January 7, 2006
Five Officials in San Diego Are Indicted Over Pensions
By JOHN M. BRODER, NY TIMES

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LOS ANGELES, Jan. 6 - San Diego's legal and financial troubles deepened on Friday as a federal grand jury handed up fraud and conspiracy indictments against five current and former officials of the city's pension system.

The charges centered on a 2002 decision by the 13-member San Diego City Employees' Retirement System to enact a plan to increase significantly the pension benefits of city employees, including all the defendants, while failing to provide sufficient money to keep the pension fund solvent.

Federal prosecutors said the five defendants had conspired to hide the details of the proposal from other members of the pension board as part of a scheme to enrich themselves and cover up the financial danger to the pension system posed by the plan.

The decision helped to push the city to the brink of bankruptcy and led to the resignation of Mayor Dick Murphy last spring. The San Diego retirement system now has a deficit of at least $1.4 billion, and the city is unable to borrow in the capital markets.

The local United States attorney, Carol Lam, said the five pension fund officials had violated their obligations to city retirees and the taxpaying public.

"The defendants had a duty to act in the best interest of the city retirement system," Ms. Lam said in a statement accompanying release of the indictments. "They breached that duty by engaging in self-dealing, ignoring conflicts of interest and exploiting their positions to the detriment of the retirement system."

In addition to the pension fund scandal, San Diego has been rocked in the past two years by a political corruption case involving three City Council members, and Representative Randy Cunningham's sudden resignation from Congress in November, when he pleaded guilty to bribery charges.

Federal and local prosecutors said Friday that their investigations were continuing. The Securities and Exchange Commission and the F.B.I. have been examining city finances for more than two years.

Those newly indicted are Ronald Saathoff, Cathy Lexin and Teresa Webster, former San Diego retirement fund trustees; Lawrence Grissom, the system's former administrator; and Loraine Chapin, its current general counsel. They are expected in court next week to enter pleas.

The three former trustees are already under indictment on state conflict-of-interest charges arising from the pension debacle, and civil charges are pending against them and Mr. Grissom. All have denied any wrongdoing, as has Ms. Chapin, contending that their jobs with the pension fund required them to act on matters that would naturally affect their own benefits.

Mr. Saathoff is president of the San Diego firefighters' union and served as a labor representative on the pension board for 20 years. Ms. Lexin, a nonvoting member of the pension board, was the city's human resources director and a lead negotiator with city employee unions, including Mr. Saathoff's. Ms. Webster, also a nonvoting member of the board, was San Diego's assistant auditor and comptroller.

As a result of the 2002 vote, the indictment alleges, Mr. Saathoff's pension benefits were to rise by more than $25,000 a year. The benefits of the four other defendants would also have been enhanced, but the indictment does not specify by how much.

As they were concealing the benefits they were to receive from the proposal, the defendants also pushed a plan to permit the pension fund to operate at a substantial deficit, allowing the city to avoid payment of as much as $100 million, the indictment says. The City Council approved the pension plan shortly after it was adopted by the board.

Michael Aguirre, the San Diego city attorney, has brought civil charges against all of the defendants except Ms. Chapin. He said the federal indictment confirmed what his own investigation had found: that the accused had concealed various side deals that would enrich themselves and bankrupt the pension system.

"The result was the largest financial catastrophe in the history of San Diego," Mr. Aguirre said.

Murphy resigns
San Diego mayor announces departure less than 5 months into second term
By Jeff Dillon
SIGNONSANDIEGO, 1:35 p.m. April 25, 2005

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NADIA BOROWSKI SCOTT / Union-Tribune
San Diego Mayor Dick Murphy announces his resignation from office.

SAN DIEGO  First the quarrelsome city attorney demanded that San Diego Mayor Dick Murphy quit. And last week Time magazine named Murphy one of the three worst big-city mayors in the country. Then came increased rumblings of a recall movement.
Less than five months after starting his second four-year term, Murphy, 62, announced this morning he would resign effective July 15.

"I now believe to be effective the city will need a mayor who was elected by a majority of the people and who has a clear mandate to take this city forward," Murphy said. "A good leader needs to know when it is time to move on, and I believe it is time for me to move on and time to bring a fresh start to our city."

Murphy was re-elected last fall in a three-way race with County Supervisor Ron Roberts and write-in candidate Councilwoman Donna Frye, narrowly edging out Frye after several thousand write-in ballots were disqualified.

The mayor took no questions after making a brief statement at City Hall.

Murphy said he selected the July 15 date for two reasons: It will let him finish work on the fiscal year 2006 budget and it will potentially give the City Council time to schedule a special election for mayor and combine it with a likely Nov. 8 statewide special election.

The City Council also could opt to appoint a replacement to serve out the remainder of Murphy's term, which would end in 2008.

Frye said today she would run again if a special election was held.

Deputy Mayor Michael Zucchet would serve as acting mayor until the vacancy is filled. But there is potential complication: Zucchet, along with Councilman Ralph Inzunza, goes on trial May 3 on federal corruption charges.

City officials and council members said they were notified of Murphy's decision only minutes before the announcement.

Zucchet, who attended the news conference, said he was stunned.

"I'm in a bit of shock right now, if you can't tell it from my voice," Zucchet said. "I got a call, 15 minutes after you got your press release, I got a call, saying what it was."

Murphy cited many accomplishments during his first term in office:

The establishment of the city Ethics Commission, the San Diego Regional Airport Authority and the San Diego River Conservancy.
The completion of Petco Park, state Route 56 and the construction of six branch libraries.
Several quality-of-life improvements: Cutting sewer spills, undergrounding power lines, and reducing violent crime.
"When I ran for re-election, I had hoped that my second term would be as productive as the first time," Murphy said. "But now that seems unlikely. It's clear to me the city needs a fresh start."
He also noted that the city is converting to a strong-mayor form of government. As of Jan. 1, the mayor, not the city manager, will have the power to hire and fire department heads and prepare the city budget.

City Attorney Mike Aguirre, a vocal critic of Murphy who called for the mayor's resignation over alleged lack of leadership in the city's pension crisis, said his office would advise the council on the proper procedure to follow in filling the vacancy.

"In making the hard choice of resignation, Mayor Dick Murphy has shown an admirable determination to do what is right, and also shown a level of courage to which all in public life should aspire," Aguirre said in a statement. "I respect his decision and pledge to work with the mayor over the next few months towards a smooth transition."

Councilman Jim Madaffer issued a statement shortly before noon, saying it was "unfortunate" that Murphy found himself in a "perfect fiscal storm," but added he respected the mayor's decision to step down.

"This is a very difficult time, unlike any in San Diego history," Madaffer said. "But I am confident that we will get through this sad chapter and get our city back on course."

Murphy's announcement follows a spate of bad news for San Diego government.

The Securities and Exchange Commission is investigating city finances and allegations of securities fraud.

The U.S. attorney and the FBI are conducting a criminal investigation into possible public corruption.

Wall Street rating firms have repeatedly downgraded the city's bond rating.

A Sept. 7, 2004, New York Times headline on a story on San Diego's financial woes dubbed the city "Enron by the Sea."

The election that returned Murphy to office also was embarrassing. What was supposed to be a two-candidate run-off between Republicans Murphy and Roberts became a three-way race when Frye, a Democrat, realized city codes didn't prevent her from running as a write-in candidate.

And though her name was written on more ballots than ballots were marked for either Murphy or Roberts, it was determined that not enough of those ballots were legally marked for them to count as being cast for Frye.

Time got personal with its criticism in its April 18 issue, blaming Murphy for failing to deal with the city's looming $1.35 billion pension deficit and labeling him one of the nation's three worst big-city mayors, along with the mayors of Detroit and Philadelphia.

Murphy dismissed the article.

"People should be proud of what we have accomplished in this city," he said. "Tell Time magazine that they just don't understand what's going on."

Murphy first was elected mayor in 2000. He briefly decided not to run for re-election, then announced he would run again after supporters urged him to reconsider.

Earlier in life he served as a lieutenant in the Army, a bank marketing manager and as a corporate attorney. He was on the San Diego City Council from 1981 to 1985, was appointed a municipal court judge in 1985 and elevated to the Superior Court in 1989.

SignOnSanDiego's Steve Perez contributed to this report.

Office of the City Attorney

IRS Giving Retirement System Fits Over DROP Accounts
By SCOTT LEWIS
Voice Columnist
Monday, Sept. 26, 2005

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The administrator of the city of San Diego's retirement system told me in an interview the other day that he just had something beaten into his brain.

Not literally, of course. Larry Grissom has gotten his fair share of knocks lately but we doubt that it has come to physical blows yet.

No, this was an intellectual beating ordered on Grissom by the IRS.

And if it weren't for the fact that the retirement system is in the middle of an historic period of political turmoil in the city these days, an issue they are dealing with right now might normally register a little brighter on the "wow-that's-interesting" radar screen.

To explain, it's all about DROP. What is it? Why are members of the pension board who are also city employees running away from a potential decision about it? And why did the IRS come calling?

A quick review: DROP stands for Deferred Retirement Option Program. Enacted in 1997, the program allows city employees who reach retirement age to retire without really retiring.

Sound like a punishment instead of a privilege? Just wait.

When an employee enters DROP, the retirement system creates for him or her a DROP account. For up to five years, the retirement system deposits that employee's pension into the DROP account. At the same time, the employee is still working for the city and still, of course, collecting a paycheck.

But there's more than one river flowing into this DROP account. Not only are the pension checks making their way to it, but 3.05 percent of the employee's biweekly paycheck -- before taxes -- also makes its way to the DROP account along with a matching 3.05 percent from the city.

That's not all, the employee's DROP account also collects the infamous 13th check to retirees -- an extra bonus paid from so-called "surplus" investment earnings of the retirement system. We won't even get into the mind-blowing paradox of how a retirement system estimated by some to be facing a deficit of $1.7 billion can give out a bonus every year because it earned a "surplus" on its investments.

Finally, the DROP account also earns 8 percent annually regardless of how well or how poorly the retirement system's investments actually perform.

And that word "regardless" has become a bit of an issue. See, Grissom told me in an interview that up until about 10 days ago he would have told me that he thought DROP was sort of a hybrid retirement vehicle. In other words, it had aspects of both a "defined benefit" retirement program and a "defined contribution" system.

A defined benefit, is just that: Regardless of how much the city or worker puts into the pension fund, a retiree receives the exact amount of money when he retires that was promised to him. A defined contribution is just that: the employees and city decide exactly how much to put into a retirement system, but what the worker gets out of it when he or she retires is uncertain.

The basic city of San Diego employee pension is obviously a defined benefit. So what's DROP? I mean, after all, for years, city retirees could just hold their DROP account as a sort of great fixed income investment account that earned 8 percent and take it out whenever they pleased. If you take it out whenever you please, then that means it's not necessarily a "defined" benefit -- because it's bigger or smaller depending on when you take it out.

Who cares? Yep, the IRS.

So, on Sept. 16, the retirement system's board of administration found itself obligated to change the rules. To protect retirees from taxes, the board had to force them to decide to either cash out their DROP accounts immediately or subscribe to a monthly predetermined withdrawal. In other words, to get what's called an annuity.

But one board member dissented. His name is Richard Kipperman. He's a bankruptcy consultant, and although he doesn't necessarily have a problem with the IRS conformity plan, he refused to authorize anything that would validate a different part of DROP: this idea that the city can guarantee DROP participants they will earn 8 percent on their accounts every year.

Apparently he's not alone on the board. For you investors out there, a quick quiz: Name the top five investment options out there through which you can get a guaranteed annual return of 8 percent. Stumped?

"For those funds with guaranteed returns or very low risk, I think the market is giving significantly less than 8 percent," said Kipperman, one of the newest members of the city's pension board.

Fellow pension Trustee Bill Sheffler agrees. What the city is offering its employees in DROP is "basically an infinitely renewable CD that earns 8 percent."

The average interest rate that banks are giving right now on one-year certificates of deposit, or CDs, is 3.64 percent. The five-year Treasury note yields about 4 percent these days.

The retirement system staff promised Kipperman and his colleagues that it would produce a report by August that outlined options the board had to reevaluate that interest rate.

For whatever reason, the report hasn't yet arrived -- Sheffler says he suspects he and others supportive of changing the interest rate are being "stonewalled."

Grissom explained the report's delay by waxing sarcastically in third person.

"Larry is wonderful, Larry is knowledgeable, Larry is skilled and a pro in this business but there has been so ungodly many things swirling around these days and I have not had time to get it done," Grissom said.

Regardless, it will be interesting to see what happens when the report does arrive.

Already two employee members of the retirement board have let it be known that they will not participate in any kind of decision relating to the DROP account interest rate adjustment.

Bill Lopez, who represents the city manager on the pension board, said he would support lowering the DROP interest rate but he will abstain totally from the debate.

"I would encourage board members who are employees to be very cautious when deciding whether to participate in that vote," said Lopez, who is the director of the city's risk management department.

The message is not lost on Lopez's colleague, trustee John Torres, who is currently defending himself against felony charges that he and five others inappropriately voted on benefit increases that directly impacted their own pensions.

Torres, also, has indicated he will abstain from any votes regarding the interest rate credited to DROP accounts. Torres also has a DROP account of his own, you see.

But in addition to the conflict-of-interest worry (which, by the way, the Pension Reform Committee warned about last year) there's another potentially problematic consequence of lowering the DROP interest rate.

See, if the board lowers the DROP interest rate, it will have basically shown that it can arbitrarily lower the DROP interest rate. And if the board can lower the DROP interest rate than the DROP system isn't necessarily a defined benefit.

And you might remember how the IRS feels about that.

"The interest rate has been disguising the irregularity of the system by artificially linking it to the entire defined benefit program via the assumed rate of return," said Diann Shipione, the former retirement board member who blew the whistle on the retirement system's burgeoning debt.

If you didn't understand her quote, let me get out my special copyright "San Diego City Employees' Retirement System to English Dictionary" and try to explain.

Careful observers of the city's retirement problems will remember that 8 percent also happens to be the assumed rate of investment return of the San Diego City Employees' Retirement System. In other words, SDCERS believes it can earn what averages out to be 8 percent every year. Some years better, some years worse. But SDCERS claims it will average out to at least 8 percent. And we can count on it.

But there's no city law that requires that DROP recipients receive the same 8 percent in their special accounts. They just do. Some of them claim that they were promised, through informational materials and such, that they would always receive the same interest rate as the assumed rate of investment return.

So Shipione is saying that if the system does lower the DROP interest rate to a more realistic return people can be guaranteed, it may unveil more problems than it solves.

Unless I'm reading my dictionary wrong.

E-mail Scott Lewis at smikelewis@comcast.net with your thoughts, ideas, tips or personal stories.

(Clarification Jan. 26, 2006: The original version of this story correctly categorized the DROP program when it first introduced the topic. However, because of an editing error, the sentence immediately after the DROP explanation incorrectly stated that employees accrue their salaries -- rather than their retirement checks -- in the DROP account. Voice regrets the error.)

Sorting Out Pension Baggage
By EVAN McLAUGHLIN
Voice Staff Writer
Thursday, Jan. 26, 2006

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The two lesser-known public agencies with stakes in the city of San Diego's retirement system continued Wednesday their low-profile push to distinguish their assets -- or remove them altogether -- from the city's in the troubled fund.

While the city teeters on the verge of bankruptcy, officials from the Unified Port of San Diego and the San Diego County Regional Airport Authority met with city and pension officials Wednesday in attempts to safeguard their assets should San Diego's financial crisis worsen.

A proposal being sought by the port and the airport would shorten the notice they would have to give the San Diego City Employees' Retirement System if they wanted to pull out of the trust from one year to six months. It would also strengthen the barriers between the different agencies' assets and make more transparent how administrative costs are divvied up between the city, port district and airport authority.

"We want to make sure 20 years from now that these folks signing on with the Port of San Diego today will have a secure retirement system," said Port Commissioner William Hall.

About 95 percent of the retirement system's portfolio is reserved for city employees and retirees. The remainder of the fund's stake, about $200 million, goes to employees and retirees of the port and airport.

Beginning in 1996, the city annually shortchanged its pension system for a number of years while also granting employees a series of benefit enhancements. As a result, officials estimate the pension fund's deficit to be approaching $2 billion. The city's annual payment into the pension fund could consume as much as one-third of the city's day-to-day budget in the coming fiscal year.

Representatives of the port and airport say they've been exploring how to better secure their assets and give themselves more pension options for more than a year. Last year, they successfully pushed legislation that allows the two agencies to create their own pension system if they desire. But retirement officials said they first caught wind of the movement this month.

At City Hall, a few of the key offices were notified in the last week or even just hours before certain SDCERS trustees met Wednesday to discuss terms with port and airport officials.

There were not enough members of the SDCERS board, Port Commission or airport authority in attendance to warrant a public noticing of Wednesday's meeting. Members of the press were told they were not permitted to enter the meeting initially, but were later invited in. Sources inside the meetings said at least one SDCERS trustee raised concerns that the retirement system could suffer cash-flow problems if the port and airport assets were removed from the fund.

The cash owed to port and airport pensioners represents just a sliver of the fund's total liabilities, but some made hushed remarks at Wednesday's meeting that the leeway being proposed for the two agencies appear to have the makings of a "run on the bank" -- code for when creditors rush to remove their money from an entity they believe to be going insolvent.

Officials estimate that the city owes the retirement system almost $2 billion, and there is speculation that the other two participating agencies, along with the pension trust's beneficiaries, may want to cash in now in case the cash-strapped city files for Chapter 9 municipal bankruptcy in the future.

Employees are withdrawing money from their accounts at rapidly increased rates as well.

From July to November 2005, participants in one city retirement program withdrew a total of $25 million -- four times more than what was paid out during the same timeframe a year earlier.

The program, known as Deferred Retirement Option Program, allows employees to squirrel away the equivalent of their retirement checks in an account during their final five years of employment at the city if they continue working after they reach retirement age. At any point in those five years, employees can retire and cash out the account.

Retirement trustee Mark Sullivan, a vice detective with the San Diego Police Department, said he supported the concept of their proposals.

"I can understand why they're doing it," Sullivan said. "They have some great concerns about the city moving into bankruptcy and what they're trying to do is secure their assets."

Local attorney Pat Shea, who worked on Orange County's bankruptcy filings in the 1990s, said that the two agencies' requests were "totally predictable."

"If you're a creditor, you need to start going out and scooping up the assets before the city's financial condition collapses," said Shea, who ran for mayor last year on a pro-bankruptcy platform. "It's almost reckless not to do this."

Shea said he thought the city employee unions would start moving quickly to usher city cash and assets into the retirement fund and that retirement-aged workers may start cashing in now as well.

The retirement board is expected to vote on the proposals at its Feb. 17 meeting. Airport authority Chairman Joe Craver said his board will also discuss the proposal at a retreat next month and port spokeswoman Irene McCormack said the Port Commission will consider it at its March meeting. The city must also make changes to the municipal code for the proposal to be enacted.

Hall said the terms of the proposal were supposed to be ready Wednesday, but the retirement system's staff was unprepared. Some pension officials thought Hall was moving to seal the deal too quickly.

Bill Sheffler, a citizen appointee to the SDCERS board, said he wanted to separate the pressure applied by Hall -- who appeared eager at the meeting to get an agreement forged soon -- from the merits of the proposal.

"My reaction after being hammered by (City Attorney Mike) Aguirre and being hammered by the mayor is that I want to take a closer look at what's going on," Sheffler said, referring to the recent calls by Mayor Jerry Sanders that the citizen trustees resign from the board. Aguirre has called for their resignations several times.

Sheffler said he didn't think the precautions the proposal calls for were necessary for the two agencies to recover their assets if the city were to file for Chapter 9 municipal bankruptcy, and that pulling out of SDCERS would cost them more in administrative fees because the retirement fund's behemoth portfolio gains them a discount with investment managers.

The port district had been double-billed in the past for SDCERS expenses, and Hall said that his agency is currently being refunded for those overcharges. He also said a shorter wait to terminate its contract with SDCERS would more easily allow the port district to explore the possibility of creating its own retirement system, a new option the Legislature granted it last summer.

Hall said he was personally intrigued of the port district's ability to have its own pension plan, asserting that he wanted the port district to eventually turn to a hybrid-style plan that includes characteristics of a 401(k)-style defined-contribution plan.

"Many defined-benefit programs are not sustainable, in my opinion," he said.

Please contact Evan McLaughlin directly at evan.mclaughlin@voiceofsandiego.org with your thoughts, ideas, personal stories or tips.

6 officials charged

Trustees' votes tied to increased benefits, DA says
By Philip J. LaVelle
STAFF WRITER

May 18, 2005

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Six current and former trustees of San Diego's underfunded pension system were charged yesterday with felony violations of California's conflict of interest law, the first in a possible wave of criminal cases to flow from a scandal that has crippled city finances and pushed a mayor from office.
The charges were announced at a news conference by District Attorney Bonnie Dumanis, who said the six received benefit boosts as a result of their votes in 2002. She said investigations are ongoing and more charges may follow.

"We believe this is the first step in restoring public trust in our government institutions," said Dumanis, who declined to take questions.

Her office alleges that a pension board majority voted in 2002 to endorse City Hall's continued underfunding of the pension, in exchange for work-force benefit increases approved by the City Council.

The deal was structured to include special benefits tailored for two board members. Some board members complained that they had been put in an untenable position  asked to bless underfunding, with the city putting in their hands the fate of healthy benefit increases.

A criminal complaint filed by Dumanis' office in Superior Court named Ron Saathoff, president of San Diego City Firefighters Local 145; John Torres, vice president of the Municipal Employees Association; former Human Resources Director Cathy Lexin; former Treasurer Mary Vattimo; former acting Auditor Terri Webster; and management analyst Sharon Wilkinson.

Dumanis said her office opened its investigation in June 2004.

"This prosecution will send a message that the District Attorney's Office is watching, and no one  let me repeat, no one  is above the law," she said.

The six are scheduled for arraignment today in Superior Court.

Of them, only Torres currently serves on the board of trustees of the $3.6 billion San Diego City Employees Retirement System.

The pension system has a deficit of at least $1.4 billion, attributable to underfunding by the city approved in 1996 and 2002, benefit increases and investment losses in 2000-02.

The deficit has sparked multiple investigations and deep financial and political crises in California's second-largest city.

The Securities and Exchange Commission is investigating whether officials committed securities fraud. And a federal grand jury continues to review evidence gathered by FBI agents in fraud and public-corruption investigations overseen by the U.S. Attorney's Office.

None of those who were charged could be reached for comment.

Webster lawyer Frank Vecchione told a news conference that his client was doing her job under the City Charter. "These charges are not only surprising, they're extremely disappointing to Terri and her family," he said.

In an e-mail to her membership, Judie Italiano, president of the Municipal Employees Association, said: "None of the Employee Reps broke any laws, and this witch hunt on our City is an attack on us all."

Federal investigations have been under way since mid-February 2004, spurred by city officials' admissions that financial documents  used by investors in hundreds of millions of dollars of San Diego municipal bonds  contained "errors and omissions."

Among the omissions: mention of the slide in pension-system assets, as well as unfunded retiree health care costs in excess of $500 million.

These admissions came two weeks after veteran city Auditor Ed Ryan announced his unexpected resignation in January 2004. By that March, City Manager Michael Uberuaga, who personally urged the retirement board to approve the underfunding, announced his resignation.

Investigations and resulting downgrades in the city's bond ratings have hobbled City Hall's ability to sell bonds to raise cash for large civic projects and forced the new city manager, Lamont Ewell, to seek special short-term financing from Bank of America for daily cash needs.

Ewell says the city is not in danger of having to file for protection under Chapter 9 of the U.S. Bankruptcy Code, reserved for distressed municipalities, which some pundits say is inevitable.

The strains of the crisis led Mayor Dick Murphy to announce last month that he will resign from office effective July 15  less than eight months into his second term. A special election is set for July 26, with a runoff, if needed, in the fall.

Murphy was not available for interviews yesterday.

His office issued a prepared statement that said: "As I've said in the past, if someone did something illegal they should be held accountable. However, as a former judge I believe that people should not rush to judgment. I trust the judicial system will do the right thing."

Ewell's office also issued a prepared statement: "It's imperative that we allow the judicial process to take its course. This is a painful and difficult time for the City. I feel for the individuals involved, as well as their families."

Lexin, an architect of the city's underfunding arrangements, faces two felony counts. The others face three felony counts each.

Lexin resigned Monday, along with Vattimo and former financial management director Patricia Frazier, who was not charged yesterday.

Webster was placed on administrative leave Friday for alleged failure to hand over documents demanded by the federal grand jury.

Violations of the state conflict-of-interest law are punishable upon conviction by a maximum sentence of three years in state prison, per count, and a $1,000 fine.

If the six are convicted, the benefit increases granted in 2002 could be voided.

The complaint alleges that the defendants voted July 11, 2002, to give the green light to a city proposal allowing continued underfunding of the pension system. In exchange for retirement board approval, the city agreed to increase benefits for the work force.

The council voted for benefit increases Nov. 18, 2002, with Donna Frye voting "no" after pension trustee Diann Shipione warned that the overall deal was possibly corrupt. Also that day, Frye joined a unanimous council in voting for underfunding, which was on the council's consent agenda, with no public debate.

A quid pro quo was suggested in a report by District Attorney's Office investigator Vincent Giaime that said: "The city's labor negotiators informed the unions . . . that the enhanced retirement benefits were contingent upon the (retirement board) approving" the underfunding package.

At the time, the city faced a huge balloon payment required under terms of the 1996 deal. That agreement called for the city to make the payment into the retirement system if its funded level  a measure of assets vs. liabilities  fell below 82.3 percent.

In 2002, with pension assets spiraling downward, city officials estimated the balloon payment at between $25 million and $75 million  easily enough to overwhelm the city's general fund budget. It has later been estimated at $500 million or more.

Saathoff, who would later become a political ally of Murphy's, received a special benefit as a union president. Webster received a special benefit allowing her compensation to exceed a 90 percent salary cap because her employment with the city began before age 24, according to Giaime's report.

A chart in his report showed how each of the defendants' monthly retirement compensation rose as a result of their vote to bless the city's underfunding request.

Many city officials say their vote to underfund the pension system was necessary to avert fiscal disaster. They claim not to have known at the time that the move violated the City Charter and the California Constitution.
"The city manager, city auditor, the city attorney and outside bond counsel all signed off on the deal," Councilman Brian Maienschein said yesterday. "All the people said the deal was OK."

Councilman Scott Peters said the balloon payment was intolerable. "We would have had to shut down police and fire stations and virtually shut down the city," he said.

Former Councilman George Stevens, who served on the council from 1991 to 2002, said he relied heavily on the opinion of Saathoff, the firefighter union president.

"He was one guy I was really counting on," Stevens said.

Saathoff was widely seen as the driving force at the pension board, but has kept a low profile since July, when mayoral candidate Ron Roberts said Saathoff told him his union would back Murphy for re-election if the mayor agreed to water down pension reforms.

Roberts, a member of the county Board of Supervisors backed by the firefighters union in the 2000 mayor's race, later told his story to the FBI. At the time, Saathoff said he did not recall saying what Roberts attributed to him at the July 6 meeting at the China Camp restaurant.

He has refused interview requests in the ensuing 10 months.

"I'm not surprised by these felony charges," Roberts said yesterday. "I think when all the dust settles, people will know that what I was saying throughout the entire mayoral campaign was the truth. I believe there is widespread corruption at City Hall, and I believe these are just the first of what I feel will be many charges filed."

Saathoff lawyer Jerry Coughlan declined to answer questions from The San Diego Union-Tribune, including whether taxpayers are footing Saathoff's legal bills.
"I don't talk to your paper. It's a rag," he said.

City Attorney Michael Aguirre told reporters he believes the pension board is paying for most, if not all, of the lawyers for the six defendants.

Yesterday's charges may only be the opening steps in what could be a long legal journey.

"We don't know exactly what charges the United States Attorney's Office is considering," Aguirre told reporters.

"We know that they are carrying out a massive and very focused and very disciplined investigation. They have provided us  almost on a weekly basis, sometimes a daily basis  with new subpoenas, which suggests to us that they are moving very deeply into these very troubled waters . . . I think this is the beginning of the process, not the end."

A spokeswoman for U.S. Attorney Carol Lam declined to comment.

Aguirre also suggested that many on the City Council, including Murphy, may face legal troubles for multiple pension-related votes, including one in 2002 designed to shield members of the pension board from legal repercussions.

"This wasn't something that was done by accident," said Aguirre. "This was a knowing and intentional set of acts that were well thought out, and basically this was an abuse of power."

Aguirre was not mentioned by Dumanis, but his investigation into the pension crisis foreshadowed yesterday's charges.

In his third report on possible violations of law related to the pension, published April 8, Aguirre listed the six defendants named yesterday as having a "prohibited financial interest" in the 2002 benefit increase.

"The City Council induced the (pension) board to violate its fiduciary duties to its retirees by enticing the Board with special benefits," the report said. "Unfortunately, the Board responded to this pressure and allowed the City to underfund the pension system from 1996 to the present day."

Staff writers Jonathan Heller, Ronald W. Powell and Jennifer Vigil contributed to this report.

Philip J. LaVelle: phil.lavelle@uniontrib.com

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