Is anyone gonna pay?

Ron Saathoff

Ever since the pension-and-bond-disclosure scandal blew up in the city of San Diego’s face in early 2004, there’s been lots of talk about moving forward and not looking back, much of it coming from politicians who have nothing to gain—or something to lose—in a search for metaphorical buried bodies. But those of us who value accountability have been waiting patiently to find out if anyone is going to be held criminally liable for what went down here in 2002. Finally, we learned some things this week.

One thing we learned is that, thanks to a California Supreme Court ruling, five former members of the San Diego City Employees Retirement System’s Board of Administration will not face state conflict-of-interest charges for allowing the city to continue to shortchange its employee-pension fund allegedly in exchange for enhanced retirement benefits for city workers (including themselves). And we learned that a sixth defendant, Ron Saathoff, will likely face state charges because he, as president of the firefighters union, stood to gain more from the deal than the others.

Quick history lesson: Back in 2001, retirement-system officials learned that the dot-com bust had ravaged the system’s stock portfolio to such a degree that the city was facing a required $25-million lump payment to the pension fund (funny how what’s considered chump change these days was seen as a lot of money only eight or nine years ago). Back then, some high-level city staffers pulled double duty as members of the retirement board, and the incestuous situation produced a proposal that would relieve the city of its lump-payment obligation and get city employees more retirement money. This essentially extended a similar agreement that was reached in 1996. The problem, of course, is that the deal increased the city’s long-term liabilities with no plan for squaring them.

Three of the six people who faced state charges also face federal fraud charges, along with two others who face only federal charges. The federal judge shut down his case until the state Supreme Court ruled. So, with three officials off the hook, what’s left is one guy (Saathoff) still facing both state and federal charges and four others facing federal charges.

U.S. prosecutors have charged the quintet with honest-services wire fraud, which essentially means they’re alleged to have deprived their victims (the employees, the retirees, the taxpayers) of honest public service and they conspired to do so through electronic communication. Google “honest services fraud” and you’ll find lots of controversy swirling around the statute, which has been on the books only since 1988. Critics say it’s overly vague and can snare just about anyone accused of any sort of dishonest behavior.

In our view, though, the San Diego case is anything but frivolous. The effects of these deals are all too apparent. Thanks to crushing budget deficits, citizens are being asked to expect less in the way of municipal services, some service fees have been increased and a city commission is currently exploring possible new revenue sources, which any conservative will warn you is a euphemism for higher taxes. The pension fund now eats up about 20 percent of the city’s general fund. In its calculation of what the city owes its pension fund this coming year ($231.7 million), there’s a line item that’s mostly attributable to the benefits that were increased between 1996 and 2002. That line item is $87.8 million, and it’s not likely to change much during the next 15 or so years, and it has to be covered by service cuts and/or taxes.

Two years ago, former City Councilmember Scott Peters, a lawyer, who voted in 2002 to underfund the pension fund and increase benefits, told us that he didn’t believe there was evidence of a quid pro quo—in other words, that the two actions were linked. Well, although the state Supreme Court justices found that there are exceptions to state conflict-of-interest laws protecting five of the players, they also seemed to find plenty of evidence of a quid pro quo—aimed at increasing the smart, savvy and influential Saathoff’s retirement pay as a way of enticing him to go along with allowing the city to escape the $25-million payment.

There are three pending U.S. Supreme Court challenges to the honest-services-fraud law, so it’s possible that the law will be struck down before it can net anyone in the pension case. That would be a shame—for those of us who, you know, value accountability.   

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