San Diego Two essential elements of financial fraud are secrecy and contrived complexity. And one driving force of the criminal mind is to continue doing what you have been doing, because if you stop, someone will get suspicious.
These three characteristics of human misbehavior explain what drove the City of San Diego to the brink of bankruptcy and why criminal indictments may result.
The Vinson & Elkins report on the City of San Diego's pension calamity stressed the system's bewildering complexity, as well as city employees' extreme reluctance to share information with the public, its bond investors, and even its own outside counsel. City officials deliberately set up the convoluted structure and then would not tell the truth, "So the city could spend more money than it had on benefits that these very same officials would receive," says Diann Shipione, the whistle-blowing member of the pension board who called attention to the billowing deficit and corruption.
Now knowledgeable sources say that after the November 2 election, the U.S. attorney's office may announce indictments of officials involved in the pension book-cooking and deception. Supposedly, the U.S. attorney's office doesn't want to influence voting. But I would suggest that if the office withholds the indictments until after the election, it will be guilty of distorting the election's outcome.
That's because the one city councilmember who opposed the pension underfunding, Donna Frye, is a late-hour write-in candidate for mayor. Mayor Dick Murphy voted for the current arrangement, and Ron Roberts permitted similar underfunding by the county. Therefore, all relevant information must get to the voters before this election.
Also, citizens will be voting on Propositions G and H, which supposedly will improve pension procedures. But both Frye and Shipione say these measures will permit continued intentional underfunding. The city has been guilty of withholding information from voters; the federal government should not do likewise.
In the few weeks remaining, Frye intends to attack the culture of secrecy that plagues San Diego government. "The public was not aware of the extent of the pension unfunded liability," says Frye, despite educational efforts by Shipione and city attorney candidate Mike Aguirre.
History is instructive. "Without taxpayer subsidies, the pension system was already unaffordable by 1990," says Shipione. "That's when they started using weird accounting tricks and off-balance sheet liabilities." In 1994, city auditor Ed Ryan said if he could not get relief from putting more in the pension kitty, the city would have to start laying people off. Politicians stalled.
In 1996, the city did not have the funds for the Republican convention, which was to showcase then-mayor Susan Golding, who wanted to run for U.S. Senate. Under city manager Jack McGrory came the plan for systematic, deliberate underfunding. But the city would have to get permission from the pension board, dominated 9-4 by city employees or their labor representatives. So in the following years, the workers got juicy benefits as the underfunding escalated.
There was a supposed safety net. If the funding ratio fell below 82.3 percent, the city would have to make a balloon payment. In mid-2002, the city found it would have to put in more than $150 million to make that payment. "That was never, ever revealed, and I have gone through 25,000 or 30,000 documents," says Michael Conger, the lawyer who successfully sued the city over pension machinations.
The city's answer was to concoct a plan to lower that 82.3 percent trigger. Shipione said such a move would create a financial crisis. Aguirre agreed and said he would sue the pension board if it lowered that trigger. The board refused to consider the proposal unless members were indemnified for voting for it, and the city went along.
Also in mid-2002, says Conger, the city gave five members of the pension board fat retirement benefits, even if they didn't work for the city. But the five neglected to tell the public of their windfall. The quid pro quo: that they would maneuver the deficit-expanding ploy through the pension board. "Mike Aguirre told them not to vote" because of that conflict, says Conger. They did. Now, it's almost certain that at least one of the five is under federal investigation for this cozy arrangement.
In November of 2002 -- with only Frye opposing -- the council passed the plan to extend the deficit until after the current councilmembers and mayor were out of office. The funding percentage plunged to 67 percent. The next balloon payment would be more than $300 million, says Conger. In early 2003, he sued. "The pension fund wouldn't give us public documents; we had to sue to get them to turn the lights on."
Similarly, the pension board used to keep track of the deficit. It was called the "net pension obligation reserve." Conger called it "the bar tab." Three months after he filed his lawsuit, as the bar tab was growing exponentially, "They decided to eliminate it, deleted it from the books, stopped keeping track of how much the city had underfunded the pension system."
Shipione points out that the pension board has stopped publishing the amounts that certain city employees and labor leaders will get in retirement, on the grounds of privacy. But taxpayers are entitled to that information. She has tried to find out about the extravagant retirement packages the labor leaders were promised in 2002. "But there isn't a paper trail, and you can't get one," she says. She is also perturbed that the pension system unilaterally declared that it was free to violate state laws against conflict of interest.
In her campaign, Frye will stress city government's tactical suppression of truth. Particularly noisome is the habit of putting important legislation on the so-called "consent agenda" -- 15 to 20 items that are passed without discussion. Only later does it sometimes become clear that a big scam was one of those items. Developer Corky McMillin made many promises when he got the sweetheart deal to convert the old Naval Training Center. "But when the final agreement was drafted, it was quite a bit different than the original intent made clear at public hearings," she says. It was a voluminous document that went unread. An egregious example today is the Vinson & Elkins report that slams the city for its secrecy over its pension woes. But the council is meeting to discuss the report in closed sessions. Frye boycotts such meetings.