San Diego 'Someday this mess will end up in the media," wrote an irate Terri Webster in an e-mail on August 13, 1999. Oh, how prescient her words were. Webster, then assistant city auditor, was writing to deputy city manager Bruce Herring. She was in high dudgeon because the city's pension board was using a Florida lawyer who was not a member of the California bar. Then-city attorney Casey Gwinn had written the board three weeks earlier, stating emphatically that "an attorney must be licensed in California to render advice on California law to a California client." Use of the Florida lawyer might be illegal, warned Gwinn.
"The city should really get control of the [pension] board before it becomes a PUBLIC embarrassment," wrote Webster -- again, clairvoyantly. She was a member of the pension board at the time. Along with fellow board member Diann Shipione -- who would later become the whistle-blower -- Webster was suspicious of what the board was doing.
She particularly challenged the hiring of Robert D. Klausner, the Florida lawyer who was not licensed in California. "You would think question #1 in selecting candidates for the board to interview would be, 'Are you licensed to practice in the state?'" wrote Webster to Herring. She questioned Klausner's past advice: "He's the guy from Florida that mostly supported the questionable issues without citing much case law. He gave the advice on independence, Brown Act, conflicts of interest, etc. He's been employed with the board for over two years. Reassuring, isn't it? The board should contact his other California clients to save them $$$ for bum advice."
Webster has now been transferred to the wastewater department. She is not commenting on the messes at city government and the pension system. Shipione, who has since split with Webster and the other board members, is still voicing her views on the problems besetting the city and pension system. The 1997-1999 period "was a time when the board was shopping for opinions and found somebody [Klausner] that would give the board opinions that it liked," Shipione says. "The California law firms that gave opinions the board didn't want to hear were fired. This guy would give all kinds of opinions that certain members of the board and staff wanted him to give."
Klausner is now based in Plantation, Florida. He represents public-pension funds, as well as municipal unions. He is also a lobbyist on public-pension issues. I have reviewed some of his opinion letters during the period he represented San Diego's pension fund. In light of what subsequently happened, his advice can certainly be challenged. For example, on June 10, 1998, Klausner advised that so-called "surplus earnings" from the pension system could be used to help fund both employee and employer contributions and also make cost-of-living payments to retirees.
Last September, the law firm Vinson & Elkins issued a lengthy report on the pension muck and the city's practice of concealing it in bond prospectuses. The report was a whitewash in many respects but did have some excellent information on the city's deficient operations. The whole concept of surplus earnings -- annual pension-fund earnings that exceeded the expected rate of return -- was "the Snake in the Garden" of the pension system, said Vinson & Elkins. There are above-average years and below-average years; so-called surpluses in good years should not be doled out for other purposes, such as helping to fund employees' contributions. They should be saved for the bad years.
True to the legal mentality, Klausner hedged his letter, saying that the city code discusses uses of surplus earnings, and he had been told that the practice was not actuarially unsound. However, in 2002, three years after Klausner stopped serving the city, a succeeding fiduciary counsel attacked the concept of surplus earnings and warned that "By draining off cash in good years, the structure makes it harder to meet the long-term earnings assumption." Klausner should have known that.
Repeatedly, Klausner advised that the pension board should be independent from the city, and in each case, he cited the California constitution. On March 6, 1998, he said that the board could "dispense entirely with use of legal services from the San Diego city attorney." (Now, city attorney Michael Aguirre, who wants the board to release documents sought by federal investigators and halt illegalities such as underfunding, is trying to take over the board's legal operation, and the board is fighting fiercely. However, its general counsel, Loraine E. Chapin, says the board is not citing Klausner's past opinions in its fight.)
On November 18, 1998, Klausner opined that the salary of the board's administrator is not subject to the cap in the city charter that applies to city employees. In the 2004-2005 fiscal year, administrator Larry Grissom is raking in $185,367, 10 percent more than last year. Given the system's woes, is this double-digit raise necessary?
Also on November 18, 1998, Klausner stated that the city auditor should have no control over the pension system, unless by invitation. The problem with this advice, says Shipione, is that the pension system has been paying out money to dead people. There should be a system of audit checks and balances involving both the city and retirement system.
Klausner backed up the board on Brown Act issues, too. On May 14, 1999, Gwinn sent a letter to Chapin. The board had hired an outside lawyer to help it achieve its goal of independence. That attorney proposed to hold one-hour private meetings with each of the 13 board members. Gwinn reminded Chapin that California's Ralph M. Brown Act was passed to make sure that public boards conduct their business openly. These private sessions would violate the spirit and the letter of the Brown Act, said Gwinn. The next week, Chapin reported to the board that Klausner had pooh-poohed Gwinn's opinion.
Klausner was asked whether a labor-union president who sits on the board has a conflict of interest, or an appearance of one, if he votes on an issue he brought to the board. Klausner found no problem under state conflict-of-interest legislation. At that time, the board was dominated by city employees and their labor-union heads. Because of potential conflicts, outsiders now have a majority. At the time he was offering this opinion, Klausner was a lawyer both for the pension board and the San Diego Firefighters Local 145, whose president, Ron Saathoff, is a power on the pension board and at city hall. According to a September 20, 2004, article in Forbes, class-action law firms pay Klausner fees to refer possible lawsuits to them. To say the least, Klausner -- who did not respond to requests for comment -- wears a number of hats, and ethicists may debate whether they all fit.
In 1999, Klausner argued that he consulted a California bar member before issuing opinions based on state law. Chapin said that Klausner had never misrepresented himself on the issue. But an earlier California supreme court decision ultimately held sway, and he and the city parted company that fall.
"Did he do a good job? I know that the board liked him a lot," says Chapin. Unlike Webster, Chapin said that Klausner's opinions had been correct ones. Well, the board and staff loved them, anyway.