"Don't Ask, Don't Tell" May Be Crux of SD Pension Woes

January 18, 2005 (PLANSPONSOR.com) - The current turmoil surrounding the City of San Diego's pension fund was stirred a little faster on Friday with new allegations from City Attorney Michael Aguirre.

In the first report on his pension investigation Friday, Aguirre alleged that city officials failed to disclose critical financial information and reports – and used the press conference to alert council members that their testimony (save for that of newly elected Tony Young) is requested in a federal investigation by the US Securities and Exchange Commission.

Friday’s bombshell took the form of a connect-the-dots series of events following the initial discovery of the pension’s dropping funding level – events that suggest a process that, intentionally or accidentally, kept the deteriorating funding level at the $2.5 billion fund from being addressed sooner.   

EEEK Streak

First, according to Aguirre, an e-mail dated October 21, 2001, concerning the burgeoning gap at the pension fund due to a 71% drop in investment earnings was sent from Deputy City Auditor Terri Webster to Deputy City Manager Cathy Lexin.   The e-mail’s subject line, prophetically enough, was “EEEK!”   Aguirre says that the information was never passed on, and that “The auditor had a responsibility to make that information available and brought home to the mayor — and that did not happen.”

Aguirre says that Mayor Dick Murphy’s Blue Ribbon Committee failed to disclose the sinking status of the pension plan in a February 27, 2002, report to the City Council’s Rules Committee, and later to the full council.   Instead, the Blue Ribbon Committee, largely made up local business leaders, delivered a report on February 27, 2002, saying that the pension was 97% funded, leaving a $68.95 million shortfall, according to the San Diego Daily Transcript.   However, a report issued on February 12, 2002, by Gabriel, Roeder, Smith & Co., the retirement system’s actuary, reflected a funding level of 89% and a shortfall of $283.89 million.  

Aguirre claims the failure to report the shift is largely responsible for allowing the unfunded liability to fall below a formerly agreed upon level of 82.3%, imposing an estimated $500 million balloon payment.

Writing the Report

However, Richard Vortmann, a member of the Blue Ribbon Committee and president of the National Steel and Shipbuilding Co., told the Transcript that committee members 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, according to the report. “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.   But 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 with the Transcript.  

April Boling, local accountant and member of the Blue Ribbon Committee, told the Transcript, “Unless someone told us that a new report came out, I don’t know how we could have known.   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.   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.

On Friday Aguirre said that notifying the city of the pension shortfall most likely would have stopped the City Council from approving another series of benefit perks to retirees in 2002 in an agreement known as City Managers II.   Last August Mayor Murphy said, regarding that agreement, "Knowing what I know now, I would not have voted to continue the underfunding. It was a mistake, but it was a mistake caused by a lack of information.   I think I speak for all of the council that the prior city manager's recommendations regarding the pension plan were not fully explained to us."   (see  Officials Admit They Made Mistake in San Diego Pension Decision ).  

However, Aguirre also said at the press conference that Murphy, chair of the rules committee, signed off on the report and also will be questioned about his knowledge on the matter.   "I categorically reject Mr. Aguirre's insinuation of wrongdoing by me," Murphy said in a prepared release. "It is untrue, reckless, and irresponsible," according to the Transcript.

"Cover Up Mode"

Aguirre warned of a potential bankruptcy filing on Monday, just hours before newly reelected mayor Dick Murphy delivered his annual State of the City address.   Later, Aguirre took dozens of boxes of documents from senior city officials in his investigation of city finances.   "We are still, I believe, in cover-up mode," Aguirre told reporters, according to the Associated Press. "We are not in a clean-up mode."

Aguirre said it would be "extremely difficult" for the city to borrow money unless the auditor and treasurer were replaced. San Diego has effectively been shut out of capital markets since September 2003, when an outside attorney raised questions about the accuracy of its financial statements and forced it to shelve a bond sale.