Judge Rebuffs Aguirre's Arguments in SDCERS Pension Case

December 18, 2006 (PLANSPONSOR.com) - Superior Court Judge Jeffrey Barton ruled last week that San Diego City Attorney Michael Aguirre can't challenge pension benefits awarded to employees before July 2004 because no effort was made to do so in two recent legal settlements with retirees.

The decision means that Aguirre can hope to recoup only a fraction – $50 million or less – of the $900 million in benefits he sought to eliminate, according to the Union Tribune.   Aguirre called Judge Jeffrey Barton’s decision “a mistake” that will, if upheld, force the city into bankruptcy or require residents to take on major new tax burdens to cover a pension deficit of at least $1.43 billion.  

Aguirre has argued that pension increases approved in 1996 and 2002 were part of an illegal exchange, and that the increases in city employees’ pensions granted by the San Diego City Employees Retirement System should be pushed back because pension board members had an illegal conflict of interest. Some board members who voted on an underfunding plan were also city employees whose retirement benefits were enhanced.   The underfunding agreement is at the core of the system’s current deficit of $1.4 billion, and has led to months of political and financial turmoil in the city (see  Aguirre Loses Pension Suit Appeal ).

Five Issues

Barton’s decision focused on five issues, chief among them the importance of two legal settlements the city agreed to in 2000 and 2004.   Those agreements called on the city to consider all forms of employee compensation when calculating benefits and to end the underfunding of the pension system.   Barton determined that the first pact means the city “cannot go back and undo” benefit increases granted in 1996, because they were replaced by other gains in the judgment.

The City Attorney’s Office also did not challenge the legality of the benefits as the second settlement was finalized – five months before Aguirre took office in December 2004. That inaction “prohibits the city from litigating the issue now,” Barton wrote.   However, those terms apply only to retirees who left the city before the July 2004 judgment, the judge said, but those entitled to what remains of the disputed benefits “must be granted the opportunity to be heard” if the trial continues, Barton said.   The judge also noted Aguirre’s “creative use” of legal principles, which he called “one of the few available mechanisms” the city could embrace to try to eliminate the benefits.

Attorneys for four groups of employees defended the benefits during the trial, which began October 30, attacking the legal foundation on which Aguirre built his case.   According to the Union Tribune, they prevailed on most counts, leaving all of the 1996 benefit increases and part of the 2002 boosts intact.   Judge Barton, who last summer ruled there were too many facts in dispute in the case in which Aguirre sought a pre-trial victory, had said at that time that he could not rule at that time in favor of the city’s legal argument that the benefits were granted illegally.

Next Steps

Turning to a higher court will almost certainly delay the trial, which had been set to resume December 27. Barton divided the proceeding into three parts; yesterday’s ruling only addressed procedural points from the first phase, though he also predicted that it could cause the trial to be interrupted.   According to the Union Tribune, Aguirre estimated that an appeal could set the case back by several months. He will appear before Barton today in an attempt to make it possible to file an appeal by December 22.

The case originated with a January 2005 lawsuit by the pension system, which sought to block Aguirre from taking over as the fund’s legal counsel. Aguirre countersued six months later, alleging that the benefit increases were granted illegally (see  San Diego’s Aguirre Demands Court Roll Back Pensions ).

Aguirre lost the bid to take over the system’s legal affairs in March, two months after Barton consolidated several pension suits into the case now being tried.   Just last month, Callan Associates, a consultant to the SDCERS pension fund for more than two decades, agreed to a $4.5-million settlement of a legal battle with the city attorney, but denied all the pay to play conflict allegations in the lawsuit that triggered the fight (see  Callan Settles $4.5M Suit over Pay to Play Conflict Charges ).   The final amount of    the settlement fell far short of the $50 million City Attorney Michael Aguirre sought when he filed the suit against Callan Associates in 2005 (See  San Diego Accuses Callan of Pay to Play Conflicts ).  

Federal investigators continue to conduct probes, and the city’s credit ratings have been slashed (see  Five Indicted in San Diego City Pension Case ).   Additionally, last month, after a nearly two-year inquiry, the Securities and Exchange Commission found that San Diego had engaged in securities fraud, in part because officials had hidden the pension liabilities (see  San Diego Slapped with SEC Sanctions for Bond Sale Fraud ).