MOORLACH UPDATE — Voice of OC — April 30, 2010

It’s days like this that you are glad you can send out an e-mail blast and correct an error or two in a news article.

The reporter did not contact me for this story.

I did not continue item number 53 on the April 20th Board of Supervisors agenda.  In fact, I was disappointed that it was continued. 

My understanding is that it was continued by Mark Denny of OC Parks.  And, why not?  Supervisor Campbell was on vacation.  With only three Supervisors present, one “no” vote creates an interesting dilemma.

My impression was that Mark Denny, having served with distinction on the fifth floor, understood the drill and continued the item until the May 4 Board meeting.

What I did do at the April 20 Board meeting is discuss some seven items during the “Board Comments” section.  We only had one Board meeting during the month of April, so I saved up a few items to discuss with my colleagues and the CEO.

I simply inquired about the county policies regarding advisory committees.  The OC Parks Commission, discussed in the Voice of OC article below, and the Orange County Airport Commission’s review of the new parking concession results, caused me to be inquisitive.

My concern is real simple.  When someone clearly achieves the highest score by the panel reviewing Request for Proposal (RFP) responses, can a commission reshuffle the deck?  Can it utilize a different scoring system, after the fact, to come to the conclusion that it would prefer?

Obviously, since item 53 was continued, I could not discuss it when it would normally have come up.

Other than the incorrect observation by the reporter, this provides a window into some of the fun I enjoy as a decision maker.

Today’s Look Back provides some fun weekend “investigative reporting” reading on how abusing a defined benefit pension plan disrupted the fiscal course of the City of San Diego.

Tradition Goes Up Against a Better Business Vision

Two immigrant families are vying for the opportunity to showcase Orange County’s surf culture by operating a small food concession sitting atop a picturesque bluff overlooking Dana Point’s Salt Creek Beach.

Ongoing since last September, the battle goes before county supervisors next week. Board members will be confronted with the difficult question of what comes first regarding the county’s concessions: Keeping a tradition alive or the promise of increased revenue.

The competition is also providing a window into the behind-the-scenes machinations that often come before the decisions supervisors make on the dais.

Currently, the Dana Point concession is operated by the Efstathiou family, led by their father John. They have been serving breakfast burritos and apple burritos from the small shack for two decades.

In the wings is the Ali family, which operates a series of beach concessions and currently operates Zack’s Pier Plaza and Zack’s Too in Huntington Beach. Family patriarch Mike Ali wants to expand to Dana Point.

The Efstathious are banking on the connection they’ve made over the years with the locals. Family members have gathered more than 1,300 signatures for a petition in their favor.

And at the February meeting of the Orange County Parks Commission, Efstathiou brought a pile of letters from local officials and residents who say he’s become a fixture in the beach community.

Natalie Efstauiou, John’s daughter, told parks commissioners that Salt Creek Beach isn’t "a typical loud overcrowded Huntington Beach-type beach."

Mike Ali counters that the site is underutilized. He called Efstathiou an "absentee owner" arguing that the site is often not open. He also said the concession’s $30,000 annual revenue for the county could be significantly hiked with a better business plan.

"We have a lot of ideas for Salt Creek," Ali told commissioners. Being so close to two upper-end hotels (St. Regis and Ritz Carlton) is a big advantage, Ali said. "The concession has a lot of potential."

When county park officials put the concession up for bid last year, Efstathiou initially came out on top of the written proposals evaluated by county real estate staff.

But in the oral interviews, Ali, who promised a better theme and more revenue, ended up being endorsed by the county staff as the better proposal.

That triggered calls of foul play from Efstathiou’s attorney, Lynne Geyser, who argued that none of Ali’s promises were in writing.

Park commissioners considered the two proposals publicly in February during a long and heated session. They ended up going against the staff recommendation, voting 4-2 to keep the concession with Efstathiou.

The county parks staff then altered their report based on the parks commission vote. That prompted the questions from Supervisor John Moorlach, who represents Ali’s district.

It’s usual for such advisory commissions to take votes on issues but the original staff recommendation usually stays the same. Top-level elected officials — such as supervisors or city council members — then typically decide whether to endorse or reject the suggestions of their staff and advisory panels.

The beach concession was scheduled to be debated by the supervisors last month. But Moorlach delayed the item, asking County CEO Tom Mauk to look into the protocols, courtesies and etiquettes on county advisory commissions.

Mauk said he’d further research the issue – fueling speculation that the recommendation might change. That has some parks commissioners concerned.

"I thought the staff report as it’s written right now does not give an accurate picture of why the commission came to decision it did," said Parks Commissioner Matt Cunningham.

"It makes it seem like a bunch of people signed a petition and we caved in. And that’s not what happened. We spent a few hours on it going over it. We asked a lot of questions. I went in there with an open mind."

There is no county policy dictating that a commission’s vote can’t actually be listened to and used to change a staff recommendation.

And apparently, that’s exactly what OC Parks Director Mark Denny did.

"We revised our staff recommendation to reflect the commission’s input and respect the hard work they did to conduct a lengthy public hearing, taking all the public testimony. We wanted our recommendation to reflect that hard work."

"They contributed to the process here," Denny said. "We recognize we did something different. We didn’t necessarily follow past practice," emphasizing the phrase, "practice not policy."

Don Hughes, a policy advisor for County Supervisor Pat Bates — who represents the district where Efstathiou lives and the concession is located — said their office agrees with the parks commission decision.

"We let the commission process play out," Hughes said. "The process did what it was supposed to do."

Please contact Norberto Santana, Jr. directly at nsantana@voiceofoc.org and follow him on Twitter: twitter.com/norbertosanatna. And add your voice with a letter to the editor.

FIVE-YEAR LOOK BACKS

May 1

2005

Before the City of Vallejo, there was the City of San Diego.  There was plenty of speculation as to whether or not it would file for Chapter 9 Bankruptcy to address its pension liabilities.  San Diego did not.  Vallejo filed for Chapter 9, but, to date, has not followed through on using it to address its pension obligations. 

Five years ago, San Diego was the story.  The LA Times covered it in San Diego Playing a Blame Game — As multiple probes of the pension crisis go forward, finger-pointing is rampant. Some observers fear that bankruptcy is possible.”  It was written by reporters E. Scott Reckard, Catherine Saillant and Kathy M. Kristof.

My closing remarks in this article show that for some five years now, I’ve been waiting for a municipality to address its unfunded actuarially accrued liabilities through a Federal Bankruptcy Court.  I’m still going to have to wait.

This article lays out all of the nonsense that led to San Diego being referred to as “Enron by the Sea” by the New York Times.  I’m providing it in total as it provides a litany of abuses that occurred to put this wonderful city on the brink of bankruptcy.

It’s amazing how much can happen in five years.  The then newly elected City Attorney, Michael Aguirre, who came in as a crusader would come to look more like a contentious megalomaniacHe did not succeed at any of his legal attempts to address the pension problem.  He did not get re-elected.  By the conclusion of his term, he called me to join in on our litigation addressing the unconstitutionality of granting retroactive benefits.  I kept my distance.  Aguirre’s successor would be former California Assemblyman Jan Goldsmith, who was a candidate for California State Treasurer in 1998, where he and I became acquainted as I was considering a similar move that year.

Speaking of updates on many of the individuals mentioned in this article, City Manager Lamont Ewell would leave San Diego for Santa Monica in January of 2006 and retired from there in August of 2009.

Carl DeMaio would run successfully for the San Diego City Council in the June, 2008, election cycle.  He continues to be a large voice on pension reform and lent me a big assist on our successful Measure J in November of 2008. 

Former Assistant City Auditor Terri Webster and former Firefighters Union President Ron Saathoff had their conflict of interest case (felony counts of Government Code 1090) thrown out just two weeks ago.  Federal prosecutors in San Diego have decided to appeal the ruling.

Carol C. Lam, the U.S. attorney in San Diego, was asked to resign in 2007 by the Bush Administration.  This now famous incident would ultimately lead to the resignation of United States Attorney General Alberto Gonzales later that same year.

As Michael Aguirre moved into the San Diego city attorney’s office in December, he was surprised to find that documents related to the city’s $1.5-billion pension shortfall were moving out — a dozen floors down to a locked room in the city manager’s suite.

Aguirre, whose campaign had taken aim at what he saw as cronyism and double-dealing at City Hall, said no one had told him about a need to move the files from the conference room where they had been kept for months.

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"They wanted to relocate the documents outside the city attorney’s jurisdiction," he said, contending it was one of a series of attempts to keep him from unearthing the truth. "This city is staggering into the financial abyss, and the people who should be cleaning it up are instead obfuscating."

City Manager Lamont Ewell dismisses Aguirre’s story about the files. "I have no idea what he’s talking about. I never gave any such direction. It never happened. I don’t have any access to his office. This is another of his fabrications," he said in a statement released by his spokeswoman, Gina Lew.

Accusations are in the air these days in California’s second-largest city — where Aguirre, the district attorney, the U.S. Securities and Exchange Commission and the U.S. Justice Department all are probing possible wrongdoing in connection with the pension deficit.

A federal grand jury has issued seven subpoenas for documents and testimony, and at least five key city officials, including Mayor Dick Murphy, have announced their resignations or moved to other positions.

"The city has been in an utter state of paralysis for more than a year," said Carl DeMaio, president of the Performance Institute in San Diego, a nonpartisan think tank. He said his group began advising the city on how to deal with state budget cuts last year, and gradually realized the problems were far worse than described at that time.

"If we don’t take immediate action, the city of San Diego will be forced into bankruptcy," he said.

But so far, there has been more finger-pointing than problem-solving.

Aguirre has issued a series of reports blaming top city officials and city employees union leaders for the deficit, saying they failed to act after the stock market plunged in 2000, hammering a retirement system that promised ever-greater benefits without identifying how to fund them.

Indeed, Aguirre said, city officials made things far worse in 2002 by striking a deal that again sweetened retirement benefits while allowing them to ignore a financial "trigger" that would have required them to pay hundreds of millions of dollars to bail out the system.

"Together, these officials decided not only to keep the people of San Diego in the dark about the situation, but also to withhold the adverse facts from investors in the city’s bonds," he said in one report.

Critics say Aguirre is creating chaos by grandstanding, usurping authority from the mayor and City Council, and inserting himself where he has little jurisdiction. "Clearly there is something wrong in San Diego, but things were being investigated long before he was elected," said former Deputy City Atty. John Kaheny. "His continued involvement only serves to hinder the process."

As the fighting among public officials plays out publicly, however, federal investigators are quietly grinding away on two fronts, according to Aguirre and others with knowledge of the probes.

One inquiry involves the city’s failure to warn investors in its municipal bonds until January 2004 of a growing pension shortfall. The troubles came after the city tapped into higher-than-expected stock market profits in the pension system, leaving it vulnerable when the market hit bad times.

Critics say the investors had a right to know because the deficit made it less certain that they’d get promised bond payments.

Randall Lee, the SEC’s Pacific regional director in Los Angeles, declined to comment on the probe. But a failure to alert investors to bad news is something his agency would investigate. After Orange County’s 1994 bankruptcy, the SEC sanctioned county officials and their advisors for failing to disclose the risks in investments that lost $1.6 billion.

The lack of disclosure in San Diego’s SEC filings was brought to light by Mark Conger, a lawyer who sued the pension board and city in January 2003 on behalf of retirees who feared their benefits were being jeopardized. That lawsuit resulted in a commitment from the city to restore full funding.

Conger said the SEC called him in February 2004, and he briefed lawyers for the agency on the allegedly misleading statements.

Robert C. Friese, an attorney for eight San Diego employees with knowledge of the city’s bonds, said his clients also have been interviewed by the SEC.

Based on questions asked of his clients, Friese said, the agency appears to be examining bond offerings in 2002 and 2003 for sewage, ballpark and other improvements. Friese said disclosure problems stemmed mainly from poor coordination, but he acknowledged one clear misrepresentation in filings connected to the offerings: that the pension fund had about 97% of the assets needed to pay for future liabilities, when in fact the ratio had fallen below 90%.

"That was wrong," he said. "And it should have been caught."

Friese said the mainly lower-level employees he represents were witnesses, not targets, in the SEC probe and a related criminal investigation of political corruption by the FBI and the U.S. attorney’s office in San Diego.

Conger and Aguirre said they thought this second line of inquiry was examining potential conflicts of interest involving powerful players on the pension board and the City Council. Aguirre said as many as 10 current and former employees of his office have been interviewed by the SEC or the FBI, and some of them have been given immunity.

Among the most damaging evidence, Aguirre contends, are e-mails showing that the pension board voted during labor negotiations in 2002 to let the city ignore a trigger requiring balloon payments when the fund’s assets dipped below 82.3% of its projected liabilities.

With the trigger waived, the city was able to skip more than $500 million in special payments that were supposed to have been made over the next two years to keep the fund healthy.

In return for the waiver, Aguirre alleges, employees were promised even more retirement pay, including 11% higher basic benefits. Compounding the potential conflicts of interest, union presidents on the pension board got special financial favors, he said.

In one report, Aguirre cited a May 21, 2002, e-mail from pension board member and then-Assistant City Auditor Terri Webster to Labor Relations Manager Dan Kelley. In the note, Webster said it was especially important to win support for the waiver of the trigger from firefighters union President Ron Saathoff, an 18-year veteran on the board, "since he runs the show."

In the end, changes in pension rules allowed Saathoff to count his $45,000 annual union stipend, as well as his $84,000 salary as a city fire captain, toward his pension. That yielded the labor leader a pension of $116,000 a year for life when he retired soon afterward at age 55. It was an increase of $32,000 over the $84,000 a year he otherwise would have received, Conger said.

Aguirre noted that state law bars public officers or city employees from participating in making a contract in which they have a financial interest. A violation can be prosecuted as a felony. Six pension board members — including Saathoff and Webster — had a "prohibited financial interest" in the deal struck in 2002, Aguirre’s third report said. All six voted to waive the trigger provision, a proposal that passed on an 8-2 vote.

Webster and Saathoff couldn’t be reached for comment. Webster now works in the city’s sewage department.

Carol C. Lam, the U.S. attorney in San Diego, declined to comment on the criminal investigation.

After taking office on a reform platform, Aguirre plowed through hundreds of e-mails, memoranda, actuarial studies and city documents exchanged over the last decade — documents tracing the series of decisions by city and retirement board leaders that preceded the financial crisis.

A 1996 agreement increasing pension benefits contained the supposed safeguard, stipulating that if the pension fund’s ratio of assets to liabilities ever fell below 82.3%, the city would have to make balloon payments to close the gap.

Adding to the fund’s burden was a city policy dating to 1980 of diverting earnings from the pension trust to pay for other benefits. Retirees were given a 13th check in any year that earnings exceeded expectations. The city also paid for retirees’ health benefits out of excess earnings.

And in an unusual twist, employees were able to "buy" pension credits at a discount, enabling some to qualify for a pension reflecting 10 years of service after having worked for just five years.

If San Diego had been following sound financial and actuarial principles, that money should have stayed in the pension trust to generate even more income, the city’s Pension Reform Committee concluded in a report last September.

But in 1996, the retirement system was more than 90% funded. Buoyed by earnings created by the stock market boom of the late 1990s, it stayed that way despite more pension enhancements approved in 1997 and 2000.

By late 2001, however, the financial picture had begun to change, with pension trust earnings falling 71% from the previous year.

As the funding level continued to plummet, city and retirement officials exchanged numerous e-mails discussing the impending meltdown.

By June 30, 2002, the funding level had dropped to 77%, triggering the balloon payment required by the 1996 agreement. The city’s Pension Reform Committee later calculated that the city should have paid at least $203 million into the fund the next year to ensure its soundness. Instead, it paid $85 million, the committee found.

Also in 2002, the mayor and City Council agreed to sweeten pensions again, giving city employees one of the best plans in the state. Police and firefighters on the job long enough could retire at age 50 with a 90% pension for life, plus health benefits. General employees finishing a 30-year career were entitled to a 75% pension at age 55.

The problem, according to Aguirre, is that the city granted these benefits without providing a source to pay for them. He put the combined cost of the enhanced pensions at $467 million.

"It is precisely this lethal combination of underpayment while simultaneously increasing contractually obligated benefits that put the city in the financial crisis it is in today," Aguirre said in one report.

After the 2002 labor contracts were signed, the pension fund level continued to fall. By last June, it had fallen to 66%. Aguirre said the shortfall now comes to more than $1.5 billion.

Given the pension’s massive deficit, San Diego would have to devote 20% to 25% of its budget to catch-up payments over the next three to four years to get the system in balance, said Scott B. Ehrlich, a bankruptcy law professor at California Western School of Law.

"No city can afford that," he said.

If San Diego could get its bond ratings restored, it could potentially float pension obligation bonds to finance the debt, noted Mary Beth Syal, a bond portfolio manager at the Los Angeles investment firm of Payden & Rygel. But the city would be forced to pay substantially higher interest because these bonds are not tax-exempt.

The result, she said, would be that the city would pay about $75 million a year to finance $1.5 billion in pension obligation bonds, versus about $45 million for tax-exempt bonds.

But it is not clear whether San Diego can even float the bonds. Standard & Poor’s won’t rate the city’s bonds because the city has no audited financial statements. Outside auditor KPMG says it won’t certify the financials until a thorough investigation determines whether laws were broken.

If the city is not able to borrow its way out of the crisis, its options would include raising taxes, getting city workers to agree to a cut in pension benefits, or even filing for bankruptcy — an option no city officials are considering at this point.

The latter would be an especially costly option, said Orange County Treasurer John Moorlach, who was elected in the backlash that followed Orange County’s 1994 bankruptcy. County taxpayers wound up shouldering $100 million for lawyers, accountants and interest payments, Moorlach estimated.

And even bankruptcy may not end San Diego’s pension obligations, Moorlach said; municipal bankruptcies are so rare that there is little precedent for what might be allowed.

If there’s one consolation for San Diego in its litany of woes, it might be this: It’s not the only city whose pension obligations are underfunded.

California public agencies borrowed more than $2 billion last year to cover pension costs; it was the biggest amount in more than a decade, according to the state treasurer’s office. If San Diego were to successfully renegotiate its pension contracts through bankruptcy, Moorlach said, other cities and agencies might line up behind it.

"If they are successful, you might see a domino effect, where a lot of other cities that have similar problems say, ‘Here’s the road,’ " Moorlach said.

*

Times researcher Scott Wilson contributed to this report.

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