San Diego pension saga offers a cautionary tale

Michael Aguirre, a onetime federal prosecutor and crusading plaintiff’s lawyer, was elected city attorney in San Diego in 2004 on a promise to undo controversial deals that had left the city’s pension fund with a growing deficit.

As part of that effort, he sued to strip away some of the enhanced benefits that had contributed to the pension fund’s $1.4-billion shortfall. It was thought to be the first time that a municipality had gone to court seeking to nullify a labor deal it had approved.

Now, Orange County is preparing to pursue the same strategy by seeking a court injunction to invalidate a portion of its 2001 agreement with sheriff’s deputies, a deal that sweetened their pensions but created more financial obligations than the county has money to cover.

But it may want to consider San Diego’s history:

Far from restoring fiscal soundness, Aguirre’s efforts so far have only cost the city more money -- and his legal arguments have found little favor in court. The lawsuit he filed to undo the pension enhancements has been thrown out of court four times, most recently on Aug. 3, when the judge found the statute of limitations had long since passed and barred him from pursuing the case any further. Aguirre said he would appeal.

San Diego has paid at least $1 million to lawyers handling the case and has been ordered to pay another $1.5 million to cover the defendant’s legal fees, according to an estimate by City Council President Scott Peters, one of Aguirre’s fiercest critics.

Asked what lessons San Diego might hold for Orange County, Peters said: “Don’t do it! Don’t do it!”

Aguirre dismisses Peters as a tool of the unions but acknowledges that his efforts have failed thus far. The city attorney thinks the city’s legal case has been undermined by the courts’ unwillingness to deal with the issue.

“What you saw was judicial gymnastics, twisting and turning every way conceivably possible to avoid dealing with the merits of the case that would have resulted in a rolling back of the benefits,” he said. “It’s going to be very, very difficult to get the courts to deal with this problem.”

Costly public employee pension obligations have been a growing concern in California, as generous deals made in the wake of the bull market in stocks of the late 1990s have created a huge debt load. Now that market returns are more modest, critics fear the cost of paying for the pensions will cut into government’s ability to provide core services such as roads, schools and public safety.

San Diego and Orange County have been among the most high-profile cases -- the former because of allegations of fraud and self-dealing by public officials -- and the latter because of its historic 1994 bankruptcy.

In San Diego, the City Council and the pension fund board agreed to deals in 1996 and 2002 that, although enhancing retirement benefits for union workers, also allowed the city to pay less into the system than it truly owed, in the belief that strong stock market returns would make up the difference. When the market declined, it left the pension fund with just 67% of the money it needed to cover its obligations over the next 30 years, a $1.4-billion deficit.

Because some of the retirement board officials stood to gain from the pension deals, they have been accused of enriching themselves at the public’s expense. State and federal criminal charges are pending. And when the city did not disclose its pension-underfunding agreement on a municipal bond prospectus, it prompted an investigation by the U.S. Securities and Exchange Commission.

The city attorney’s office says the pension enhancements triggered $700 million to $900 million of the deficit in the retirement fund. The deals sweetened the formula used to calculate pensions, allowed employees to buy credit in the pension system and created a special fund permitting employees to collect deferred retirement pay while they continued working.

In Orange County, the situation is less volatile, but the numbers are larger. Labor agreements between unions and the county Board of Supervisors in recent years contributed to a $2.3-billion deficit in the pension fund.

A big part of that, board members and their staff now say, was a deal with sheriff’s deputies that retroactively increased benefits, allowing deputies to retire with 3% of their highest year of pay, multiplied by their years of service, rather than 2%. Supervisor John Moorlach estimates that, on average, retired deputies in Orange County earn $70,000 a year.

The retroactive portion, the county now maintains, created an immediate shortfall because neither the county nor the deputies had been paying into the system to cover the previous years. Some county officials say retroactive benefits may account for as much as $550 million of the system’s unfunded liability.

The legal challenges face an uphill battle: A large body of state and federal constitutional and other protections generally safeguard worker pensions from employers seeking to roll them back. Several labor lawyers said there has never been a case in which a judge allowed an employer to rescind benefits it had already granted.

At their core, the pension problems in San Diego and Orange County vary significantly, with different issues and different legal theories. San Diego’s case has largely been based on fraud allegations; Orange County’s is more focused on constitutional issues.

Moorlach, who has been leading his colleagues on the issue, said the troubles with the San Diego case did not concern him.

“We’re going after constitutional issues,” Moorlach said. “We think the issues we’re raising are a little more weighty than the approach [Aguirre] took.”

But the cases also hold similarities. In each case, the employer is going to court seeking to invalidate benefits it has already granted, and each involves a claim that the debts created by the agreement are unconstitutional.

Orange County is planning to make one of the same arguments that Aguirre used in his case -- that the deal violated the state Constitution’s prohibition on deficit spending.

On that point, a San Diego judge ruled against the city earlier this year, finding that violations of the debt limit were the city’s own fault and not the fault of the pension fund.

A San Diego union representative said the city’s tactics are doomed to fail.

“In addition to being a flawed legal theory and a poorly implemented legal strategy, from the inception it was morally and ethically wrong to attempt to undo a bargain that was made fairly and squarely,” said Ann M. Smith, a lawyer who represented the Municipal Employees Assn. in San Diego. Meanwhile, Peters, the council president, said the city has made progress on repairing its pension finances by making tough choices to put more money into the plan and through negotiations that have forced employees to put up more of their own money. He says the plan is now 80% funded. Aguirre disputes the success of the efforts.

“We’ve worked on the problem with the unions, making sound financial decisions, and none of it had to do with Aguirre’s litigation,” Peters said. “We just don’t expect anything from it. Except, sometimes, entertainment.”

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christian.berthelsen@ latimes.com