2003 San Diego Memo Critical of Pension Underfunding Decision

October 4, 2005 (PLANSPONSOR.com) - A two-year-old memo from private lawyers representing San Diego's pension fund was sharply critical of the fund's agreement with a decision to delay fully funding the city's pension program.

The March 2003 document, from San Diego firm Seltzer Caplan McMahon Vitek, was released publicly Monday as a result of a Public Records Act filed by the San Diego Union-Tribune newspaper and other media outlets, the Union-Tribune reported.

By agreeing to a city proposal in 2002 to underfund the pension system, pension board members were putting their own needs above those of fund beneficiaries, the legal memo said. According to the letter, any argument that the pension system could benefit by accepting reduced city contributions “is difficult to accept,” particularly because the 2002 deal also “locked in a significant reduction in contributions over the following eight years.”

A pension board member must weigh the needs of retirees and the employer, it continued, but if there are conflicts, “the duty to participants and beneficiaries takes precedence over any other duty.”

The arrangement, which also cleared the way for the city to increase employee pension benefits, should have been nullified, the memo advised officials from the San Diego City Employees Retirement System (SDCERS). Ultimately, the part of the pact that allowed the underfunding was set aside by a legal settlement, but the benefits have remained in place. Those factors, and to a lesser extent stock market losses, have led to a pension deficit of at least $1.4 billion.

According to the Union-Tribune report, the lawyer’s letter is one of the many e-mail messages, memos, reports and files the pension system turned over to federal investigators and city consultants in September.

Michael Conger, the lawyer whose lawsuit, filed on behalf of retirees, ended the underfunding practice in 2004, said the letter shows that the pension board ignored the truth.

Last year the city acknowledged making errors and omissions in bond disclosures dating to 1996. Allegations of conflict of interest also have dogged the city officials and pension board members who prepared or approved plans to underfund the system while increasing benefits. In fact, six current and former city employees face conflict-of-interest charges stemming from their 2002 votes to allow the underfunding to continue. The board was comprised of employees, political appointees and retirees until its composition changed in April to allow non-employees to dominate the panel.

The pension board, after months of talks, voted to approve the underfunding plan in November 2002. The City Council took up the issue days later and approved the plan. At the time, the city was said to be avoiding a required payment of $75 million to bolster the pension system. It has since been estimated that $500 million would have been needed.