A federal grand jury Friday indicted five former and current city pension board officials for their role in approving an investment scheme that has left the city struggling with a $2-billion pension deficit, the worst financial debacle in city history.
Former pension board members Ronald Saathoff, Cathy Lexin and Teresa Webster -- along with former board administrator Lawrence Grissom and the panel's current attorney, Loraine Chapin -- were named in a 20-count indictment charging them with wire fraud, mail fraud and conspiracy.
The five are accused of using their positions to approve pension boosts for themselves and others while saddling the system with a "dangerous practice" that depended on a bull market on Wall Street to keep the pension plan solvent. When the technology bubble burst, the pension system's deficit ballooned.
According to the indictment, Saathoff, longtime president of the local firefighters union, received a pension boost of $25,000 a year in exchange for voting to endorse a plan whereby the City Council would continue to rely on the investment plan rather than increasing payments from the city budget.
Increasing payments to the pension fund would have meant cutting services to residents, a politically risky move. When the stock market declined, the council faced the prospect of making a $100-million "balloon payment" to keep the system funded at the level the council thought prudent, the indictment said.
Saathoff and his co-defendants are charged with hiding his pension boost and "considerable other material information" from other board members and arranging a charade where Saathoff appeared to vote on the spur of the moment for the plan at a pension board meeting in 2002.
In a written statement, U.S. Atty. Carol Lam said the five violated their duty to protect the pension system "by engaging in self-dealing, ignoring conflicts of interest and exploiting their positions, to the detriment of the retirement system."
Defense attorney Jerry Coughlan, representing Saathoff, called the indictment "a reckless misuse of federal law by a prosecutor who has a built-in hostility to local government."
Coughlan represented Councilman Michael Zucchet during the federal court case in which Zucchet and two other council members were charged with accepting illegal campaign contributions from a strip club owner.
Zucchet was convicted on nine charges, but late last year the judge threw out seven of the counts as meritless and ordered a retrial on the remaining two, although he said those charges were "barely sufficient" for a retrial. He also criticized the conduct of prosecutors working for Lam.
"They got slapped down in the Zucchet case, and they're going to get slapped down again," Coughlan said.
Federal prosecutors, at a news conference, declined to say whether other pension board officials or city employees would be indicted or if any were assisting in the investigation.
At a separate news conference, Mayor Jerry Sanders said that though he was not judging the guilt or innocence of the five, "I'm sick and tired of individuals appointed to serve the public trust taking advantage of that trust."
Sanders, a former police chief, suggested that others may be indicted.
"I don't think it's just contained to the [five] individuals," he said.
Sanders called on Chapin to resign as attorney to the pension board but declined to support City Atty. Michael Aguirre's bid to become the board's lawyer. Aguirre has engaged in an acrimonious power struggle with members of the City Council over a series of issues.
Saathoff, a fire captain, and former city employees Lexin and Webster were also among six former pension board members charged in May with criminal conflict of interest by San Diego County Dist. Atty. Bonnie Dumanis. A preliminary hearing is underway in Superior Court in which a judge will decide whether the case is strong enough to go to trial.
Of the six whom Dumanis charged, only two remain as city employees and none is still on the 12-member pension board. Those who are no longer with the city either retired, were fired or were pressured to resign.
Also, voters approved in 2004 a change in the pension board system to dilute the influence of city workers. Employee labor unions had gained political power in the 1990s, and pension benefits were increased during that time.
The City Council has also endorsed a new system of financial oversight and for reporting the city's financial situation to Wall Street prior to selling bonds.
The city's omission of the pension deficit information on a prospectus for sewer bonds has led to an investigation by the Securities and Exchange Commission that is not yet complete. Rating agencies have withdrawn or greatly downgraded the city's credit rating, freezing it out of the bond market.
An outside auditing firm hired to scour the city's financial records has refused to certify its audit until a "forensic" team determines whether there were illegalities in the way the city kept its records.
Sanders has said he hoped those audits would be complete by midyear, allowing San Diego to sell pension bonds.
"The city needs to put its financial house in order," he said at the news conference.
San Diego's financial problems, unprecedented in a city that prided itself on fiscal conservatism, have led to political turmoil. Mayor Dick Murphy resigned in July, leading to the election of Sanders in November on a reform platform.
The five officials named in the federal indictments will be allowed to surrender for arraignment next week, prosecutors said.
The indictments mark the second time in Lam's tenure that the U.S. attorney's office has brought corruption charges against City Hall figures. The strip club bribery case involved an alleged plot for council members to change a city law that prohibits nude dancers from nuzzling patrons.
Councilman Charles Lewis died before trial. Council aide David Cowan was acquitted. Zucchet and Councilman Ralph Inzunza were convicted in July.
U.S. District Court Judge Jeffrey Miller in November threw out most of the charges against Zucchet but upheld them against Inzunza. Still, he told Inzunza that he had grounds for appeal and has allowed him to remain free on bail during that appeal.