pension plan: Lawrence Grissom 3/07/02 (4:58 PM):
"Hi Terri. Just got a call from Ray Huard at the Tribune wanting comment on the Report's statement that the City is seriously funding [sic] its retirement plan. I told him that I had not had the opportunity to read the report and would like to before I made any comment.
"Think [sic] I'll tell him that we are seriously underfunded due to the City not paying it's fair share..........OK with you???
"Seriously, is there any 'party line' for me to communicate?"
The pension problem reported on by the Blue Ribbon Committee was shuffled from one part of City government to another. On 27 February 2002, the report went to the Rules Committee. From there it was sent to the City Manager. On 20 March 2002, the City Manager returned the report to the Rules Committee. The Rules Committee then sent the Report to the City Council. The Council passed it on to the Pension Board. A year later the board brought it back to the Rules Committee. The Rules Committee then sent it to the City Manager. The Manager returned it to the Mayor. Then the Mayor gave the report to the Pension Reform Committee. And finally it was returned to the City Council. Mayor Murphy attributed his failure to take on the pension problem in 2002 to a desire not to violate "protocol."
Unlike deferred maintenance, these are mandatory costs which ultimately must be paid; and these amounts explicitly grow with interest when they are deferred.
I have a growing and daunting concern that we possibly did our City a disservice by not ringing a very loud bell that:
1) the City's fiscal health is not what it appears,
2) there are serious problems,
3) their solutions will be painful in terms of reduced services and/or increased taxes and fees, and
4) a comprehensive multi-year strategic plan to deal with the situation must immediately be developed; difficult decisions must be made now.
Was this letter shared with Mayor Murphy? Mr. Vortmann has declined a request from the City Attorney to be interviewed about this matter. Mr. Gibson, Mayor Murphy's Senior Policy Adviser, who received a copy of the letter, has also refused the City Attorney's request for an interview.
The Mayor was quoted in The San Diego Union-Tribune as stating that Mr. Gibson had not shared Mr. Vortmann's 29 April 2002 letter with him.
The report for the 29 April 2002 Closed Session Council meeting shows votes were taken on ten meet-and-confer issues. On nine (9) of the issues the vote was nine in favor none opposed. On the issue of retroactively awarding 2.5% and allowing retirement at age 55, Council District 6 (Ms. Frye) voted in the negative.
The "Presidential Leave and Retirement Benefits" refers to a proposal approved by the City Council in 2002 that gave certain special benefits to the Presidents of the Firefighters Union and the Municipal Employees Association (MEA@).
For fourteen (14) years Judie Italiano, president of the Municipal Employees Association, has been making contributions to the retirement system based upon her MEA salary. Her payments to and participation in the City employee pension plan have been found to be unlawful under federal tax laws. MEA, Ms. Italiano's union employer, is not a San Diego City Employees' Retirement System employer. Therefore, the pension plan should not have accepted the MEA as a plan participant. This decision threatens the tax-exempt status of the San Diego City Employees' Retirement System.
Rather than putting a stop to the illegal practice of accepting payments from non-plan participants during the 2002 meet and confer process, the Council was asked to extend the scheme to Ron Saathoff, president of the Firefighters Union.
Although at the 29 April 2002 closed door session the Management Team appears to have recommended against allowing Firefighter Union president Ron Saathoff to include his union income in his City retirement benefit, the Manager changed his position and eventually recommended in favor of Mr. Saathoff. The revised position of the Management Team is described in the 13 June 2002 memorandum from Human Resources Director Cathy Lexin to the Mayor and City Council.
It appears that at the 29 April 2002 Closed Session meeting the Council unanimously approved the proposed retirement benefit that would allow the POA President to include his Union salary in City retirement calculation. Minutes of the 30 April 2002 Closed Session meeting of the City Council shows that the presidential leave proposal was approved for the MEA and POA presidents on a nine in favor, zero opposed vote: "Presidential leave MEA & POA only Mgr. Recommendation – base retirement on high 1 year union salary. 9-0-0." The same minutes show that the presidential retirement issue for Firefighter president Ron Saathoff was trailed one week: "145-Trail 1 wk."
The City Council's proposal to wipe out the trigger and balloon payment protection for plan beneficiaries ran into difficulties at the pension board because the board's outside counsel balked at passing on the proposed arrangement.
The SDCERS outside fiduciary counsel was not going to approve the Mayor's and Council's proposal to lower the trigger and eliminate the balloon payment:
"We had hoped the SDCERS Board would accept our proposal to lower the funding ratio floor to 75% with a commitment from the City to bring forward a long term solution within the next year. It does not appear that the fiduciary counsel will support this request."
Ms. Lexin urged the Mayor and Council to back the 1.00% per year increased funding proposal in order to avoid having to make the balloon payment:
"If we do not make this offer, it is likely that the SDCERS Board will not approve the proposal based upon a negative report from their fiduciary counsel. It is also a possibility that the funding ratio calculated for year ending FY02 will fall below 82.3% and trigger the full actuarial rate in FY04."
In no uncertain terms Ms. Lexin informed the Mayor and Council that the Meet and Confer benefits were a quid pro quo for a waiver of the trigger and balloon payment.
Mr. Vortmann also asked for a clear statement from the City officials about why they feel it is necessary to violate their previous '96 agreement. Mr. Vortmann next asked the obvious question: "What is so compelling to violate the '96 safeguard? Is not that why the safeguard was part of the '96 deal?" Mr. Vortmann then put his finger on the issue that the Mayor and Council were unwilling to face:
"The problem is very simply that the City does not want to pay currently for what they want to give the employees. They clearly are addicted to the give now, pay later or burden the future years's taxpayers' when they no longer have any say in the decision – i.e. the decision being locked down now, with the mandatory bill being paid later.
"Since the City is in essence asking the Board to be an 'enable' to the City in their 'addition,' the Board at least deserves to hear everybody enunciate the truth – not a bunch of smoke about tough economic times, the State is screwing us, etc."
This change was approved by a vote of nine (9) in favor, none opposed.
On 11 July 2002 the SDCERS Board approved the modified version described in Ms. Lexin's 8 July 2002 memorandum to the Council. The motion passed 9-2 with one abstention. Mr. Vortmann and Ms. Shipione had departed the meeting prior to the vote.
On 18 November 2002 the City Council approved the modification passed by SDCERS.
The Mayor and Council granted substantial benefit increases including general salary increases and an 11% per year increase in pensions for general members, and special retirement benefits for the incumbent presidents of the MEA, POA, and Firefighters' unions.
When the ordinance received its second reading on 18 November 2002, it was approved by an 8-1 vote, with Councilmember Frye voting against it. The Presidential Benefit was passed by Council Resolution Number 297212 that same day. When the ordinance received its second reading on 18 November 2002, it was approved by an 8-1 vote, with Councilmember Frye voting against it.
On 26 November 2003 Paul Maco, the City's outside legal counsel, informed auditor Terri Webster that an SEC enforcement action against the City of Miami found that disclosures like those included in the City of San Diego's financial statement footnotes could be the basis of a fraud violation.
In addition to failing to make these disclosures until the voluntary filing on 27 January 2004 the City misstated that its "corridor" funding method was "excellent" when in fact had a long-standing practice of reducing employer and employee contributions to its pension plan thus pushing the liability onto future generations of city employees and taxpayers. The City adopted prolonged amortization schedules and used creative accounting practices, such as adopting a method for computing the unfunded liability (the PUC method) that allowed the City under report the amounts due from the City to the pension plan.
In order to avoid the trigger and balloon payment, the Mayor and Council granted general and special benefits to pension board members to induce the board members to waive the trigger and allow the City to escape the balloon payments. Upon these premises, the San Diego City Attorney finds there is substantial evidence consistent with a finding that pension board members failed to hold the funds and assets of the City pension fund "for the exclusive purposes of providing benefits to participants in the pension or retirement system and their beneficiaries in violation of California State Constitution Article 16 & 17(a). These actions were not consistent with the duties imposed upon the City by the 23 July 1996 agreement. The City failed to live up to its commitment to keep the funded ratio at 82.3% and pension board members joined in that failure. With the City failing to contribute the funds needed to keep the pension plan funding ratio at 82.3% it plunged to 65% as of 2004.
By choosing to allow the plan's funding ratio to fall below the floor agreed to in Manager's Proposal I, the Board breached its fiduciary duty to the City and the plan participants to protect the fund's assets.
The City's duty to keep the plan at the 82.3% funding ratio which would required the City to contribute over $500 million to the pension plan was acknowledged by the plan's fiduciary counsel, board member Ron Saathoff, and the plan's actuary. The City Auditor and the plan's administrator misinformed the Council that the balloon payment was $25 million.
Investors were kept in the dark about the trigger and balloon payment to the pension plan.
The City should have disclosed that the payment of retiree health care benefits with pension funds, the allowing of non-participant union employers to participate in the plan, and the payment of special benefits to union presidents in exchange for their agreement to violate or aid in the violation of fiduciary obligations threatened the tax exempt status of the pension plan. The City should have informed investors that pension plan participants were granted the right to buy pension credits at deep discounts when there was no identified funding source. Investors also should have been told that the City had granted pension benefits retroactively without providing a funding source.
The Mayor and the City Council were reminded that the County Board of Supervisors in neighboring Orange County had been found to have violated federal securities laws in connection with bond offerings in 1996.
Conclusion
Based upon these premises, the San Diego City Attorney concludes that there is substantial evidence consistent with a finding that the Mayor and Council authorized the issuance of City bond offering and related disclosure documents, identified above, that the Mayor and City Council Members knew to be false, as set forth above.
recklessly disregarded facts indicating a risk that the disclosures might be misleading, as set forth above.
had knowledge of facts set forth herein that brought into question the City's ability to repay the bonds sold by the City of San Diego, identified above. The City Attorney of San Diego finds that under these circumstances there is substantial evidence supporting a finding that it was reckless for the Mayor and City Council, with regard to the bond offerings identified above, to approve the related disclosures to investors without taking steps to prevent the dissemination of materially false or misleading information regarding those bonds. In this matter, such steps should have included becoming familiar with the disclosure documents and questioning the City's officials, employees, or other agents about the disclosure of the material facts.
Upon these premises the San Diego City Attorney concludes that there is substantial evidence consistent with a finding that the Mayor and City Council engaged in civil violations of federal securities laws. There is no finding of any wrongdoing by Council Member Tony Young. He was not elected to represent the Fourth Council District until 4 January 2005 and therefore there is no evidence of his involvement in any of the alleged securities law violations.
There is no finding of any wrongdoing by Council Member Michael Zucchet. He did not take office until 2 December 2002. He was not a Council Member during the period of time in which the information about the trigger and balloon payment was provided to the Council. The remaining council members fall along a continuum...
Finally, it should be stressed that much of the evidence set forth in this report was made available to the investigation only because the Mayor and Council made the honorable decision to waive the confidentiality privileges held by the City. They did this knowing that it would put them at risk.
Aguirre is San Diego city attorney.

"Subpoenas issued for aide e-mail and letters
By Matthew T. Hall, Union Tribune, February 18, 2005
Ramping up a criminal investigation into possible public corruption in San Diego, a federal grand jury has subpoenaed a mayoral aide's e-mails and city correspondence with Wall Street's credit-rating agencies going back to 2000.
The subpoenas were issued Feb. 11, one week after news reports that mayoral aide Dennis Gibson, among others, received a memo in April 2002 warning of the city's fiscal condition. That memo came before votes by the City Council on San Diego's underfunded pension system made the fiscal situation worse.
Mayor Dick Murphy said this month that he didn't learn about the 2002 memo at the time and that he only recently read it. The memo was sent by Richard Vortmann, a pension board member who sat on a volunteer committee studying city finances.
Calls to the mayor's office were not returned yesterday.
City Attorney Michael Aguirre released the latest subpoenas in the criminal investigation yesterday after requests from several media outlets, including The San Diego Union-Tribune.
One subpoena seeks communications between the city and Moody's Investors Service, Fitch Ratings and Standard & Poor's Ratings Services related to the city's finances and its pension system since Jan. 1, 2000. Another seeks "e-mails to, from and otherwise concerning Dennis Gibson" over the same span.
Gibson has worked for the city for nearly 20 years and was appointed the city's ballpark administrator for Petco Park in late January by City Manager Lamont Ewell.
Before that, Gibson was a senior policy adviser to Murphy on ballpark construction, library system development and downtown redevelopment, among other issues. Gibson, who has a bachelor's degree in political science from San Diego State University, also was a business operations manager for the Water Department and a supervising analyst in the Financial Management Department.
He has been unavailable for comment for two weeks. His voice mail at City Hall has said for most of the month that he will be out of the office until Tuesday.
Aguirre raised questions about Gibson's whereabouts yesterday, one day after receiving some 50 boxes of documents from Deputy City Manager Patricia Frazier. She said they may fall under a federal subpoena issued in April.
Frazier said in a memo Tuesday to a city document custodian that she first read the subpoena from the Securities and Exchange Commission in January and found the documents while changing offices.
"Mr. Gibson disappears and 50 boxes show up out of nowhere," Aguirre said. "It just looks like there's a game of cat and mouse that's being played with the authorities. It's a very dangerous game that I'm hoping city officials will disengage from."
Ewell was unavailable for comment yesterday because he was testifying under oath before the SEC for a second day in Los Angeles.
In 2002, two weeks after giving the council a report on city finances, Vortmann second-guessed the report in a memo to eight colleagues on the Blue Ribbon Committee on City Finances and three city staff members, including Gibson. Vortmann wrote "we possibly did a disservice by not ringing a very loud bell that . . . the city's fiscal health is not what it appears" and that "painful" fixes will be "reduced services and/or increased taxes and fees."
Vortmann's memo surfaced this month because of internal and federal investigations into the city's worsening finances. The memo is receiving scrutiny because it was sent before the council voted to continue underfunding the pension system and to increase retirement benefits for city employees.
The $3.6 billion San Diego City Employees Retirement System now has a $1.37 billion deficit. In January 2004, city officials acknowledged that they did not disclose the depth of the ballooning deficit to investors in municipal bonds.
Soon after, the SEC began investigating the city's finances and allegations of securities fraud, and the U.S. Attorney's Office and the FBI launched a criminal investigation into possible public corruption.
Two annual audits of the city's books – for fiscal 2003 and 2004 – are now overdue, and San Diego's borrowing ability has been hampered, stalling capital construction such as fire stations and water and sewer projects.
Yesterday, Vortmann said he had no opinion on the latest federal subpoena.
"I don't pass judgment on what they do," Vortmann said.
Even though he expressed reservations after the 2002 report was issued, Vortmann said yesterday that it gave the city sufficient warning about looming problems with deferred maintenance and its pension system, among other things.
"I wish everybody had paid more attention to the blue ribbon committee report when it was issued," he said. "The report, as written, was ample warning to the city of San Diego if people had read

Experts: Former SEC exec hired to get city through political, legal impasse
By KEVIN CHRISTENSEN, The Daily Transcript, February 17, 2005
The city of San Diego's hiring of a reputable former executive at the U.S. Securities and Exchange Commission may be a last ditch effort to avoid a political melee caused by the pension fund board's refusal to waive certain legal privileges, according to actuarial experts.
Lynn Turner, partner for Kroll Inc. and former chief accountant for the SEC, was hired by the city to pore over investigative reports from Vinson & Elkins and another from City Attorney Michael Aguirre to help move the city beyond its current financial crisis, according to members of the City Council.
Actuarial experts, however, say the real reason for Turner's hiring is to assist the city avoid the political impasse with the San Diego City Employees Retirement System and still receive a "clean" 2003 Comprehensive Audit.
At issue is the reluctance of the pension board to waive its attorney-client privileged, which in itself is hindering completion of the city's long-overdue 2003 audit by accounting firm KPMG, according to Aguirre.
This is where Turner's role is imperative, according to Stephen Austin, a managing adviser for Swenson Advisors and former Pension Reform Committee member.
"This is an unusual case and you bring in someone like Lynn Turner for his credibility and his ability to negotiate with decision makers," Austin said. "He is a special case crisis person to bring on board."
Councilwoman Toni Atkins asked Turner during Monday's council meeting if the audit could be completed without the SDCERS waiver.
If the board does not waive privilege, Turner replied, the city would have to modify footnotes or disclosures in the audit. Such footnotes are typically frowned upon by rating agencies and Wall Street investors and could significantly change the face of the audit.
The city of San Diego is currently facing an estimated $1.37 billion deficit in the pension fund and another shortfall for retiree health care estimated to be between $600 million and $900 million.
The key issue is that the city of San Diego is ultimately responsible to pay those deficits if there is a default on the part of the retirement system, Austin said.
"The connection is that the liability of the pension is the liability of the city," Austin said. "That's why KPMG won't let go because they probably can't tell if they've got everything disclosed and quantified."
In Monday's City Council meeting, where $250,000 was allocated to pay Turner's $750 per hour fee, he said that he was hired to provide "cover" for KPMG.
This statement means different things to different people. For example, Turner could be tasked with working with the SEC on a way to release a "qualified" or "clean" audit without the waiver from the SDCERS board, according to Austin.
The issue of a "clean" audit is a red flag for many actuaries and provides important insight into why Turner may be in San Diego, said William Sheffler, consulting actuary for Sheffler Consulting Actuaries and member of the mayor's Pension Reform Committee.
A footnote in an audit that indicates that financial information was not disclosed by the municipality or company strikes at the authenticity or "cleanness" of the document.
More specifically, it could make the difference between a document that is "qualified" and one that is "unqualified." An unqualified audit basically says all the financial information requested was provided and represents an opinion equal to a clean bill of health.
A qualified audit basically asserts that information was collected and analyzed, but the information may not be completely accurate because all of the financial data requested was not disclosed.
"You don't want a qualified opinion because that means that the actuary has a reservation about the information that was provided for the audit," said Lisa Briggs, executive director for the San Diego County Taxpayers Association.
Amy Doppelt, managing director of Fitch Ratings, which dropped the city's credit rating Wednesday, said that a "qualified" opinion could lead to higher interest rates.
"It raises some questions and the impact on the rating would relate to the nature of the qualification," Doppelt said.
City Manager Lamont Ewell on Monday said that options to complete the audit are still available if SDCERS does not waive their privacy privileges.
City Attorney Aguirre has repeatedly called on Mayor Dick Murphy to require the SDCERS board of directors to waive the privilege or use the bully pulpit and call for their removal from the board.
Murphy has not issued a more forceful request.
The board of administrators is set to be replaced on April 1, according to voter approved Proposition H. Murphy, however, has given no indication whether he plans to reappoint the current members or choose new trustees.

San Diego's plunging credit, bond ratings jeopardizing construction projects
By THOR KAMBAN BIBERMAN, San Diego Daily Transcript Feb.17, 2005
Fitch Ratings has downgraded its ratings on more than $2.71 billion worth of San Diego's bonds and debt, and city projects ranging from sewer and water upgrades to a 46-acre park at the old Naval Training Center stand to be impacted.
The city hasn't issued bonds for new projects since December, and it could be a year or longer before the city is able to resume issuing bonds. In the meantime, there is a lot of work that's not getting done.
Moody's and Standard and Poor's have both checked in with reports expressing major concerns about San Diego's fiscal uncertainty. This week it was Fitch's turn.
The largest of Fitch's line items is the $1.1 billion in sewer revenue bonds that have been downgraded from "AA-" to "A".
Michael Scahill, Metropolitan Wastewater Department spokesman, said the city needs the funds for rehabilitating and replacing sewer lines, upgrading pump stations, expanding the purification system at the North City Reclamation Plant, upgrading the grit chambers at the Point Loma Wastewater Treatment Plant, and ongoing maintenance.
Shortly before Fitch announced its downgrade, Scott Tulloch, director of San Diego's Metropolitan Wastewater Department, gave a financial overview to the Metro JPA/Commission regarding the city's financial obligations on short-term financing as a result of its inability to issue bonds.
Tulloch identified how the delay of the city's 2003-04 audit report could affect existing loan repayments and could financially impact the participating agencies, which are represented by communities throughout the region.
The current goal of the city is to have a financial audit completed by June 2005. It typically takes six months to issue revenue bonds that would enable the Metropolitan Wastewater Department to pay back the short-term financing before the first principal payment is due in March 2006.
The city and the Metro JPA not only have to worry about the $1.1 billion in principal bonds, but have another planned issue of $734 million in subordinate sewer bonds not yet executed.
The city's water infrastructure has been crumbling for decades and could easily take upwards of $2 billion to fix. Much of that work may not happen for a while. Now the concern is not only getting bonding for future water projects, but getting reimbursed for projects that have already been completed.
The San Diego Facilities and Equipment Leasing Corp.'s $290 million in certificates of undivided interest series 1998 (secured by a senior lien on water enterprise revenues) have been lowered to "A" from "AA-", and $282 million in subordinate water revenue bonds issued by the authority have been lowered from "A+" to "A-".
In addition, the rating agency downgraded about $250 million in leased-backed debt to "A-" from "AA-". It also downgraded approximately $46 million in outstanding general obligation bonds to "A" from "AA".
"Fitch takes this rating action as a result of continued delays in the release of the city's fiscal 2003 audited financial statements, as well as ongoing political struggles that appear to hinder progress toward resolving the city's sizable financial challenges," the Fitch report states. "The ratings for San Diego remain on Rating Watch Negative to reflect continued uncertainty, centering on rising and sizable pension system contributions and their implications for the city's ability to achieve long-term budgetary balance. Also, Fitch views the city's current financial strains as exacerbated by the costs of ongoing federal and internal investigations, as well as these efforts' possible implications."
Fitch said the city remains with strong fundamentals. Even with all the problems, the city should still be able to pay its general fund, enterprise debt and lease obligations. The report did not say when the city might be able to begin offering bonds once more.
Richard Mendes, deputy city manager for public works, said that while the stoppage affects contractors who may have been banking on new work with the city, ongoing projects will proceed as planned.
In the near term, however, Mendes said the inability to issue bonds immediately affects 82 sewer projects worth a total of $252 million and 30 water projects worth about $80 million.
"These were all scheduled for award during this calendar year," Mendes said.
There were other downgrades for which Fitch did not attach amounts. These included a refunding for the San Diego Old Town light rail extension, Convention Center Expansion Authority Lease revenue bonds, Series 1998A, and fire and life safety work. In each case Fitch's rating was downgraded to "A-" from "AA-".
The previously mentioned projects are not the only ones that stand to be affected. A notable project is the proposed *46-acre waterfront park at Liberty Station (former Naval Training Center).
Corky McMillin Cos. wanted $15 million in bonds to be released several months early so the park could be started. The park could be completed by 2008 with the bonds, or 2012 without them in place.
*(Watchdog Alert: SD Council voted to let McMillin off the hook on his obligation to pay the cost of putting in the NTC Park, by voting for property tax assessment, that have now come back to bite the City because of the inability to issue bonds.)

Pension Strike Force Team Being Formed
San Diego Business Journal, Mike Allen , 1/24/2005
San Diego City Attorney Michael Aguirre vowed to solve the pension fund crisis by forming a pension strike force team within his department to go after those who are not abiding by the law.
Aguirre specifically aimed his sights at the City Employees Retirement System‚s board of directors, which has failed to hand over key documents sought by Aguirre and federal investigators concerning the under-funding of the city‚s pension plan.
“We are getting no cooperation from the San Diego CERS board,” Aguirre said. “It‚s a rogue board, and it is a runaway situation.”
Aguirre said he‚s made every effort to work cooperatively with the board to resolve problems, but has been ignored. “So now we are going to raise the bar,” he said, by taking legal action against those who oppose his requests for certain documents.
The retirement fund had a deficit of about $1.4 billion as of last year, and is at the core of a financial controversy that has resulted in two credit rating agencies downgrading the city‚s bond ratings, and another suspending ratings altogether.
It has also led to investigations by the U.S. attorney‚s office, the FBI and the Securities and Exchange Commission into the city‚s deliberate under-funding its pension fund, and allegations of a quid pro quo by employee unions that accepted the situation with an expectation that members would receive increased benefits.
Aguirre hired Donald McGrath, a former securities fraud attorney with some 35 years‚ experience, to lead a pension strike force team of attorneys and investigators.
“We’ll be taking action against the San Diego CERS board and any other party that does not respect and abide by the law so we can restore order to the pension plan and to the normal and regular business of the city,” he said.
McGrath, 63, is a retired partner of Baker & McKenzie‚s San Diego office and had extensive experience as a lead counsel in numerous federal and state securities actions, including the J. David Dominelli fraud case, according to his biography.
Aguirre called McGrath one of the most qualified and high-powered attorneys in his field, and someone he came to know and respect while he worked on the opposite side of some securities and other civil cases.

Feud Brewing At City Hall— City Manager, City Attorney At Odds
UPDATED: 3:29 pm PST January 20, 2005, SAN DIEGO -- There is a territorial battle under way at San Diego City Hall, 10News reported.
The city manager's office and the city attorney are going head-to-head over alleged censorship and an investigation into the city's debt-ridden pension fund.
Citing protocol, City Manager Lamont Ewell scrapped plans Thursday to broadcast live a public meeting by City Attorney Michael Aguirre on the pension system.
Ewell said he wanted to review what's said before it's aired on the city television station, Channel 24.
Meanwhile, Ewell also locked out employees from the city attorney's office from a monthly staff meeting in Balboa Park Thursday morning. One of those staff members, investigator Robert Abel, was turned back at the door.
10News investigative reporter Thom Jensen asked the city manager why the investigator was barred from the meeting.
"Remember, Mr. Abel is an investigator. He has been sent to a number of different departments to get documents and asked to surrender documents and do interogations, so it's a discomfort within the organization," Ewell told Jensen.
Ewell also said he shut the doors on city attorney employees because city workers are suspicious of Aguirre.
"We now have a situation where a number of departments of the city are wondering if they are clients of the city attorney or if they are potential targets," Ewell said.
Aguirre said he is not targeting anyone who has not broken any laws. He maintains it is his job to investigate any misdeeds no matter who it involves or what position they may have.
Aguirre's meeting is scheduled to begin at 5:30 p.m. in the Council Chamber at San Diego City Hall, 202 C St.
Sources at City Hall told 10News that Ewell is protecting Mayor Dick Murphy. They said the mayor has offered Ewell his chief of staff position now that John Kern is leaving the post in April.
Copyright 2004 by 10News.com. All rights reserved. This material may not be published, broadcast, rewritten or redistributed

Efforts to alert council of pension shortfall outlined in letters
By KEVIN CHRISTENSEN, The Daily Transcript, January 20, 2005
As City Attorney Mike Aguirre moves forward with his pension funding investigation, more questions arise around the role of pension administrators.
A number of newly released letters show that members of the San Diego City Employees' Retirement System board of administration were trying to alert the City Council of potential financial trouble on the horizon -- many of which were reportedly disregarded.
Richard Vortmann and other members of the SDCERS board blocked an attempt to proceed with a full system audit that may have illustrated the poor financial situation, according to letters Aguirre confirmed were public documents.
Vortmann was on Mayor Dick Murphy's Blue Ribbon Committee on Finances and the SDCERS board as a volunteer of both organizations, and receives no compensation from the city.
According to the letters, Pension Trustee Diann Shipione-Shea sent two letters on May 23, 2002 requesting a full and comprehensive audit of the system to identify funding shortfalls and other problems. One letter was sent to Pension President Frederick Pierce, IV, the other was sent to Mayor Murphy.
Neither Pierce nor Murphy responded directly to Shipione's letter.
The reply came from Vortmann, a new Murphy appointee to the SDCERS board in September 2001, chiding Shipione for not following proper protocol on the board and noting that he saw no need for an audit citing a lack of reasons. The reply was sent on May 29, 2002.
Vortmann wrote, "To understand your underlying interest in such an audit, I would need to see the explicit scope and purpose of such an audit."
Shipione replied to Vortmann's letter on June 7, 2002, writing, "An audit helps establish evidence of stewardship, it enables fiduciaries to compare their procedures with those of their peers, and may disclose procedural omissions or shortcomings that can help fiduciaries establish priorities."
That was the last written communication with Vortmann on the matter, Shipione said Wednesday.
Also on June 7, 2002, Dennis Gibson, Mayor Murphy's chief policy adviser, issued a letter to Pension President Pierce inquiring whether the SDCERS board would take action on Shipione's audit request.
Pierce replied to Gibson in a June 11, 2002 e-mail and said the board did not agree with Shipione and that no comprehensive audit would move forward, according to the documents.
Pierce also issued a letter to Mayor Murphy on June 20, 2002, saying the board would "conduct a thorough investigation" of Shipione's claim and said, "Mayor Murphy, I can assure you the Retirement System is operationally and financially sound."
Meanwhile, the funded ratio was declining closer to the "trigger" agreement the council made and the city was facing a balloon payment of as much as $500 million. A report released on Feb. 12, 2002 by the pension's actuary, Gabriel, Roeder, Smith and Co., showed that the pension was only funded at 89.9 percent.
The city in 1996 agreed to keep the funding of the pension above 82.3 percent, called the trigger. The council promised that if funding fell below that mark, a one-time lump sum payment would be made to bring funding back to the trigger level.
Later in June 2002, the SDCERS board began reviewing proposals from the city to lower the trigger number.
Shipione began writing letters, one sent to the SDCERS board on June 20, 2002, saying, "The proposal would change an already insufficient 82 percent to an even more inadequate 75 percent."
The board approved the changes in July 2002.
Set for a hearing before the full City Council, the pensions system's actuary, Gabriel, Smith, Roeder and Co., issued a letter to Retirement Administrator Larry Grissom on Nov. 5, 2002, warning of the dangers of approving the proposal.
"From a purely actuarial viewpoint, it would be best to hold the City to the existing Manager's Proposal and the 82.3 percent trigger," wrote Rick Roeder, the system's actuary.
The new trigger level and the increased benefits were passed by the council on an 8-to-1 vote on Nov. 18, 2002.
The city now faces an estimated $1.2 billion deficit in its pension, and is under investigation by the U.S. Securities and Exchange Commission and the U.S. Attorney General over its financial disclosure practices.
Vortmann and Pierce could not be reached for comment.

Aguirre wants U.S. Attorney to investigate committee member
By KEVIN CHRISTENSEN, The Daily Transcript, January 19, 2005
City Attorney Mike Aguirre on Wednesday continued blasting a member of the mayor's Blue Ribbon finance committee for not reacting to information about the mounting pension deficit warnings in 2002.
At a Wednesday afternoon press conference, Aguirre restated his frustration with Blue Ribbon Committee member Richard Vortmann for coming into possession of important financial information and not disclosing it.
"Mr. Vortmann has some explaining to do," Aguirre said. "I hope there is a full investigation."
Aguirre said the matter has been referred to the U.S. Attorney General's office for the possibility of an investigation.
Vortmann, the member of the committee responsible for the financial reporting on the pension, delivered a report to a City Council committee on Feb. 27, 2002, that the pension was 97 percent funded.
In fact, according to a report released by the San Diego City Employees' Retirement System actuary, Gabriel, Roeder, Smith & Co., on Feb. 12, 2002, the funded ratio had dropped to 89.9 percent.
In an interview Friday, Jan. 14, Vortmann said he hadn't seen the report.
Aguirre, however, released a letter earlier this week from Vortmann dated Feb. 18, 2002, where he discussed the contents of the actuarial report and warned that the city was dangerously approaching the trigger.
The city previously agreed to keep the funding of the pension at 82.3 percent, called the trigger. The council promised that if funding fell below that mark, a one-time lump sum payment would be made to bring funding back to the trigger level.
Aguirre said Vortmann may have lied to Paul Maco, an attorney of Vinson & Elkins, in an investigation into the city's disclosure practices and compromised the integrity of Maco's report.
The report states, "Given that the (Blue Ribbon) Committee had no information on the SDCERS funded ratio more current than June, 30, 2003, which, at 97 percent ... was the highest ever achieved by the System ..."
Vortmann said in a Monday interview that he did not report the new numbers because he included a warning that the funding status would significantly decline.
"What more do they want?" he asked Monday.
Vortmann was a volunteer member of the committee and also began serving on the SDCERS board of administrators in 2001.
Vortmann noted on Monday that the Blue Ribbon report was handed to the office of the mayor on Feb. 28, 2002, the day after the presentation to the City Council subcommittee, and from there it followed a path set by Mayor Dick Murphy.
The report, including the information about the 97 percent pension funded status, was also delivered to the full City Council on April 15, 2002.
Aguirre said he will investigate whether the city and mayor had any knowledge of the pension status.
When asked if he had any discussion with Mayor Murphy regarding the funding status, Vortmann said, "I don't recall talking to the mayor about that."
Responding to Vortmann's remark, Aguirre said Wednesday, "That's not good enough."
Aguirre reportedly pulled the Vortmann letter from one of 15 boxes that were seized last week from the office of acting City Auditor Terri Webster.
Coming straight to the press conference from a meeting with representatives of the U.S. Attorney, Aguirre said he had confirmed that the boxes had not been previously turned over.
He added that some of the documents in the boxes were separated in observance of the attorney-client privilege between attorneys and SDCERS.
The billed purpose of the press conference was to discuss talking points of a community meeting Aguirre plans to hold on Thursday at 5 p.m. in San Diego City Council Chambers. The meeting is open to the public.
Vortmann did not return a call to comment Wednesday.

Aguirre says pension ills weren't revealed, City attorney to probe whether Murphy kept quiet about problems
By Philip J. LaVelle, UNION-TRIBUNE, January 15, 2005
City Attorney Michael Aguirre defended his investigation at yesterday's news conference.
Hinting of a cover-up, City Attorney Michael Aguirre said yesterday that he is investigating whether Mayor Dick Murphy knew about the deteriorating state of San Diego's pension system three years ago but kept it quiet.
Aguirre, speaking at a downtown news conference, said a 2002 report by Murphy's Blue Ribbon Committee on City Finances failed to disclose deepening troubles with the $3.2 billion San Diego City Employees Retirement System, which today has a $1.2 billion deficit.
Aguirre's news conference didn't live up to its billing – a report on "possible abuse, fraud and illegal acts" by city officials – but it kicked over a hornet's nest of reaction. It also renewed criticism, which Aguirre rejects, that he is overstepping his bounds by investigating officials he is supposed to represent.
Murphy declined to be interviewed, but his office issued a strongly worded statement: "I categorically reject Mr. Aguirre's insinuation of wrongdoing by me. It is untrue, reckless and irresponsible."
Aguirre also repeated his contention that unless the city takes strong action to fix the pension mess, San Diego is headed toward bankruptcy.
City Manager Lamont Ewell flatly rejected that possibility, adding: "I'm a little tired of this sideshow."
Aguirre also said he took custody yesterday of 10 more boxes of documents from city bureaucrats that he said had been subpoenaed by the Securities and Exchange Commission but not turned over.
On Tuesday, Aguirre sent investigators to seize 15 boxes from acting city Auditor Terri Webster, a pension trustee. A lawyer representing the pension system has demanded that Aguirre return materials relating to attorney-client communications from his firm to the pension board, which he said were part of the Webster seizure.
Boxes of documents seized as part of City Attorney Michael Aguirre's investigation into city financial problems drew considerable attention from the news media yesterday.
Webster did not return a phone call. Her lawyer, Jerry Coughlan, had tough words for Aguirre's hardball methods.
"I was a federal prosecutor for 11 years," Coughlan said. "I've always viewed it as irresponsible for anybody with prosecutorial authority to be issuing any form of interim press announcements before all the facts are in and evaluated and they have decided whether or not this is something that is chargeable."
Aguirre said at the news conference that his comments as well as the interim report on his pension probe were appropriate. He said his report was expected by KPMG, the city's outside auditor, and that KPMG's requests for an investigation of city finances are the reason he's conducting an inquiry.
Aguirre also announced that SEC officials told him during a meeting Thursday in Los Angeles that the agency wants to interview Murphy and individual City Council members under oath.
Aguirre said he will advise the mayor and council – except newly elected 4th District Councilman Tony Young – to seek private legal representation.
Advertisement Retired veteran municipal lawyer John Kaheny, who spent nearly 23 years in the San Diego City Attorney's Office and more than six as Chula Vista city attorney, said Aguirre's actions "make no sense."
"He's slowly but surely working himself into the position where he's not going to be able to represent either the city or any of its high officials because the ethical rule for a lawyer is that you're not supposed to do your client harm," said Kaheny, who supported Aguirre opponent Leslie Devaney in the Nov. 2 election.
"He's clearly harming his clients' ability to either defend themselves or to cooperate with this investigation."
In addition to the SEC probe, the city is under investigation by the FBI and the Justice Department.
"Mr. Kaheny has never gotten over the election," Aguirre said. "Mr. Kaheny's philosophy was rejected by the voters. . . . I represent the city and the people of San Diego. I don't represent any individuals right now."
The bulk of Aguirre's news conference yesterday was aimed at Webster, the acting auditor, and relied on previously disclosed information.
He noted that in an e-mail uncovered by Vinson & Elkins, a law firm hired to represent the city in talks with the SEC, Webster told another top bureaucrat in October 2001 of an alarming drop in the pension fund's investment earnings.
Webster's memo was titled "EEEK" and raised the specter that San Diego might have to make a balloon payment, later estimated at hundreds of millions of dollars, to boost pension fund assets. The city has underfunded the pension since 1996.
This information never made it into the Blue Ribbon committee report, issued in late February 2002. Neither did an actuarial report noting the pension fund slide. Webster was on the committee, as was her boss, then-Auditor Ed Ryan.
Ryan resigned unexpectedly a year ago, shortly before the city disclosed errors and omissions in financial statements provided to prospective investors in San Diego's bond portfolio.
These admissions sparked bond rating agency downgrades and the federal investigations, hobbling the city's ability to borrow money.
The mayor and council majority dodged the balloon payment by enacting another pension underfunding method while boosting benefits in late 2002.
Aguirre said his report is "clear and convincing proof" that city auditors knew that the plan's assets had "dropped precipitously" as early as June 2001.
"Instead of the mayor's blue ribbon committee bringing that information to the attention of the people of San Diego . . . that information was concealed," he said.
Asked if this was illegal, Aguirre said: "I am not prepared to say that yet."
For now, he would call it only a "knowing misrepresentation of a material fact . . . and this was done by the Mayor's Blue Ribbon committee . . . "
He added that "this has been a pattern" and that his next report will identify city officials and employees "responsible for the false statements and omitted material facts."
Richard Vortmann, president of the National Steel & Shipbuilding Co. and the author of the pension section of the blue ribbon committee report, took exception to Aguirre's comments.
"We were using whatever information the retirement system personnel gave us to work with," he said.
Linc Ward, a retired Pacific Bell vice president who also served on the committee, said there was no effort to mislead the City Council.
"We said there are a lot of things about the city that are fiscally sound, but you've got a couple of real problems you better damn well look at – deferred maintenance and the liability problem in the pension fund," he said.
"Everything we got, we got through staff," said April Boling, another former committee member. "We were at their mercy."
Aguirre's talk of bankruptcy continued to rattle. But that threat remained unclear.
David Kupetz, a Los Angeles lawyer experienced in municipal bankruptcies, said cities must prove insolvency before gaining protection under federal Chapter 9 bankruptcy.
"Insolvent means . . . financial conditions such that the municipality is not paying its debts when they become due, or unable to pay its debts as they come due," he said.
Aguirre said the pension imbalance meets that test. But Ewell said, "The city is not in that position."
The city has a $1 billion investment pool that could be tapped in emergencies, Ewell said, as well as a steady stream of tax revenue and the ability, if needed, to "streamline the organization."
"The city has never, ever, defaulted on any payments," he added. "We've never defaulted on a paycheck. . . . We've never defaulted on a vendor paycheck, and I don't anticipate that we'll ever be in that position."

Aguirre shakes City Hall with pension probe findings
By KEVIN CHRISTENSEN, The Daily Transcript, January 14, 2005
City Attorney Michael Aguirre dropped a bombshell on City Hall in the first report of his pension investigation Friday. Aguirre alleges that city officials failed to disclose critical financial information and reports.
City Attorney Michael Aguirre alleges that city officials failed to disclose critical financial information and reports.
He also used the time to alert council members -- except newly elected Tony Young -- that their testimony is requested in a federal investigation by the U.S. Securities and Exchange Commission.
The sleuthing into the financial activities of the city was launched shortly after Aguirre took office. At the press conference Friday, he elaborated on the initial discovery of the pension's dropping funding level.
Assistant City Auditor, Terri Webster, sent an e-mail in October 2001 to Deputy City Manager, Cathy Lexin, alerting that the pension unfunded liability exploded due to a 71 percent drop in investment earnings. The letter is known as the "EEEK" memo.
The information was never passed along, Aguirre said.
"The auditor had a responsibility to make that information available and brought home to the mayor -- and that did not happen," Aguirre said.
Mayor Dick Murphy's Blue Ribbon Committee later failed to disclose the status of the tanking pension plan in a Feb. 27, 2002 report to the City Council's Rules Committee and later to the full council, Aguirre said.
The Blue Ribbon Committee, largely made up local business leaders, delivered a report on Feb. 27, 2002, saying that the pension was 97 percent funded, leaving a $68.95 million shortfall.
In reality, the pension was only funded to 89 percent, which left a shortfall of about $283.89 million, according to a report issued on Feb. 12, 2002 by the retirement system's actuary, Gabriel, Roeder, Smith & Co.
Aguirre said the failure to report the news is largely responsible for allowing the unfunded liability to fall below a formerly agreed upon level of 82.3 percent, necessitating an estimated $500 million balloon payment.
The circumstances regarding the commission's ability to report the true status of the pension remains shrouded in mystery, with the committee's leadership saying it was never given key new information, said Richard Vortmann, a member of the Blue Ribbon Committee and president of the National Steel and Shipbuilding Co.
Vortmann said committee members had stopped their research one to three months prior to delivering the report because they had to write it.
"We were in the throes of finishing," he said. "No one came forward and said 'Stop the press -- there is new information.'"
Vortmann said during the research process he was getting information from Retirement Administrator Lawrence Grissom, San Diego City Auditor Ed Ryan and Webster, the assistant city auditor.
Grissom said the actuary's report was not included in the information that Vortmann requested, so it was not delivered.
"They just contacted me when they needed something," Grissom said in an interview Friday.
April Boling, local accountant and member of the Blue Ribbon Committee, said the committee had not received or been notified about the release of the additional financial information.
"Unless someone told us that a new report came out, I don't know how we could have known," Boling said. "I'm concerned that our committee was not told that there was significant new information."
Vortmann said that, most likely, any new information would have been brought to the Blue Ribbon Committee Chairman, Joe Carver, and that he would have reconvened the group to include it.
"To my knowledge, no one was ringing the bell saying, 'Stop and listen to this,'" he said.
Carver did not return a call to comment.
Vortmann also noted that once the Blue Ribbon Committee report was completed and delivered, it followed a set course of action as identified by Mayor Murphy.
"The mayor, I believe, established a process," he said. "It was their report. It was in their hands. It was out of our hands."
Aguirre said that notifying the city of the pension shortfall would most likely have stopped the City Council from approving another series of benefit perks to retirees in 2002 in an agreement known as City Managers II.
Aguirre also said at the press conference that Mayor Murphy, chair of the rules committee, signed off on the report and will also be questioned about his knowledge on the matter.
"We want to make clear right now there is currently a review of facts to determine whether Mayor Murphy was aware of the fact that the pension plan was substantiality underfunded," Aguirre said.
Murphy denied wrongdoing.
"I categorically reject Mr. Aguirre's insinuation of wrongdoing by me," Murphy said in a prepared release. "It is untrue, reckless and irresponsible."

Aguirre: Without pension rollbacks, city headed for bankruptcy
By KEVIN CHRISTENSEN, The Daily Transcript, January 10, 2005
City Attorney Michael Aguirre has issued a list of pension reform suggestions to city leaders -- including a retroactive rollback of "pension benefits created without corresponding payment sources" -- that will likely bring uproar from unions.
Without these benefit repeals, the city is headed for Chapter 9 bankruptcy, Aguirre said.
The city is currently facing an estimated $1.167 billion shortfall in its pension system that Aguirre blames on the City Council's granting of unfunded benefits.
In a press conference on Monday, Aguirre said, "There was a decision made by city officials to pay something into the pension plan that was significantly less than what the actuary had determined, or had computed, was necessary."
Aguirre sent a memo to the mayor and City Council that specifically proposes repealing a retroactive increase in benefit multipliers used to calculate the value of a pension package. The problem is that benefit multipliers were increased without ensuring that the increased payout is funded. Residents of the city then pay for the additional costs.
"Employees were not required to contribute to the costs associated with the application of the new factor to past years of service," Aguirre wrote in the memo.
Specifically, this benefit makes up about 40 percent of the city's unfunded liability, Aguirre said.
April Boling, a local accountant and former chair of the city's pension reform committee, said the rollback wouldn't be fair to retirees who made life decisions to retire based on the information given by the city.
"There would be some reasonable compromise that could be reached for those people," Boling said. "They can't un-retire when they have been retired for years. There needs to be some accommodation for these people."
Boling, who also headed up the city's Pension Reform Committee, suggested that the city repeal the benefits for new retirees.
In order for any action to be taken, the item must be docketed before the City Council. The council would have to approve discussing ideas from the memo with the city's unions. The city would then negotiate with the labor unions in this year's "meet and confer" process. The unions also have to sign off on the agreement.
Attorneys for the San Diego Municipal Employee's Association released a seven-page legal opinion discounting the reform suggestions in the memo that included claims that Aguirre misconstrued how a federal judge would treat vested pension rights.
Boling also noted that a decision by the unions to accept an agreement does not mean that individual retirees or employees cannot sue.
"There is no doubt in my mind that employees would sue," she said. "Then (the city) would have to get a judge to agree that it is legal."
Aguirre notes in the memo that individual members of the pension system will be able to bring individual suits against the city. To address this issue, he suggests floating a series of pension obligation bonds that will be used to settle these suits.
Aguirre also suggested the city no longer subsidize employee costs associated with purchasing service credits. He also wants to end the Deferred Retirement Option Plan, or DROP, program.
The DROP allows retiring city employees to collect a pension if they agree to work an additional five years, sparing the city the cost of hiring and training replacements.
Carl DeMaio, president and founder of local think tank The Performance Institute, said Aguirre has given the city and unions a "way out" and that this is the last chance for the unions to discuss what the pension benefits will look like.
"Aguirre's providing a way for the mayor, council and union that would avoid bankruptcy for the city," DeMaio said. "It comes down to, do the unions want to have the availability to take part in the decision or have it decided by a federal bankruptcy judge?"
Pension Trustee Diann Shipione said the proposed reforms are a good "first step," but may not go far enough.
"Does it get the system back to the position where the retirement obligation is fully funded?" Shipione asked. "If not, more needs to be done."
Aguirre did not include a timeframe for the council or mayor to respond.
In December, Boling and local attorney Michael Conger threatened to sue the city if controversial retirement benefit increases granted to employees in 2002 were not repealed.
Aguirre said an opinion regarding that threat would be released in the coming weeks.
Conger and Boling gave the city until Wednesday, Jan. 12 to rollback the benefits.
Aguirre also announced his intention to push for the release of transcripts of closed session meetings where discussions about granting unfunded benefits were made.
The memo, issued by Aguirre on Friday, was released to the press the same day that Mayor Dick Murphy was scheduled to deliver his State of the City address

S.D. is using liability fund for auditor, lawyer fees
By Philip J. LaVelle, Union Tribune, December 30, 2004
Millions have been diverted from a San Diego reserve fund to pay auditors who are trying to untangle City Hall finances and for lawyers who are representing the city in federal investigations, according to documents released yesterday.
The documents, released by the City Attorney's Office, show large payments to auditors, consultants and law firms – including ones representing the city in lease and stadium talks with the Chargers – from the city's Public Liability Fund.
City Attorney Michael Aguirre said the fund exists to pay claims against the city that are not covered by insurance. The city's insurance does not cover the first $2 million of individual claims, he added.
"These are very substantial amounts of money," he said yesterday of the expenditures. "It's a creative and I think financially questionable use of funds that were supposed to be used to pay claims."
About $1 million of the money spent from the liability fund would be reimbursed from the city's water and sewer funds, which are supported by ratepayers, city officials said.
Mayor Dick Murphy was on vacation yesterday and could not be reached, according to his office.
The financial documents released yesterday suggest a possible misuse of public funds, Aguirre said. An executive in the city Auditor and Controller's Office disputed that view.
The documents Aguirre released came from his investigation into city finances.
"The irony is that we're paying for our audit out of this," Aguirre said. "It's hard to understand how the audit of the city's financial statement could be called a claim."
The documents show that in the current fiscal year, nearly $1.1 million has been paid to law firms Vinson & Elkins and Hawkins Delafield Wood for "financial investigation." Also, nearly $784,000 has been paid to KPMG and other entities for auditing the city's annual financial report.
In fiscal year 2004, which ended June 30, the documents show the city paid more than $1.3 million from the public liability fund for "financial investigation." Also that year, $800,000 was spent for the audit and more than $1.2 million went to law firms and consultants for Chargers talks.
The federal investigations cover a broad landscape. The Securities and Exchange Commission, the FBI and the U.S. Attorney's Office have been investigating city finances for nearly a year, following admissions by city officials that financial statements, used by prospective investors in San Diego bonds, contained errors and omissions.
Among the errors and omissions: failure to fully state the depth and causes of the $1.2 billion pension system deficit, largely attributed to underfunding and benefit hikes.
In addition to investigations, the admissions led to several downgrades of the city's credit ratings. In September, Standard & Poor's Ratings Services suspended its rating of San Diego, citing the failure to complete audited books for 2003. The city's 2004 audited books also are not finished.
The SEC is looking into whether city officials committed securities fraud. The FBI is conducting two criminal investigations – one into city finances, the other into possible public corruption.
All this has left the city unable to issue bonds, forcing delays and possibly cancellations of major projects.
The director and deputy director of the city's Risk Management Department, which oversees the liability fund, were not in the office yesterday and could not be reached. A subordinate in the office did not return a reporter's phone call.
In addition to questioning the use of this money, Aguirre contends that the liability fund is depleted. He points to a footnote on a document indicating that the numbers include "an anticipated credit" of $1 million that would come from city "enterprise fund" departments, according to the city auditor and controller.
"The auditors are investigating whether we're diverting money – and they're being paid with diverted money," he said.
As of Dec. 22, the fund showed total expenditures of more than $9.9 million for about half the fiscal year. Of this, more than $1.6 million went toward "non-claims expenditures," including the payments to outside law firms, auditors and consultants. Its ending balance was reported at just under $794,000.
Since $1 million on the books is not really there yet, Aguirre said the fund is "in the red."
Acting Auditor-Controller Terri Webster was out of the office and not available yesterday. Darlene Morrow-Truver, acting assistant auditor-controller, said the use of enterprise fund money for the audits is appropriate. But she declined to comment on the use of the liability fund for the expenditures questioned by Aguirre, deferring to the Risk Management Department.
Enterprise funds are established to pay for specific services – such as sewer and water service – financed directly by fees and user charges. Unlike many departments financed by the tax-supported general fund, enterprise funds are intended to be self-supporting. In the current fiscal year, the water and sewer funds have combined expenses approaching $1 billion, according to city budget documents.
Morrow-Truver said tapping the water and sewer funds to reimburse for the audits is proper because those are two areas being audited by KPMG.
She added that the water and sewer funds always pay for audits of their books.
"It's not a new expense – it's a large expense this year – but something that occurs every year," she said.
Aguirre saw it differently, saying it is wrong to "include amounts in the fund that haven't even been received, and that we're anticipating receiving funds from the enterprise funds – which are restricted – to make up the shortfall."
Also yesterday, Aguirre released copies of federal grand jury subpoenas, issued in February, showing that federal criminal investigators demanded documents from the highest ranks of the city bureaucracy as part of an ongoing FBI probe of city finances. The subpoenas were similar to subsequent SEC subpoenas that have been widely reported.
Aguirre released grand jury documents after requests by local media, including The San Diego Union-Tribune, under the California Public Records Act.
A dozen top city officials were ordered in February by the U.S. Attorney's Office to turn over a broad range of documents related to the troubled pension system and city finances. The officials include former City Manager Michael Uberuaga; his successor, Lamont Ewell; former City Attorney Casey Gwinn; Treasurer Mary Vattimo; Webster, the acting auditor-controller; firefighters' union President Ron Saathoff;Lamont Ewell
Ewell said that the city has long used the liability fund to pay for nonclaim-related matters and that the expected transfer of water and sewer fund money is appropriate because their books are being audited.
He also said the costs of paying for the investigations will be spread "back to all funds," including those supported by the tax-financed general fund, because of the scope of the investigation.
"These charges are based on the additional investigations that we're conducting for the city to satisfy itself, and to satisfy KPMG that there was no wrongdoing," Ewell said. Michael Aguirre KPMG has expressed concerns to city officials that it cannot complete its long-anticipated audit of the city's books until City Hall seriously investigates possible criminal wrongdoing.
The Securities and Exchange Commission, the FBI and the U.S. Attorney's Office have been investigating the city's troubled pension system and city finances for nearly a year.
The SEC is investigating whether city officials committed securities fraud in connection with the sale of San Diego bonds. Several top city officials, including Ewell, were subpoenaed by the SEC to testify in February.
The FBI and U.S. Attorney's Office are conducting two criminal investigations, one into city finances, the other into possible public corruption. Federal prosecutors issued grand jury subpoenas demanding documents from top city officials last February.
Aguirre said he discussed the liability fund with Ewell on Monday. Ewell said he did not object to Aguirre's digging into city finances, but was surprised he would make the remarks he did to the media.
Ewell also said he hopes for a "better working relationship" with Aguirre.
"I want all the facts to get out, and not just dribble out . . . which undermines the credibility of the city," he said. "I think that we all want the very same thing. We want open government. We want integrity. But we also have to make sure that we're working together to achieve that."
In response, Aguirre said the City Attorney's Office will no longer condone the transfers from the fund, previously approved by the mayor and City Council.
"The fact that they are engaging in questionable practices for a period of time doesn't make it right," Aguirre said.
He also defended his release of the liability fund information.
"The reason we're having so much trouble restoring our financial reputation is because we continue to defend financial practices which are indefensible, as in this case," he said.
"Until we start recognizing the misuse of public funds, we will never restore ourselves to financial credibility."
Documents released by Aguirre on Wednesday show that in fiscal year 2004, which ended June 30, the public liability fund paid more than $1.3 million to lawyers for "financial investigation"; $800,000 for the audit; and more than $1.2 million to lawyers and consultants for talks with the Chargers.
The documents also show that in the current fiscal year, nearly $1.1 million has been paid by the fund to the law firms Vinson & Elkins and Hawkins Delafield Wood for "financial investigation." Nearly $784,000 has been paid to KPMG and other entities for audits.

Subpoenas of city officials released, December 29, 2004
City Attorney Michael Aguirre has released 12 subpoenas issued by the U.S. Attorneys office in relation to federal investigations into the city of San Diego's financial disclosure practices.
The subpoenas, dated Feb. 13, 2004, requested that the following city officials produce and provide documents to a federal grand jury by March 11, 2004: City Manager Lamont Ewell, Assistant City Manager Les Girard, Senior Deputy City Manager George Loveland, Deputy City Manager Bruce Herring, Deputy City Manager Patricia Frazier, Deputy City Manager Ray Arellano, Human Resources Director Cathy Lexin, City Treasurer Mary Vattimo, acting City Auditor Terri Webster, San Diego Fire Department official Ron Saathoff, former City Manager Michael Uberuaga and former City Attorney Casey Gwinn.
Last week, Aguirre released subpoenas issued to three of seven city officials by the Securities and Exchange Commission on Dec. 16.
The SEC subpoenas named Ewell, Lisa Irvine and Girard. Aguirre declined to release names of the remaining four, whom he described as nonmanagement.
Aguirre released the subpoenas in response to requests from several news organizations filed under the California Public Records Act.

SEC subpoenas San Diego officials in pension probe
Dec 20, 2004,SAN DIEGO (AP) -- The U.S. Securities and Exchange Commission has subpoenaed several city officials to testify in an investigation of city finances and the troubled pension system, City Attorney Mike Aguirre said Monday.
The demand for sworn testimony, along with a separate subpoena seeking a sweeping array of city financial records, was issued late Friday and will be discussed at a special City Council hearing Tuesday.
The SEC, spurred by revelations of errors and omissions in the city's financial disclosures, has been investigating city finances for nearly a year along with the FBI and U.S. attorney's office. The SEC probe focuses on the city's failure to fully disclose the pension system's $1.2 billion deficit in bond sale documents.
Aguirre said six current city officials and one former city official have been subpoenaed. He declined to name them.
"This is the first wave of subpoenas and I would anticipate more," said Aguirre, a longtime critic of the pension fund who was elected last month after running as an outsider. "In piecing together everything I've seem and heard, I would say a very thorough investigation is under way and we'll have to brace ourselves for formal action against the city."
The subpoenas were reported Monday by The San Diego Union-Tribune.
"Neither the mayor nor the City Council has been subpoenaed," Mayor Dick Murphy told the newspaper, referring additional questions to Aguirre.
The SEC began its inquiry after the city issued a statement in January admitting to errors and omissions in financial statements to potential bond investors. The intentional underfunding of the pension system while boosting benefits is a leading cause of the deficit at the San Diego City Employees Retirement System.

San Diego City Attorney releases names of subpoenaed officials
December 23, 2004, San Diego Daily Transcript
The names of three ranking city officials subpoenaed to testify before the Securities Exchange Commission were released Thursday morning by San Diego City Attorney Mike Aguirre. The subpoena's request that City Manager Lamont Ewell, Financial Management Director Lisa Irvine and Assistant City Attorney Les Girard, testify before the SEC in February 2005. Aguirre released the information in compliance with the California Public Records Act, as several news organizations requested the seven subpoenas that were issued to city employees on Dec. 16 by the SEC. The other four subpoenas were issued to non- management employees and were not released by the City Attorney. Earlier this year the SEC launched an investigation into possible fraudulent financial disclosure practices by employees of the city of San Diego.

Mayor's chief of staff joins controversial pension program
By CATHERINE MACRAE HOCKMUTH, The Daily Transcript, December 20, 2004
John Kern, chief of staff for San Diego Mayor Dick Murphy, has enrolled in the notorious DROP pension program even while the city is struggling to reform the system.
The Deferred Retirement Option Plan allows retiring city employees to collect a pension if they agree to work an additional five years, sparing the city the cost of hiring and training replacements.
The money is dropped into a special account where it earns an interest rate set by the pension board, which is currently 8 percent, according to Paul Barnett, assistant retirement administrator for the San Diego City Employees Retirement System. After five years, the employee must retire.
Kern's enrollment, approved Dec. 17 by the pension board, comes just a few months after Murphy endorsed cutting the program, which critics say is just one of several benefit increases approved by Murphy and previous city leaders that have contributed to an estimated $1.167 billion shortfall in the city's retirement system.
"This is an absolutely brazen disregard for the public's outrage over the pension scandal," said Carl DeMaio, president and founder of The Performance Institute. "This is very hypocritical of the mayor's office."
Kern did not return calls for comment on his enrollment. Murphy issued a statement supporting Kern's right to enroll.
"The DROP program was approved by the prior mayor and council in 1997and was made permanent in 2000," Murphy said. "I continue to support eliminating the DROP program for future employees. I cannot prevent
DeMaio released a copy of city payroll for 2003, which shows Kern's salary
is $191,592.27. He said the pension benefit would bring Kern's annual compensation to nearly $300,000. Barnett would not disclose Kern's monthly compensation under the DROP program. After retirement, DROP enrollees receive their regular pension plus the money accrued in their DROP account, which can be dispersed in a variety of ways including a lump sum.
Employees make no retirement contributions once enrolled in the program, except for paying 3.05 percent of their salary into the DROP plan, which the city matches. By comparison, city employees not enrolled in DROP pay into the pension at a rate determined by their age and when they entered the system. The rate even for the lowest paying contributor is generally more than the 3.05 percent paid by DROP enrollees, Barnett said.
The program is open to all city employees who meet the age and length of service eligibility requirements. Barnett said it was established to keep seasoned people around a little longer.
Although Kern is entitled to enroll in the program, the timing has raised question about the propriety of such a move.
Andrew Serwin, a local attorney who is active in the Republican party here, said the timing is ironic given news that the Securities and Exchange Commission has subpoenaed several San Diego city officials to testify in an investigation of city finances and the troubled pension system.
"The program exists and he's eligible to exercise his rights, there's nothing wrong with him doing it," Serwin said. "From a political perspective, it may not be the best timing for the mayor and for the city."
DeMaio said the mayor could not reasonably ask unions and city employees to support cuts to their own benefits or paying more into the system when his own well-paid chief of staff is enrolled in the controversial DROP program.
"It's called leadership," DeMaio said. "If you really believe the pension system needs reform it is the absolutely wrong message to send.
"Either it means they're out of touch with the city's financial problems, or they just don't care how the public will react to something so brazen."

Cozy pension deals, Union chiefs got improper gifts of public funds
UNION-TRIBUNE EDITORIAL , December 20, 2004
In a vote that was scarcely noticed at the time but today is drawing scrutiny from federal investigators, the City Council quietly approved extraordinary retirement benefits for three politically powerful individuals – the presidents of the police union, the firefighters union and the white-collar workers union. All three are current or former city employees and vested in the municipal pension system.
Under this highly irregular arrangement, the union chiefs were allowed to add their union salaries to their city salaries in calculating their retirement benefits, thus substantially boosting their taxpayer-financed pensions. This unique perk, extended exclusively to the three incumbent union leaders, but not to their successors, will cost taxpayers $2 million, according to an estimate by Michael Conger, a Rancho Santa Fe lawyer who has successfully sued the city on other pension matters.
At best, the cozy deal worked out for the union presidents was a grossly improper gift of public funds. At worst, it may have constituted an illegal bribe to win the union leaders' support for a controversial plan to underfund the retirement system. That question is at the heart of a corruption probe being conducted by the U.S. Attorney's Office in San Diego.
On Oct. 21, 2002, the City Council unanimously adopted the resolution providing the special pension benefits to Ron Saathoff, president of Firefighters Local 145; Bill Farrar, president of the Police Officers' Association; and Judie Italiano, president of the Municipal Employees' Association. At the time, the city was seeking the approval of the labor organizations and the retirement board, which the unions dominated, for a new underfunding scheme.
The revised plan, known as City Manager Proposal II, perpetuated the deliberate underfunding of the retirement system until 2009 and – most significantly – relieved the city of its obligation under City Manager Proposal I to make an immediate catch-up payment of several hundred million dollars to the retirement fund. A balloon payment of that scale would have devastated the city's budget.
Less than a month after the council granted the lucrative pension payments to the union chiefs, the San Diego City Employees' Retirement Board gave its approval to the new underfunding plan. The motion for approval was made by Saathoff, the firefighters union president. A captain in the Fire Department, Saathoff now stands to receive a pension estimated at $173,268 a year – on a city salary of only $84,000.
Three days after the retirement board approved Saathoff's motion, the City Council on Nov. 18, 2002, adopted the City Manager II underfunding plan, thereby escaping the balloon payment. Earlier this year, in response to a lawsuit brought by Conger on behalf of city pensioners, the City Council agreed to discontinue the policy.
Were the special pensions for the three union presidents a quid pro quo to buy their support for the revised underfunding proposal? Why were these lavish perks granted only to the incumbent union leaders and not to their successors? Of all the outrageous aspects of the city's pension fund crisis, these questions cry out the loudest. For answers, we will have to await the outcome of the U.S. attorney's investigation.

Pension trustees resisting takeover, Aguirre deputy warns of possible legal action
By Philip J. LaVelle, Union Tribune, December 18, 2004
With two FBI agents watching from the audience, a deputy to City Attorney Michael Aguirre warned the San Diego pension board that anyone resisting Aguirre's push to take over the retirement system's legal affairs "will be held accountable under the law."
Board President Frederick W. Pierce IV pushed back, telling a room packed with news media that the board was rejecting Aguirre's demands on the advice of outside lawyers.
But the biggest potential fireworks – the question of what would happen if board whistle-blower Diann Shipione tried to attend a scheduled closed session – did not occur.
Shipione attended the retirement board meeting and intended to stay for the private session – but that was canceled, averting a potential crisis.
Yesterday's meeting came a day after revelations that Pierce; retirement board administrator Larry Grissom; and board member Charles Hogquist, a San Diego Police Department lieutenant, devised a plan to have Shipione placed under citizen's arrest and handed over to police if she refused to leave a Nov. 19 closed session after being banned from such meetings.
The board's published agenda for yesterday's meeting listed a closed session, which included discussion of five pending legal cases under the heading "conference with legal counsel," as well as a performance review of Grissom.
Pierce was later asked by reporters if the closed session was canceled to avoid a possible confrontation with Shipione.
"No, it was not," he said. "There was no business to be conducted in closed session."
Yesterday's board meeting also followed Aguirre's move Wednesday to assume the role of chief legal adviser to the San Diego City Employees Retirement System.
These latest developments come at a time of protracted turmoil at City Hall, where last month's mayoral election is under dispute, and in the pension system, which has a $1.2 billion deficit.
The deficit poses a serious threat to city finances. Deep cuts and fee increases, to finance the city's growing annual pension obligations and begin paring down the shortfall, are expected in the next city budget.
The pension problems, as well as irregularities in the city's financial reporting, have led to several downgrades of the city's credit ratings – one major service suspended the city's rating in September – and sparked investigations by the Securities and Exchange Commission, the FBI and the U.S. Attorney's Office.
The presence of two FBI agents, who took notes during yesterday's 70-minute meeting, underscored the high stakes surrounding San Diego's fiscal crisis, which has captured national attention and hobbled the city's ability to issue bonds for major projects and was a central issue in the mayoral election.
Murphy said in a prepared statement Wednesday that he had no knowledge of the plan to detain and possibly arrest Shipione, and he has been silent on Aguirre's moves.
Joe Flynn, one of several city retirees who publicly denounced the Shipione detention plan, told the board yesterday that retirees "hoped we had reached the bottom of the barrel of bad news."
"Unfortunately," he said, "this appears not to be true. Recent events have shown the board's uncanny propensity to dig deeper holes and further impair the respect and credibility of the pension system."
Flynn worked for the city for 38 years, retiring 10 years ago as deputy planning director.
Uncertainty now seems to be the watchword for San Diego's pension system, with Aguirre demanding the board accede to his authority and the pension establishment in open defiance.
Deputy City Attorney Yolanda Gammill told the board that Aguirre was taking over as its chief legal officer. She cited the city charter and municipal code, and also issued a warning.
"We are making a record of today's meeting," she said. "Board members who disregard the San Diego City Charter and the municipal code, as indicated in the city attorney's letter of Dec. 15, will be held accountable under the law for their actions."
She also told the board not to proceed with any decisions or convene any closed-door meetings unless they do so under the advice of the City Attorney's Office.
In his letter Wednesday, Aguirre instructed Grissom to have the system's legal staff turn in their keys and identification badges and report to the City Attorney's Office. He also told Grissom to secure system legal records and computers.
Grissom has refused.
Lori Chapin, general counsel to the retirement system, said Aguirre told her in a phone conversation yesterday that she was fired.
"He fired me twice," Chapin said. "First in writing (Wednesday) and then he fired me over the phone today. I just don't think he has the authority to do so. I'm not his employee."
Aguirre said he did not fire Chapin, but directed her to return to the City Attorney's Office, where she worked 12 years before becoming retirement system general counsel in 1997.
"We have no intent of firing her," Aguirre said. "She's just being removed from her current position. That assignment's over now."
Aguirre also informed the board yesterday in a letter that their Nov. 19 closed-session actions against Shipione violated the Ralph M. Brown Act, California's open-meeting law.
On that day, with Shipione not present, the board voted to file a complaint against her with the city Ethics Commission, accusing her of disclosing confidential information about legal fees to a retiree whose lawyer seeks multimillion-dollar payment of legal fees.
Shipione says she only discussed vague, unprivileged information and did nothing wrong.
The board also voted that day to ban her from closed sessions and to ask Murphy to kick her off the board. In his letter to the board, Aguirre said all its actions taken that day "are void in their entirety."
Shipione's husband, lawyer Pat Shea, is an unpaid adviser to Aguirre. Aguirre has said his actions are not driven by that relationship.
On top of the week's discord, one of the more controversial pension programs – which has become a flash point for the larger pension dispute – was discussed briefly at the meeting. The discussion was spurred by the agenda listing that John Kern, Murphy's chief of staff, had applied to enter the Deferred Option Retirement Program.
Under DROP, city employees are allowed to begin having retirement pay deposited into a special account beginning five years before they retire. Top city executives have been able to draw lucrative sums, some in excess of $1 million, in the program. Kern did not return a phone call seeking comment.

Aguirre orders ouster of pension board legal staff, City attorney says he has authority to do so and assume role of chief counsel
Union-Tribune, SIGNONSANDIEGO, 3:57 p.m. Dec. 16, 2004
SAN DIEGO Ý Newly elected city attorney Michael Aguirre said he was removing the legal staff of the embattled city pension board Thursday and would assume the role of chief counsel to the board. Whether he had authority to do so was unclear, however.
The move comes as it was disclosed in the Union-Tribune that pension officials planned to make a citizen's arrest of outspoken board member Diann Shipione last month and have police remove her from a closed meeting.
The plan was not put into action because Shipione had left the building. At the meeting Nov. 19, the board voted on several punitive actions against Shipione, including banning her from future closed sessions and seeking her permanent removal as a pension trustee.
"All counsel currently serving the board in a legal advisory capacity are immediately discharged from those duties," Aguirre wrote in a hand-delivered letter to Lawrence Grissom, administrator for the City Employees Retirement System.
"All personnel identifications and office access devices are to be turned in to you immediately. All files and office materials, including computers, are to remain in the respective offices of these former counsels, and not removed or altered in any way unless and until you receive specific directions from me in that regard."
In 1998, the pension board sought to have city-provided legal counsel replaced with an attorney of its own choosing, asserting that state law allowed it to do so. Casey Gwinn, the city attorney at the time, entered into an agreement with the board allowing it to hire its own legal staff, but the agreement reserved the right for the city attorney to again control legal staff as specified in the city charter.
Aguirre asserted in his letter that he had authority to remove the pension board's legal staff because the "decision of the prior City Attorney to abdicate his role under the Charter and the relevant Municipal Codes was legal error."
"Municipal Codes and Memorandums of Understanding do not allow for the abdication of the City Attorney's right to serve or responsibility to serve, in the role of legal advisor to the Board of Administration."
In recent years, Shipione has been an irritant both to fellow board members and to City Hall in general, warning of the dangers of underfunding the pension system while boosting benefits, a practice that has played a key role in the system's $1.2 billion deficit.
She also has brought to light financial irregularities, forcing city officials this year to admit to errors and omissions in financial statements used by bond investors.
As a result of these revelations, the city has suffered several credit-rating downgrades Ý one major agency suspended the city's credit in September because of a missing audit Ý and sparked investigations by the Securities and Exchange Commission, the FBI and the U.S. attorney.
This has left the city unable to issue bonds for important projects such as sewer upgrades.
Increasingly, politicians and the public have been expressing concern over the city's financial problems Ý and now the pension board's actions against Shipione.
Aguirre said at a news conference Thursday that his office had launched a criminal investigation into whether the board's closed session Nov. 19 was in violation of open meeting laws.
"We are looking at that under the provisions of the open meeting laws that make it a misdemeanor to deprive the public of information knowingly, and those that conducted the meeting have an obligation to disclose," he said.
Aguirre said pension board members have "not achieved their highest potential."
"Obviously, the way in which the legal work and the other administration into the pension plan has gone, has put the city in perhaps the greatest financial crisis it has ever faced," he said.
"They are not able to operate and administer the plan in an orderly fashion," he said. "The attention and focus of the board has been absorbed by the criminal investigations."
Last week, Aguirre announced the start of an independent investigation by his office into San Diego's financial disclosure practices related to the pension system.
The pension board is next scheduled to meet Friday.
Reports by Union-Tribune staff writer Philip J. LaVelle and SignOnSanDiego news services were used in compiling this story.

Aguirre asserts control over legal advice to retirement board
Existing legal counsel refuses to budge
By SCOTT LEWIS, San Diego Daily Transcript, December 16, 2004
Officials geared up for what might become an interesting confrontation at a meeting of the board of administration of San Diego's city pension fund Friday afternoon after City Attorney Mike Aguirre attempted to seize control of the board's once-independent legal counsel.
Aguirre announced the move Thursday and held his first official press conference since taking office. During his still nascent tenure, Aguirre has initiated a criminal probe into the city's public disclosure practice regarding the pension system and other internal probes.
In a letter to San Diego City Employees' Retirement System Administrator Lawrence B. Grissom, Aguirre demanded that all legal counsel working with the pension fund report to his office and that they be discharged from their duties. The pension fund's legal team is headed by Lorraine Chapin.
She will not go quietly.
Among the flurry of memoranda and letters crisscrossing various offices of City Hall Thursday was one from Pension Board President Frederick W. Pierce and Grissom stating defiantly that they will not obey Aguirre's demands, and that Chapin would continue in her capacity.
"We specifically do not agree that you have the authority to commandeer the legal counsel employees of SDCERS, and either dismiss them or reassign them," the officials wrote to Aguirre.
At the heart of their argument is a clause in the California Constitution that the retirement system believes guarantees its independence.
"The retirement board shall also have sole and exclusive responsibility to administer the system in a manner that will assure prompt delivery of benefits and related services to the participants and their beneficiaries," reads the state Constitution.
Aguirre said he does not expect a physical confrontation at the next scheduled meeting of the retirement system Friday.
"We're not going to wrestle them out of the chair," he said. "But we'll have someone there."
In his letter to the officials, he pointed out that until 1998 the system's legal advice had come from the city attorney's office.
And the City Charter reads that "the city attorney shall be the chief legal advisor of, and attorney for the city and all departments and offices thereof in matters relating to their official powers and duties."
Aguirre claims that a 2003 state appellate court put stringent limits on the independence of pension systems from their sponsors -- in this case the city of San Diego.
"The (court's) opinion dramatically limits the asserted expanded powers of such boards, especially in the face of regulatory and administrative efforts of municipal plan sponsors and contributors," Aguirre said in his letter.
At the press conference Thursday, Aguirre laid out his reasons for pursuing the action.
"There is a general sense that the administration of the pension plan has started to gyrate out of control," he said.
But primary in his motives clearly was to thwart the imminent attempt by the board to oust dissident member Diann Shipione who members of the board actually planned to force out in the context of a "citizen's arrest," as first reported in The San Diego Union-Tribune.
Neither Grissom, Chapin nor Pierce responded to requests for comment Thursday. Aguirre said his office was investigating the board's effort to bar Shipione from secret meetings and purge her from the 13-person board.
Shipione said she welcomed Aguirre's announcements -- with a warning.
"These people will not go easily; they think the system's money and power is theirs personally," she said.

Citizen's arrest of Shipione weighed, Contingency not used in pension board fight
By Philip J. LaVelle, Union Tribune, December 16, 2004
San Diego city pension officials planned to make a citizen's arrest of outspoken board member Diann Shipione last month and have police remove her from a private meeting.
The plan was not put into action because Shipione had left the building before the pension board entered closed session Nov. 19. At the closed meeting, the board voted on several punitive actions against Shipione, including seeking her permanent removal as a pension trustee.
These new revelations underscore the bitter divisions between San Diego's pension system establishment and Shipione, whose warnings about underfunding and other irregularities have sparked federal investigations, Wall Street scrutiny and national media attention.
Pension officials involved in the plan said they thought it was prudent. "We felt the provision was necessary because we felt there was a possibility that Ms. Shipione might not accept the decision of the board," pension administrator Larry Grissom said in an interview.
In its closed session, the board voted to file a complaint against Shipione with the city's Ethics Commission, accusing her of improperly disclosing confidential information about attorney fees.
She says she only told a retiree, in vague terms, about fee arrangements, and did nothing wrong.
The board also voted to ban her from future closed sessions and ask Mayor Dick Murphy, who has borne the brunt of two years of negative news generated by the pension mess, to kick her off the board.
Shipione says the board violated the state's open-meeting law, and that Murphy lacks the authority to boot her.
"The board is obviously planning to do something really irregular very soon, which is why they have to get me off the board," Shipione said yesterday.
The move to involve police called for two patrol officers to be posted downtown, near the retirement system's offices in the Wells Fargo building on B Street, and for retirement board President Frederick W. Pierce IV to ask for their assistance after making a citizen's arrest of Shipione if she did not leave on her own.
Grissom confirmed that the plan was ready to go on the day of the meeting. Grissom said it was his idea and was discussed in advance with Pierce and board member Charles Hogquist, a San Diego Police Department lieutenant.
Hogquist described the planning in detail, saying it was done to preclude the need for a call to 911 and was intended "to spare anybody embarrassment."
He said the officers would have had discretion on what to do after taking custody: They could have merely escorted Shipione out and released her; they could have issued a citation; or they could have arrested her and booked her into jail.
In an interview yesterday, Pierce said at first that he was "not at all aware of what the logistics would have been."
Told that Hogquist said he reminded Pierce he would have to make a citizen's arrest for police to come, Pierce said, "Yeah, the truth is, in recalling back, I was aware at some point – and it probably was that day – and I don't remember when that day."
Pierce defended the plan as proper.
"I think that any time one might expect a disturbance, one does contingency planning," he said.
Through his press secretary, Murphy was asked yesterday what he thought of involving police in the Shipione affair. "I have no personal knowledge of what transpired between the retirement board and Diann Shipione," Murphy said in a statement released by his office.
Shipione said she was not aware she would be discussed at the closed session and was informed of the board's votes in a Nov. 22 letter from pension system lawyer Lori Chapin.
Among the actions the board is hoping to take with her gone, Shipione said, is a multimillion-dollar settlement in a malpractice case against the board's former fiduciary counsel that she says could amount to insurance fraud.
In recent years, Shipione has been an irritant both to fellow board members and to City Hall in general, warning of the dangers of underfunding the pension system while boosting benefits, a practice that has played a key role in the system's $1.2 billion deficit.
She also has brought to light financial irregularities, forcing city officials this year to admit to errors and omissions in financial statements used by bond investors.
As a result of these revelations, the city has suffered several credit-rating downgrades – one major agency suspended the city's credit in September because of a missing audit – and sparked investigations by the Securities and Exchange Commission, the FBI and the U.S. attorney.
This has left the city unable to issue bonds for important projects such as sewer upgrades.
Increasingly, politicians and the public have been expressing concern over the city's financial problems – and now the pension board's actions against Shipione.
Earlier in the week, Pierce denied that moves were taken against Shipione in a bid to silence a prominent whistle-blower.
Grissom said he came up with the plan to involve police officers "out of an abundance of caution."
Hogquist said he was contacted by Grissom two days before the Nov. 19 meeting and was told a board member might have to be excluded from closed session. "I was asked if the police would be available to escort them out if there was a disturbance," he said.
Hogquist, a detective lieutenant in the department's Western Division, said he explained to Grissom that police can't simply escort someone from a meeting. He said police can act, however, if a citizen's arrest is made for a suspected criminal violation such as trespassing or disturbing the peace.
"I contacted a lieutenant and asked if he could have a couple of officers in the area, not in the building. They were just supposed to be somewhere in the area, a couple of blocks away, doing routine stuff," he said.
Hogquist said he did not directly contact the patrol officers because he did not want his rank to influence their judgment in the board room.
"I did not discuss it with Pierce," Hogquist said of the planning with Grissom. "But I did remind Fred on the day of the meeting, on Friday, that if Diann refused to leave, he as president would have to make the citizen's arrest, or otherwise the police would not come."
Asked if he felt torn about such possible action, Hogquist said: "Of course. I understand and respect Diann's right for free speech. But at the same time, when people came to me and said there might be a possible violation of the law, I have to act as a police officer."
He added that police have been called to board meetings after irate retirees have threatened trustees' lives. "Those are easy (calls), but this is a tough one," he said.
Shipione said she plans to attend tomorrow's closed session.
"I'm a trustee, and as a trustee, I have a responsibility to attend all meetings, both open and closed, as long as they're legal," she said. "If the board is going to prohibit me and actually does call the police, I imagine that I will allow them to escort me out and deal with it from there."
Pierce said: "We do not intend to allow her to participate."
He said, however, that he will not attempt a citizen's arrest.
Asked what will happen if Shipione refuses to leave, Pierce said, "Well, I guess we'll cross that bridge when I come to it."
Hogquist said, "To be honest with you, the Police Department won't be involved."
Added Grissom: "No, we will not enact this plan, because I don't think this particular plan, obviously, will work."

Pension whistle-blower sees 'sinister' ouster plot
By Philip J. LaVelle, UNION-TRIBUNE, December 14, 2004
A behind-the-scenes move is under way to kick whistle-blower Diann Shipione off San Diego's pension board, an action she says is part of a "dangerous and sinister" plot to silence a dissenting voice.
A pension board majority meeting in secret Nov. 19 – with Shipione not present and unaware she would be talked about – voted to file a complaint with the city Ethics Commission alleging she disclosed confidential information about attorney fees. Diann Shipione
The board also voted to bar her from future closed sessions, and asked Mayor Dick Murphy in writing to remove her from the governing body of the San Diego City Employees Retirement System.
Shipione says the complaint to the Ethics Commission is trumped up, and that the board's real intent is to remove her from closed sessions.
"So much of what's done by the board in closed session is irregular and illegal," she said yesterday. "They can't tolerate a member who is not in on it and not willing to stay quiet."
Shipione asserts in various letters that the board's action violated the Ralph M. Brown Act, California's open-meeting law.
She also suggests that it was done to prevent her from blocking a multimillion-dollar legal settlement in a malpractice case the board launched against its former fiduciary lawyers.
In one letter, dated Dec. 9, she asks Councilwoman Donna Frye, chairwoman of the City Council's new Open Government Committee, for an investigation. Frye, whose write-in campaign for mayor was built on a pledge of open government, said she will launch one.
"It's absolutely outrageous," Frye said yesterday. "Once again, the city's business is being conducted behind closed doors without proper public notice, to where even the person directly involved was not given adequate notice.
"On its face, it appears nothing more than political retaliation for the fact that Diann spoke up. It certainly has the odor of political retaliation."
Pension system officials say they did nothing wrong.
"This is not an effort to get rid of a whistle-blower or a dissenting voice. It's not in any way, shape or form an effort to do that," said Frederick W. Pierce IV, pension board president.
Shipione's questions about board policy often chafe fellow trustees, and since 2002 she has been a persistent critic of city underfunding of the pension.
Underfunding has been identified as a leading cause of the system's $1.2 billion deficit. This, coupled with financial reporting irregularities brought to light by Shipione, sparked multiple downgrades of the city's credit ratings and spurred investigations by the Securities and Exchange Commission, the FBI and the U.S. Attorney's Office.
Asked what kind of board member Shipione has been, Pierce said: "This is just coming from a personal perspective . . . her personal attacks and accusations have been inappropriate and have made for a challenging environment for the board to try to conduct business."
Lori Chapin, staff lawyer to the board, informed Shipione of the panel's actions in a letter dated Nov. 22.
"The board felt there was a disclosure of confidential information and a violation of attorney-client privilege," Chapin said yesterday.
Through a spokesman, Murphy said he will take no action until the Ethics Commission concludes its review. Shipione contends the board's request of Murphy asks him to exceed his authority.
In letters to Pierce and Chapin, Shipione asserts that the information she gave about fees was vague and not privileged, and that the only Brown Act violations were committed by the board.
Shipione also said the board's actions violate the board's own guidelines, as well as the Brown Act; she said both prohibit using closed session to take action against a board member.
Chapin declined to comment, "except (to say) that we disagree."
Michael Conger, a lawyer who sued the pension system and reached a settlement on behalf of retirees claiming a 2002 underfunding arrangement was illegal, is involved in the case giving rise to Shipione's current situation. He disagrees with some of Shipione's interpretations in the malpractice case, but believes she is being targeted.
"They can't stand her because she's blown the whistle at the top of her lungs for the past two years,"Conger said yesterday. "They've got ringing in their ears, and they can't think straight . . . they're beside themselves."
The case Shipione says she threatens involves a malpractice lawsuit by the retirement system against Robert Blum, its former fiduciary counsel, and law partner Connie Hiatt. In early 2002, Blum advised against an underfunding deal proposed by City Hall. By November, he opined that the deal was OK.
On Nov. 18 of that year, the City Council, led by Murphy and acting against strong objections by Shipione, voted to increase benefits while continuing to underfund the pension system. Frye voted for the underfunding but against boosting benefits.
Retirees sued the city and the pension system, with Conger as their lawyer, and later settled. In May, Conger sued Blum and Hiatt for malpractice, on behalf of retiree David Wood. The next month, the retirement system sued Blum as well.
Conger said the board sued to silence Blum.
"By the board suing, it sets the board up to say everything is privileged," he explained. "I believe the board sued to keep things covered up so we wouldn't find out exactly what happened to make those lawyers change their minds so dramatically."
Last week, Conger wrote city officials, on behalf of former Pension Reform Committee Chairwoman April Boling, threatening legal action if benefits granted in 2002 are not rescinded because several board members had conflicts of interest. He is set to meet with city lawyers this week.
Shipione's remarks about attorney fees were made to Jim Gleason, co-plaintiff with Wood in Conger's underfunding litigation.
In the Blum litigation, Conger said he learned that Blum has a $15 million insurance policy for malpractice. "We demanded that they pay the entire policy to settle the lawsuit, or we're going to go after more than the $15 million," he said.
Settlement talks are under way.
Shipione has written that she believes a settlement could amount to insurance fraud. Pierce and Chapin declined to discuss her allegations, citing ongoing litigation.
Shipione points to remarks made by Deputy City Manager Cathy Lexin, until recently a pension trustee.
In 2002, city officials had told the pension board, which included several city employees and labor representatives, that if it did not approve the underfunding deal, City Hall would drop promised benefit hikes.
Lexin later told investigators with Vinson & Elkins, a law firm hired to represent the city in talks with the Securities and Exchange Commission, that this was "no more than a bluff."
In her letter to Frye, Shipione said Lexin's remarks, if true, raise the possibility the settlement "might be fraudulent as against Mr. Blum's insurance carrier . . . "
Lexin was replaced on the board last month. She did not return a phone call seeking comment yesterday.
Conger said he believes there was malpractice, but does not agree with Shipione's thoughts on insurance fraud.
Kurt Peterson, a Los Angeles lawyer representing Blum and Hiatt, declined to discuss the status of the case but said: "We are confident that both of them are pre-eminent practitioners in this area and rendered nothing but sound advice."
In addition to alerting Frye, Shipione wrote to the Public Integrity Division of the City Attorney's Office. Shipione's husband, lawyer Pat Shea, is an informal unpaid adviser to new City Attorney Michael Aguirre.
Shipione, who was appointed by former Mayor Susan Golding, said this is the third attempt in two years to oust her from the board.
In July, a City Council majority voted for last-minute language in a pension matter that would prohibit financial advisers from participating. Shipione is an executive with UBS Financial Services. The council reversed itself amid criticism. Shipione also said retirement officials tried to set her up for ouster in 2003

Aguirre begins finances inquiry, Case is independent of one authorized by City Council
By Matthew T. Hall, Union Tribune, Dec. 10, 2004
San Diego City Attorney Mike Aguirre launched an investigation yesterday into allegations that city employees lied and withheld information in financial disclosures.
He also released the names of a councilman and four city employees who hired attorneys with taxpayer money in connection with federal investigations into the city's billion-dollar pension deficit.
Aguirre's investigation will be independent of one authorized by the City Council, which hired the legal firm of Vinson & Elkins LLP to investigate allegations of accounting fraud and other illegal conduct.
"I think it's important that I allocate the majority of my time and effort to focusing on those things that are the most damaging and the most threatening to the community," said Aguirre, who was sworn in Monday.
Vinson & Elkins, which represents the city in an investigation by the Securities and Exchange Commission, has documented the city's failure to disclose full details to investors and the public about its pension deficit.
In September, it issued a 268-page report, rapping the city for releasing negative information "only when it has felt legally required to do so" but saying there is no evidence of intentional accounting and disclosure errors.
"There's enough evidence in the report for me to make my own investigation and determine whether the report should be referred to the public integrity unit (of the City Attorney's Office) for possible prosecutions," Aguirre said.
So far, the city has paid Vinson & Elkins $2.6 million.
When Aguirre was sworn in to office this week, he announced that the city has paid the legal bills of past and present city officials. He named them after receiving a public records request from The San Diego Union-Tribune.
Councilman Michael Zucchet, current Deputy City Managers Bruce Herring and Pat Frazier, former City Manager Michael Uberuaga and former City Auditor Ed Ryan have retained lawyers at an undisclosed cost to the city in connection with the Vinson & Elkins investigation, Aguirre said.
The city has not retained these firms to provide a criminal defense for the employees, according to the letter Aguirre sent the Union-Tribune.
Zucchet said last night he retained a lawyer through the city for his interview with Paul Maco, the Vinson & Elkins lawyer who co-wrote the city's pension report and is sharing information with the SEC during its civil investigation.
Zucchet, who faces federal corruption charges in an unrelated criminal matter, said his experience with that case made him think it is "always prudent" to have an attorney with him.
The bill amounted to about $2,000 for four to six hours of work by his attorney, Jerry Coughlan, Zucchet said. He said he never saw the bill, which went directly to the city. The city is not paying for his legal bills in the federal corruption case.
Messages left with Herring, Frazier and the law firms representing Uberuaga and Ryan were not returned.
Aguirre announced Monday that he was restarting the dormant public integrity unit in his office to investigate and prosecute violations of law, conflicts of interest and criminal waste, fraud and abuse of city resources.
The City Attorney's Office can prosecute misdemeanor crimes, but felonies must be referred to the District Attorney's Office or the U.S. Attorney's Office for prosecution.
The city's finances are the subject of investigations by the FBI, SEC and U.S. Attorney's Office.
Through a spokesman, Mayor Dick Murphy declined comment last night on Aguirre's investigation.
Aguirre said he will focus on city interactions with its outside bond counsel from 2001 to 2004. He also said he wants to interview Uberuaga and Ryan.
During his Monday speech, Aguirre said both resigned under pressure amid the city's mounting financial problems.
On his fourth day yesterday, Aguirre also announced that he would refrain from taking pension benefits from the city until his investigation ends.
The Vinson & Elkins investigation into the allegations of illegal conduct began Nov. 8 after the city's independent auditing firm said it could not complete a long-delayed audit of the city's 2003 books without it.
Financial services giant KPMG has been paid $1.7 million for that audit but won't release it until the city has investigated whether "likely illegal acts" related to the troubled pension system and financial reporting practices have occurred.
Meanwhile, the city's borrowing ability has been crippled. Two Wall Street credit rating agencies downgraded the city's rating and a third suspended it. Last week, the city announced it must halt new water and wastewater capital projects until it can borrow more money.
Diann Shipione, the whistle-blowing member of the city's pension board, welcomed Aguirre's investigation. Shipione had called the Vinson & Elkins report damning but still a "whitewash" on the day of its release.
"This situation needs conclusions and consequences, and if Mike Aguirre does that, he will have done a lot for all of us," she said.
Shipione is married to attorney Patrick Shea, who leads a transition team Aguirre has put together to restructure the City Attorney's Office.
Maco, the lead attorney in charge of the Vinson & Elkins investigation, deflected criticism about his firm's report as he had after its release.
"My response is the same," he said. "We stand by our report."

.Lawsuit Exposes Alleged Cover-Up At Family Justice Center
City Employee Files Suit Against City, Casey Gwinn
TheSanDiegoChannel.com , 5:54 PM PDT September 29, 2004
SAN DIEGO -- The San Diego Family Justice Center has gained national and international attention as a leader in prevention of domestic abuse. But, a lawsuit filed against the city and city attorney's office may rock the center's reputation.
City Employee Files Suit Against City, Casey Gwinn
The founder of the Family Justice Center, San Diego City Attorney Casey Gwinn said he has handled more than 10,000 domestic abuse cases. Now, many of his employees at the Family Justice Center and at the City Attorney's Office are asking how one of his workers was allegedly abused for years without getting help.
A lawsuit filed in Superior Court detailed how Gwinn's office had been aware that one of its legal secretaries, who remains anonymous, suffered from domestic abuse for at least two years.
"Up to this day, my question to Casey Gwinn is, why hasn't he helped this person?" said Josie Clark, (pictured, left), a city legal secretary.
Clark is suing the city and Gwinn, not for what happened to her co-worker, but for the way she said she was used to cover it up.
Official records show that police responded to numerous calls at the victim's former home on Armacost Road. Several workers at the City Attorney's Office and the Family Justice Center told 10News that the victim came to work with broken bones, bruises, cuts and black eyes.
"If Casey Gwinn didn't notice that on one of his own -- seeing her every single day -- then what is he doing at the Family Justice Center?" questioned Clark.
According to the lawsuit, a long history of severe abuse against a Family Justice Center employee was going to be made public when the woman threatened to kill her husband and was arrested. Clark was then assigned a special project to quietly help the woman.
"(Gwinn) said that my job was going to get her into rehab, because that was the only way she was gong to be able to keep her job," Clark said.
The assignment came from Gwinn, (pictured, right), 10News reported.
Clark took on the new responsibilities that lasted more than two months. She said the woman called her seeking help day and night -- once every half hour at work and at home at 3 a.m. and 5 a.m. Late last year, Clark said the woman's estranged husband threatened her life.
"Her husband basically said I was going to regret it for interfering and said he was going to come after me and that he was going to kill us both," Clark told 10News.
After her arrest, Gwinn had the woman working as a receptionist on the 16th floor near his office. But when the death threat allegations against Clark surfaces, the woman was moved to the 11th floor, just 30 feet from Clark.
Last week, Clark's attorneys told City Council members about the case. Gwinn tried to clarify what it was about.
"The matter is described in the special closed session docket as an employment discrimination case. That's the only description of the case," said Gwinn at last week's City Council meeting.
But Clark said the lawsuit could have been avoided if a domestic violence victim in her office would have received the help she needed for abuse that was too obvious to overlook.
"She still comes to the office beaten up, and Casey Gwinn has done absolutly nothing to help her," Clark said.
The lawsuit itself, the plaintiff's attorneys say, is about how Clark was forced into the mess and then discriminated against after she had nervous breakdowns and clinical depression. Conditions, they say, came directly from her "special project" to basically act as a drug, alcohol and abuse counselor for a co-worker.
Both Gwinn and the law firm that was hired by the city to represent this case have denided 10News' request for an interview. They said that this case is a personnel matter that is being litigated in court and they are not going to do any interviews on it. They said the court will handle it.

"Sunny San Diego Finds Itself Being Viewed as a Kind of Enron-by-the-Sea
New York Times, Sept. 7, 2004, By JOHN M. BRODER
SAN DIEGO, Sept. 1 - In the summer of 2003, Diann Shipione, an investment adviser at UBS Financial Services in San Diego and a trustee of the city's employee retirement system, was scanning a prospectus on a proposed San Diego sewer bond issue when alarm bells began to ring in her head.
  Important financial information was missing. The prospectus did not mention that the city had for years been shortchanging its public pension fund, leading to an unfunded liability of more than $1.15 billion, or that the city owed nearly $1 billion more in health care benefits to retirees and did not have the money. And it implied that the pension fund's actuary had approved the underfunding when Ms. Shipione knew that he had not.
In a letter to city officials, and in a commentary in the local newspaper, Ms. Shipione blew the whistle.
  "I had completely lost confidence in the city's financial decision making," she said in an interview on Wednesday. "I just couldn't let this go forward."
 Ms. Shipione's warning began a cascade of events that have led to a legal, financial and political crisis in San Diego, the nation's seventh-largest city, which has long enjoyed a reputation for clean and conservative governance.
  The sewer bond sale was postponed. Alarmed bond-rating agencies have significantly downgraded the city's credit rating, raising borrowing costs years into the future.
  The city was forced to admit that it had misstated its financial condition for the last several years, and it has not yet produced a certified financial statement for 2003.
  Several senior city officials abruptly resigned. Retired city employees, concerned that they would lose benefits because of mismanagement of the pension fund, sued the city, demanding immediate payments into the fund.
Reputable analysts have begun talking openly about the possibility that the city will have to declare bankruptcy, as Orange County did a decade ago.
  And the Securities and Exchange Commission and the United States attorney's office in San Diego opened investigations this year into possible fraud in the city's financial statements and potential political corruption. Subpoenas were served on a number of city offices and several people confirmed that they had been interviewed by the F.B.I. in connection with the inquiry.
  "This is a powder keg, a major, major problem," said Mike Aguirre, a securities lawyer and former financial fraud investigator for the United States Senate and the Justice Department who is running for San Diego city attorney. Mr. Aguirre said that the city's inability to produce a credible financial statement made it impossible to know just how severe the crisis was.
  He said that a corporation that behaved like the City of San Diego would be delisted from the stock exchanges. He suggested that the best solution might be reorganization under Chapter 9 of the federal bankruptcy law to allow the city to rescind pension benefits.
  Mr. Aguirre blamed San Diego's laid-back civic culture in which a handful of influential businessmen, union leaders and political figures called the shots while issuing reassurances to the public that everything was on the up-and-up.
"The basic story is that San Diego has become a thoroughly corrupt community in which the power players cut the deals, you don't ask any questions, and everybody gets what they want," Mr. Aguirre said. "People don't realize that one of the largest cities in the United States is on the verge of bankruptcy, and it's on the verge because of a massive amount of local corruption that has resulted in the thorough mismanagement of city finances."
  San Diego's mayor, Dick Murphy, who is up for re-election this year, declined to be interviewed for this article. His chief of staff, John Kern, acknowledged that the city's budget was under stress for a variety of reasons. But he asserted that the city was on sound fiscal footing.
  "We are not on the verge of bankruptcy," Mr. Kern said in an interview in his city hall office. He said that the city's budget problems had many causes, including cutbacks in payments from the state, which is facing its own budget crisis. He also cited the poor performance of the stock market after 2000, cutting the value of the city's pension accounts. He said that last fall's devastating wildfires had cost the city millions of dollars and required substantial new investments in firefighting equipment.
  He also said that hundreds of other public and private pension systems were suffering problems similar to San Diego's because of the stock market and the rising cost of benefits.
He acknowledged that the city had made a "mistake" in underfunding its pension programs, but said the practice began in 1996, under a former city administration. That year the city essentially borrowed millions from its pension plans to cover the cost of holding the Republican National Convention and has continued the practice to cover operating costs and underwrite numerous city projects.
  He also acknowledged inadvertent "errors" in the city's recent financial statements.
Mr. Kern said that the city's actions were not illegal and that he understood that the federal investigations center on what he described as financial disclosure issues and not criminal behavior.
"The fundamental fact of the city and its finances is that it can meet its obligations, and we are working through the issues as carefully and methodically and expeditiously as we possibly can," Mr. Kern said.
Deborah Hartman, a spokeswoman for Carol Lam, the United States attorney for San Diego, declined to comment on her office's investigation.
  Nels Mitchell, associate regional director of the Securities and Exchange Commission, said the agency did not confirm or deny the existence of any investigation.
  Carl DeMaio of the San Diego Citizens' Budget Project, a nonpartisan watchdog group that has long been critical of the city's financial management, said the city's wounds were almost entirely self-inflicted and not a result of state cutbacks or the stock market. Mr. DeMaio said that officials had deceived residents about the city's fiscal condition for years but got in trouble when they issued misleading statements in recent bond offerings.
  "If the U.S. attorney finds the city knowingly misled investors with Enron-like accounting, we could see both a large civil liability and criminal indictments," Mr. DeMaio said. "I believe that people for political and personal gain built this Ponzi scheme, and it's coming home to roost this year."
  Among the chief causes of the long-term instability of the city's employee retirement fund was a pair of decisions in 2002 to add benefits for future retirees while reducing the city's annual contribution to the funds. Among the most costly was a program called a deferred retirement option plan, or DROP, which allows a worker to defer retirement and build up a special account earning 8 percent interest and a 2 percent annual cost-of-living adjustment. Such programs have touched off investigations in Philadelphia, Houston and Milwaukee.
  That action prompted an impassioned warning from Ms. Shipione, who was one of only 2 of 13 members of the San Diego City Employees' Retirement System board to vote against the plan. She said that DROP would entitle a worker earning an average of $50,000 to collect a lump sum of more than $300,000 at retirement, along with all his or her other benefits. A higher-paid employee could walk away with close to $1 million.
  At the same time, the city approved a reduction in payments into the retirement fund.
  Ms. Shipione went before the City Council in November 2002 and said the changes were a recipe for disaster.
"It made no sense fiscally, no sense," she said. "The city has never been able to afford this kind of retirement program. I told them, 'This is corrupt.' "
  City officials ignored her warnings and approved the benefit increases and the underpayments to the account, then glossed over them in bond issues last year. They are reaping the whirlwind today.
  "I saw this happen in Orange County and I realized I had to speak up," Ms. Shipione said. "I let the retirement board know, I let the mayor and the council know, and no one appeared interested. The city basically did it to itself."

KPMG letters raise questions about city attorney's office
By CATHERINE MACRAE HOCKMUTH, San Diego Daily Transcript , October 28, 2004
A dispute between the city and its independent auditor KPMG has raised questions about the parameters of a recent investigation into the city's financial disclosure practices and the role of the city attorney's office in directing that investigation, particularly regarding possible illegal activities by city employees.
Assistant City Attorney Leslie Girard said Thursday that attorney Paul Maco, a partner with the law firm Vinson & Elkins who was hired to investigate financial disclosure practices related to the pension fund, recommended the scope of the independent investigation based on his expertise. Maco is a former director of the Office of Municipal Securities at the Securities and Exchange Commission.
Maco said conclusions in the resulting Sept. 20 report that there was no evidence of intentional wrongdoing were based on a thorough investigation.
The Daily Transcript reported Oct. 28 that, according to KPMG auditors, a highly anticipated analysis of the city's 2003 financial statements has been delayed because the city has not adequately investigated whether city employees committed or had the intent to commit illegal acts. The audit must be completed and the city's financial statements certified before the city can re-enter public financial markets.
An Oct. 11 letter <http://www.sddt.com/microsite/bravosd/KPMG101104-1.pdf> from KPMG to Girard said the Sept. 20 investigation report by Vinson & Elkins, which cost the city $2 million, KPMG letters raise questions about city attorney's office
By CATHERINE MACRAE HOCKMUTH, San Diego Daily Transcript , October 28, 2004
A dispute between the city and its independent auditor KPMG has raised questions about the parameters of a recent investigation into the city's financial disclosure practices and the role of the city attorney's office in directing that investigation, particularly regarding possible illegal activities by city employees.
Assistant City Attorney Leslie Girard said Thursday that attorney Paul Maco, a partner with the law firm Vinson & Elkins who was hired to investigate financial disclosure practices related to the pension fund, recommended the scope of the independent investigation based on his expertise. Maco is a former director of the Office of Municipal Securities at the Securities and Exchange Commission.
Maco said conclusions in the resulting Sept. 20 report that there was no evidence of intentional wrongdoing were based on a thorough investigation.
The Daily Transcript reported Oct. 28 that, according to KPMG auditors, a highly anticipated analysis of the city's 2003 financial statements has been delayed because the city has not adequately investigated whether city employees committed or had the intent to commit illegal acts. The audit must be completed and the city's financial statements certified before the city can re-enter public financial markets.
An Oct. 11 letter <http://www.sddt.com/microsite/bravosd/KPMG101104-1.pdf> from KPMG to Girard said the Sept. 20 investigation report by Vinson & Elkins, which cost the city $2 million, did not fulfill the auditor's requirements to determine whether illegal acts occurred, and if so, what impact those activities might have on the city's 2003 financial statement. The letter also stated that during an Aug. 27 meeting both the city and Maco made it clear to KPMG that the law firm was not retained to investigate violations of law or regulations or intentions to do so.
Girard and Maco said KPMG misunderstood what was said at the meeting.
In an Oct. 21 letter, Girard proposed a follow-on investigation by Vinson & Elkins into whether or not any "fraudulent accounting or disclosure failures" occurred beyond the scope of the original investigation. The proposal said the investigation would focus on the offices of the treasurer, auditor, financial management and any other office the firm considers appropriate. Maco will report directly to Mayor Dick Murphy rather than the city attorney's office, which contracted the firm for the first investigation. Girard said the city attorney's office recommended this change in command because City Manager Lamont Ewell and City Attorney Casey Gwinn supervise employees who may be investigated.
The proposal asked that KPMG require no further work from the city, assuming that no significant new issues arise from the investigation. KPMG reacted strongly to this suggestion. "To the extent the proposed program appears to suggest that KPMG has or will undertake to promise that it will not require further work it may feel to be necessary and to issue its audit report without regard to the investigation's findings, KPMG cannot accept any limitations on, or conditions for, the performance of our audit," KPMG auditor Steven DeVetter wrote in an Oct. 27 letter <http://www.sddt.com/microsite/bravosd/KPMG102704-1.pdf> to Girard.
Girard said KPMG's reaction is based on a misunderstanding. He said the city attorney's office was absolutely not trying to get the accounting firm to back off the intensity of its audit.
Mike Aguirre, a consumer fraud attorney and city attorney candidate in the Nov. 2 election, said the revelation highlights the failure of the city attorney's office to adequately determine whether city employees are guilty of fraud or other illegal acts. Aguirre said the city attorney's office had the responsibility to ensure that the Vinson & Elkins investigation matched up with the requirements of an independent accounting audit. "If there are serious allegations of wrongdoing it is the job of the city attorney to investigate," Aguirre said.
But Girard said Aguirre does not understand the delicate nature of negotiations with KPMG. "Michael Aguirre couldn't be more wrong," Girard said. "Michael Aguirre doesn't know how to handle these discussions. It was our manner of dealing with things that keeps alive the possibility of reaching a favorable conclusion with KPMG."
But Leslie Devaney, Gwinn's No. 2 deputy, who is running against Aguirre for the top job, also criticized the execution of the audit work. Devaney has been on leave of absence during the campaign.
"It sounds like there's a lot of finger-pointing going on," Devaney said. "It's unclear as to who's running the show." Devaney said if anyone asked KPMG to limit the scope of its audit, they should be fired.
Girard stressed that the KPMG audit was commissioned in April two months after Vinson & Elkins was hired to do an independent investigation. KPMG never expressed concerns about the scope of the investigation until late July or early August, Girard said. Moreover, he said, the city attorney believes the Vinson & Elkins report satisfies the requirements. Girard said the city needs more specifics from KPMG about what else it needs from the investigation. The KPMG audit work has been managed by the city manager's office with steady involvement from Girard.
Maco said since the enactment of the federal Sarbanes-Oxley Act in 2002, the appropriate extent of investigations into potential illegal activities has been a topic of discussion and struggle among entities and auditors. Accounting firms are particularly sensitive to the new requirements because they are no longer self-regulated, Maco said. "They're understandably a bit nervous," he said.
The proposal asked that KPMG require no further work from the city, assuming that no significant new issues arise from the investigation. KPMG reacted strongly to this suggestion. "To the extent the proposed program appears to suggest that KPMG has or will undertake to promise that it will not require further work it may feel to be necessary and to issue its audit report without regard to the investigation's findings, KPMG cannot accept any limitations on, or conditions for, the performance of our audit," KPMG auditor Steven DeVetter wrote in an Oct. 27 letter <http://www.sddt.com/microsite/bravosd/KPMG102704-1.pdf> to Girard.
Girard said KPMG's reaction is based on a misunderstanding. He said the city attorney's office was absolutely not trying to get the accounting firm to back off the intensity of its audit.
Mike Aguirre, a consumer fraud attorney and city attorney candidate in the Nov. 2 election, said the revelation highlights the failure of the city attorney's office to adequately determine whether city employees are guilty of fraud or other illegal acts. Aguirre said the city attorney's office had the responsibility to ensure that the Vinson & Elkins investigation matched up with the requirements of an independent accounting audit. "If there are serious allegations of wrongdoing it is the job of the city attorney to investigate," Aguirre said.
But Girard said Aguirre does not understand the delicate nature of negotiations with KPMG. "Michael Aguirre couldn't be more wrong," Girard said. "Michael Aguirre doesn't know how to handle these discussions. It was our manner of dealing with things that keeps alive the possibility of reaching a favorable conclusion with KPMG."
But Leslie Devaney, Gwinn's No. 2 deputy, who is running against Aguirre for the top job, also criticized the execution of the audit work. Devaney has been on leave of absence during the campaign.
"It sounds like there's a lot of finger-pointing going on," Devaney said. "It's unclear as to who's running the show." Devaney said if anyone asked KPMG to limit the scope of its audit, they should be fired.
Girard stressed that the KPMG audit was commissioned in April two months after Vinson & Elkins was hired to do an independent investigation. KPMG never expressed concerns about the scope of the investigation until late July or early August, Girard said. Moreover, he said, the city attorney believes the Vinson & Elkins report satisfies the requirements. Girard said the city needs more specifics from KPMG about what else it needs from the investigation. The KPMG audit work has been managed by the city manager's office with steady involvement from Girard.
Maco said since the enactment of the federal Sarbanes-Oxley Act in 2002, the appropriate extent of investigations into potential illegal activities has been a topic of discussion and struggle among entities and auditors. Accounting firms are particularly sensitive to the new requirements because they are no longer self-regulated, Maco said. "They're understandably a bit nervous," he said.