Audit Finds Pension Errors Favoring City Retirees : Retirement: State Controller Gray Davis believes improper calculations in survey, which included three South Bay cities, could indicate broader troubles for state Public Employees’ Retirement System.

An audit of pension funds has uncovered “significant deficiencies” in the practices of eight Southern California cities, including Torrance, Manhattan Beach and Hawthorne, State Controller Gray Davis said Thursday.

Although the seven-month audit did not reveal fraud or criminal misconduct, Davis said, it does suggest that the state Public Employees’ Retirement System could be fraught with problems. With $63 billion in assets, the system administers pensions for 1,200 cities and government agencies throughout California and is the nation’s largest state pension fund.

“Virtually every agency we audited had substantial problems,” Davis said. “So there is no reason to believe that the other 1,200 agencies are operating smoothly and efficiently.”

The audit was prompted by allegations last year of pension fraud at the American River Fire Protection District in Sacramento County. All eight of the cities selected for audit based pensions on an employee’s final-year salary, not an average of the worker’s last three years of wages, as is more common.

The investigation, according to the audit report, found a variety of problems in the administration of pension programs and the methods used by cities to calculate retirement benefits. In six of the cities, the report says, auditors found “substantial instances” of pensions being improperly inflated because they included such items as car allowances, accumulated sick leave and even business expense accounts.

“Many local agencies were dumping everything . . . but the kitchen sink” into the final year’s salary before retirement, Davis said.

That practice, the audit found, occurred in all three South Bay cities examined by the controller’s office. Although the report did not identify retirees by name, it provided enough information to identify them.

In Manhattan Beach, auditors criticized a decision that allowed former City Manager David J. Thompson to retire on a pension paying him $139,000 annually--$50,000 more than he had earned on the job. That retirement package soared, auditors said, after Thompson’s monthly salary was boosted by $700 to $7,414 and other benefits, including a $5,000 annual bonus, were added to his pension.

Although Thompson could not be reached for comment Thursday, Manhattan Beach City Manager William Smith said city officials in August slashed the former manager’s annual pension by $60,000 after concluding that it violated PERS regulations. As such, Smith said, the new state audit only confirmed what city officials had already concluded.

“It’s something that shouldn’t have been done,” Smith said. “So, in a way, I am glad that the audit is bringing this to everyone’s attention.” The city had never before allowed such a pension package and has not since, he said.

The report also took aim at the hefty salary increases that the Torrance City Council granted two high-ranking city officials shortly before they retired.

The report singled out the 34% salary hike given to former Torrance City Atty. Stanley Remelmeyer in late 1987, one year before he stepped down. Remelmeyer’s salary jumped from $92,724 to $124,548. In exchange, Remelmeyer agreed to stop accepting city-financed health benefits and a car allowance.

The report also criticizes a raise given to former Torrance Police Chief Donald E. Nash, who stepped down in June with health problems amid a controversy over his reported underpayment of sales tax on the purchase of two used cars.

After Nash announced plans to retire in February, 1992, the council last February unanimously voted to boost his base pay by 15% to $109,379--increasing his annual pension by almost $11,000.

The controller’s report says the 15% raise should not have been used to calculate Nash’s pension “because it was awarded upon the announcement of retirement, and therefore is considered final settlement pay.”

It recommends that PERS recalculate Nash’s pension, subtracting the 15% increase.

Mayor Katy Geissert would not say if the council raised either officials’ salary specifically to improve retirement pay.

And City Atty. Kenneth Nelson, Remelmeyer’s successor, said of the council’s actions: “I have no idea what was in their minds. I don’t think you do, either. It’s all speculation . . . This thing is really a matter between the employee and PERS.”

Neither Remelmeyer nor Nash could be reached for comment.

The audit also took the city of Hawthorne to task for allowing 28 retiring employees between 1986 and 1990 to convert unused, accrued sick leave into money--up to 20% of their final year’s salary--with the balance covered in a lump-sum payment.

But Hawthorne City Manager James Mitsch said the violations were merely technical.

Under public employee retirement law, retirees may only convert vacation and sick leave that was accumulated in their last year on the job. Some of Hawthorne’s employee contracts, however, allowed retirees to convert a limited amount of sick leave and vacation time that accrued before their final year.

Although the wording of the contracts was inappropriate, a city review shows that none of the retirees in question received more compensation than was due them under state guidelines, Mitsch said. That is because the retirees earned enough sick leave and vacation time in their last year on the job to cover the days they converted into salary when they retired.

He also said the audit came as a shock because the city always cleared its employee contracts with PERS officials. City officials have since rewritten those contracts.

“There’s no last-year attempt to throw in large amounts of money for the sake of a sweetheart deal or anything,” Mitsch said. The formula for sick leave and vacation time conversions “had been planned and communicated with PERS all the way down the line,” Mitsch said. “We are unfortunately being lumped in (with) the criticism” against other cities, he said.

Controller Davis said it was unknown if the problems uncovered in the investigation are common to other cities and agencies with pensions administered by PERS.

“Because we have narrowed our focus . . . we may well have (found) the bulk of the problem,” Davis said. “On the other hand, my instincts as an auditor tell me that’s probably not the case.”

Richard H. Koppes, general counsel for the retirement system, said PERS will review the audit report and make its own decision whether to order the cities to change the pensions being given to their retirees.

Times staff writer Kim Kowsky contributed to this story.

Torrance Raises Singled Out The audit by State Controller Gray Davis took aim at hefty salary increases that the Torrance City Council granted these two high-ranking city officials shortly before they retired.

Donald E. Nash

Former police chief

Stanley Remelmeyer

Former city attorney