Monday, June 21, 2010


WRITTEN BY: Just Wondering

If you bought Pension Service Credits or PSCs like me and hundreds of other City employees, between August 15th and November 1, 2003, be prepared to open your wallet again and fork over more of your hard earned, and ever dwindling take home dollars.

On June 7, 2010, the COURT OF APPEAL, FOURTH APPELLATE DISTRICT ruled against SDCERS and in favor of the City of San Diego with regard to the SDCERS appeal of a local court ruling on the value of purchased service credits.

The court said the question that needed to be answered was, “Did SDCERS have the right to charge the City of San Diego (City) for SDCERS's underfunding of pension service credits DURING THE TIME PERIOD OF AUGUST 15, 2003 THROUGH NOVEMBER 1, 2003, when the authorizing statute states that the employees purchasing such service credits were and are to pay the full cost of service credits purchased? We conclude, as did the trial court, that this action by SDCERS was contrary to law and thus exceeded its authority to administer the pension system's assets and the trial court properly set aside its decision to charge the City for the underfunding.”

The Purchase of Service Credit program (PSC) allows eligible members, which are active employees, to purchase up to five additional years of service credits.

Originally implemented in 1993, the PSC program was designed to allow employees to purchase periods of time when the member did not contribute to SDCERS, such as

• Military Leave

• Long-Term Disability Leave

• Family and Medical Leave (FMLA) periods

• Special leaves of absence without pay, with your job to be saved

• Any period before reinstatement by the Civil Service Commission

• Certain probationary periods

In 1996, during the Jack McGrory era, about the same time DROP was being concocted by City leaders, they, the City, added the ability for employees to purchase up to five years of general service credits. The City emphasized that employees "would pay into the retirement fund an amount, including interest, equivalent to the employee and employer full cost of such service." In 1997 the PSC program was expanded to include periods of time not actually worked when the City Council passed Ordinance No. 0-18383, "General Provision for Five Year Purchase of Service Credit," allowing employees to purchase up to five years of general service credit, or what is referred to as “air time credits” along with the original reasons listed above.

Because your retirement benefit is based in part on your years of service credit, a PSC will increase your lifetime pension payment.

Many of you, like me, purchased these so-called “air time” pension credits to add time to your years of service to the City. Some purchased the maximum, five years, others, like me, bought varying amounts to reach certain milestones for retirement purposes. By purchasing service credits employees carefully planned to remain chronologically and financially on track for their goals on a retirement date and percent of pay.


Here’s where the problem lies. City Charter section 143, states that employees who contribute extra money for their pensions are only "entitled to receive the proportionate amount of increased allowances paid for by such additional contributions." With regard to the City's obligation toward its employees' pensions, Charter section 143 also states that the City "shall contribute annually an amount substantially equal to that required of the employees for normal retirement allowances, as certified by the actuary, but shall not be required to contribute in excess of that amount, except in the case of financial liabilities accruing under any new retirement plan or revised retirement plan because of past service of the employees."

In 1997, SDCERS's actuary advised the board that a two-tiered rate structure, 15 percent for general member employees and 26 percent for safety member employees, would be sufficient to meet the requirement that the purchase price for service credits. SDCERS's board approved the rate structure and employees were then permitted to purchase service credits at the rates the board established.

But then between 1997 and 2002 the City made changes, through negotiated meet and confer sessions and labor agreements. These enhancements to your retirement retroactively gave you credit for past years of service. In 2002, then SDCERS administrator, Larry Grissom, commented that under pricing of the PSC program costs to employees was creating an unfunded liability that the City was not supposed to bear.

Grissom told the board that it had a fiduciary duty to increase the purchase price of the service credits: "But now we are aware of this problem it seems like it is our fiduciary duty to fix it [be]cause every time somebody signs a purchase of service contract, or almost every time it seems like, we're increasing the liability to the plan sponsor, which isn't right. And the Board doesn't have the authority to allow subsidizing for the member's purchase. . . . [W]e need to fix the bleeding."

An actuarial study in August 2003 recommended the Board raise rates upwards to 27 percent for general members and 37 percent for safety members. The actuary noted the 1997 rates were outdated because "they were set by the Board prior to certain negotiated benefit increases by the City and the program was not cost neutral as required by law.

At the August 2003 the Board of Administration adopted the new rates but delayed implementation of the cost increase for 60 days, thus allowing employees to purchase credits at the old rates. When questioned, then Board Member and SD Fire Local 145 President Ron Saathoff, that the cost of the purchase during the 60-day period would be borne by the employees. SDCERS then notified 10,000 city employees of the impending change and the flood gates opened. During the window 5,726 years of service were purchased by 1609 general members and 828 years we bought by 412 safety members. It’s interesting to note that during the so called window of opportunity general members purchased more credits then they has purchased since the inception of the program in 1997.


In 2007 the unfunded liability from the PSC program had grown to 146 million dollars. Public meetings were held. Some of you may recall going to the Convention Center to listen or even testify. During the hearings SDCERS Counsel informed the board that they had:

1. A duty to preserve and protect the fund; to pay benefits that are promised and earned and collect sufficient contributions to support the benefits.

2. But they also had a duty to correct errors when appropriate and not perpetuate erroneous interpretations of the plan."

The fiduciary counsel opined that SDCERS could legally take several courses of action to remedy the underfunding, including:

• voiding contracts

• collecting arrears payments

• offering rewritten contracts

• spreading out additional payments

• reducing benefit levels

• and continuing to collect the shortfall through the amortization of the system's unfunded liability.

The Board voted unanimously to saddle the City with the bill, prioritizing its fiduciary duties to the members and their benefits to the first position. And this is where the Appellate Court says they erred.

In very simple terms, the issue was not the entire PSC program. The court narrowly focused on the period between August 15, 2003, when SDCERS'S board adopted the new pricing of PSC rates, and November 1, 2003, when those rates went into effect. Oh, if you haven’t made the connection yet, it’s the period of time when over 6,100 years of “air time” were purchased, and the gigantic majority of the underfunding happened. When SDCERS failed to maintain the cost neutrality of the program as required by Charter and Ordinance and knew it or should have known it. The court added, “Charter section 143 thus confirms that the City must only contribute payments substantially equal to those of the employee for normal retirement allowances. The employee must bear the cost of any additional contributions. SDCERS allowed employees to purchase service credits at a discounted rate between August 15, 2003 and November 1, 2003. It was that action that caused the deficiency SDCERS later tried to charge to the City." The court say, SDCERS argument citing the decision in Hittle v. Santa Barbara County Employees Retirement Assn. did not support this case. In our matter, City employees were NOT entitled to purchase service credits at a rate that did not reflect the full cost of those credits. SDCERS did not have a duty to inform employees of a benefit to which they were not entitled and certainly had no duty to allow them a 60-day window to purchase service credits at a price it knew was below the full cost of the benefit.

Further, SDCERS argued the statue of limitations had run out but the court overruled that argument using the logic the City was dealing with the Board’s action in 2007 to have the City foot the bill, not the actual selling of Credits in 2003. It was not until November 2007 that SDCERS voted to charge the City, as opposed to employees, for the underfunding. The City's petition was filed four days after the board's November 2007 vote. Thus, it was unquestionably timely. Moreover, the unfunded liability was not created as of 2003. It occurred over several years and may have been avoided entirely if, for example, the retirement fund experienced better than expected investment returns, or, as stated above, SDCERS had taken action to ensure employees were responsible for the full cost of service credits purchased during the 60-day period in 2003. It was not until August 2007 that SDCERS announced a shortfall existed and the amount of the shortfall.

In addition, the Court said, “…in 2003 when SDCERS voted to allow service credits to be purchased at the old rates for a period of 60 days and a concern was raised as to who would pay the cost of purchases made during that time period, board member Saathoff confirmed the cost of the benefit would be borne by the employees. (Thanks Ron) There was no indication at that 2003 meeting that the City would bear any of the cost of purchases made at the old rates. There was also no decision made to charge the City for any resultant underfunding.


A portion of one sentence in bold face above concerns me and may have an affect over the City’s newest litigation concerning Substantially Equal and investment losses. That litigation will determine if you may be responsible for a substantially equal portion of losses to the system. While the Court holds SDCERS accountable for not pricing PSCs correctly, it adds a caveat of investment return experience into the substantially equal argument. Everyone needs to keep an eye on this.


SDCERS must decide if it will appeal the Appellate ruling or accept it. If an appeal is made the status quo is maintained. But the City will most likely reduce its Actuarially Required Contribution or ARC by a few million dollars. However, an editorial in Sunday’s SDUT Pension Delimma goes further. Attacking the Board for its litigation and praising City Attorney Goldsmith for his accomplishments. Then it warns employees that Substantially Equal ruling regarding investment losses is also within Goldsmith’s grasps.

If SDCERS accepts the Appellate ruling affirming the Trial Courts ruling the Board acting unlawfully, then because of its fiduciary duty to the members, and advice of fiduciary counsel the Board will be forced to choose an option or combination of option outline earlier. And those options mean you either lose your PSCs purchases, adjust the time purchased or pay the amount that makes them cost neutral to City of San Diego.

To read the full Appellate decision.


Anonymous said...

Im sure no one will mention the fact that Dick Murphy and all his minions purchased years of PSC's enabling them to receive full pension benefits, a la Lamont Ewell. Ewell was so ignorant that he resigned before the credits would enable him to recieve a full pension. But, being the solid corrupt elected official that he was, Dick Murphy talked Ewell into staying a few more months until that December so that he would attain 10 years (including his PSC's). I guess those didn't really hurt the city. Yeah right.

Just Wondering said...

Since writing the column a few days ago some additional information has surfaced.

SDCERS Board President, Mark Sullivan, has said, safety members may have "overpaid" for Pension Service Credits during the period cited by the courts. He also cautioned to not expect a refund if in fact, an overpayment occurred. Thus you may be safe from additional payments.

Certainly Mr. Sullivan has deep insight into this matter due to his experience and position on the SDCERS Board. However, the reality is he's one of 13 votes on the Board, with a majority of Board members, (8) appointed by the Mayor and seven of those eight approved by Council.

The Board also has three major fiduciary duties, sometimes those duties conflict each other.

For example and in simple terms one duty is maximize member benefits, while another is to maintain the viability of the SDCERS system for all members, active and retired. These two duties seems to be in conflict, especially if you put them into the context pension service credits. As we all recently saw on the vote with the substantially equal argument for Disability costs. As Jeff Jordon, Vice President of the San Diego Police Officers Association stated, “No other police officer or firefighter in the state has to pay for the benefit of getting killed or gravely disabled in the line of duty.”

Now it's up to SDCERS to decide how it will proceed. What analysis will be done and how it will work to resolve the shortfall. It appears each and every PSC contract entered into between the dates in question must be evaluated on its own. Only time will tell, but you must become involved if you want to protect your pension rights.

On a slightly more positive note, the decision reached by the Appellate Court is not a published opinion. So it cannot be cited in future litigation over substantially equal. In my earlier post I pointed to a specific sentence about the substantially equal argument. While that case is still lying in wait to ambush employees, the City still has its work to do to overcome 50 plus years of practice concerning investment earning.

Just Wondering said...

Judge Barton, who is the trial judge in the City Pension litigation case, ruled for the City and against SDCERS and employees hired on or after July 1, 2005.

Last week Barton agreed with the City’s argument that the DROP program and retiree medical benefits are not available to those individuals.

SDCERS argued it must follow the law and the ordinances approved by the City Council, and not MOUs from labor negotiations. SDCERS position in this matter was direct result of other past practices which had raise the ire of the IRS. So SDCERS made assurances it would follow the law. The IRS said if they did not they's risk a change in their tax status. A change in tax status could cost the City and taxpayers billions.

Since the City had not passed any Ordinance changing the benefits until Febuary of 2007 any employee hired before that date was still eligible to participate in DROP and earn retiree medical benefits. In other words, following the enacted laws.

But why did the City Attorney delay the ordinances for over a year and a half?

Seems then City Attorney Michael Aguirre chose not to prepare the Ordinances necessary for Council approval. Some say Aguirre thought the ordinance ending the DROP program and medical benefits would undermine his pension litigation. By delaying the implementation he would gain some sort of tactical advantage to his on-going pension litigation against City employees and SDCERS. But those thoughts proved as accurate as Aguirre's litigation as his matters have all gone down to defeat.

SDCERS rightfully believed it was following the law. Judge Barton disagreed. Simply put he said the City’s intent was to end DROP effective July 1, 2005, for those hire on or after that date and to end the lifetime medical benefit too.

I'm just wondering if the IRS feels the same way? Or if the City, by bringing this action, has jeopardized SDCERS' tax status?

Just Wondering said...

Disability and the Rules Committee

I don't know about you, but I was moved by Chief Lansdowne's two minute speech at yesterday's Council Rules Committee informational hearing on Disability costs. The speech was about changes enacted by SDCERS, urged by City Attorney Jan Goldsmith, to make you pay for a substantially equal portion of your disability retirement costs.

By enacting this change, the City of San Diego will save a few dollars in its annually required pension payment. But, there is no doubt it will be another straw on the camel’s back causing veteran officers to flee to other agencies, costing city of San Diego taxpayers dearly. Millions will be spent training new officers who will leave soon after for better pay and benefits elsewhere. Experience levels will fall further than they already have and San Diego will hit another new low. First it was “Enron by the Sea” for its gross mismanagement of the people’s treasury. Now, it becomes the very first municipality in California, if not the nation, forcing it police officers to pay for half the actuarial determined cost of a disability retirement. While it’s not as catchy as Enron by the Sea, how about; Hurt on the Job – Pay for it.

Meanwhile, City Attorney Jan (I won’t be political) Goldsmith, further bolsters his position, and arguments for Substantially Equal. All of this is, of course leading to the big prize; your responsibility to pay for a substantially equal portion of SDCERS investment losses.

Kudos to Chief Lansdowne
Lansdowne, gave an impassioned plea on behalf of “his officers” who risk their lives every day. The “ones who have been stabbed, shot, runover and killed protecting this city.” Lansdowne added, “that’s not an overstatement.” In the end I could tell he moved the council members on the committee with his letter of the law versus the spirit of the law argument. All while Goldsmith squirmed in his chair looking as bad as his comb over hairpiece on his head. Then something new just popped out. Goldsmith announced he has made overtures to SDCERS for a “global settlement conference” to end the litigation and NOW he wants to invite other interested parties. He even said his office is interested in hiring a mediator.

Landmines proliferate

Be careful boys and girls, mister “I’m not going to be a political city attorney” made it very clear he’s NOT going to back off the law. He said he’s heard from the taxpayers too and they need help. The UNSPOKEN words there are:

I'm going to help them because I want to be the next STRONG Mayor of San Diego.

How do you suppose a lawyer who publicly said "I'm not going to back off the law," meaning his interpretation of the Charter and municipal code’s “Substantially Equal” statements is going to help you and the voters, err a, I mean taxpayers? He negotiates and gets you, the employees to pay, pay dearly in one way or another.

You heard it here first!

Just Wondering said...


According to Brian Marvel, SDPOA President, Council President Ben Hueso has schedule a special Rules Committee meeting on July 8, 2010 at 0930hrs. Hueso is also Chairman of the Rules Committee and says he wants to clarify who pays for a disability retirement.

City Attorney Jan Goldsmith has made his position clear. He believes you are responsible for 50% or a "Substantially Equal" as part of your normal retirement contribution. Goldsmith also said he's not backing off the law, that is his interpretation of the law, adding taxpayers need help.

If San Diego Councilmembers do nothing, the City will be the first municipality in the State, if not the nation to force its employees to pay a portion of the costs of a disability retirement. This also means an increase in your contribution which reduces your take home pay.

During the Committee meeting earlier this week, POA Attorney Michael Conger pointed out he has disability coverage at no cost via his contribution to Social Security.

Oh wait a second, I forgot, the City persuaded employees to leave the Social Security system in 1982 with a promise of life time medical coverage. Of course the millions saved in matching contributions by leaving social security are no where to found.

For the first time I can recall Chief Lansdowne stood up because this IS wrong. He told the members during public comment this change sends the wrong message to employees. Not only does it violate the spirit of the law but it is morally reprehensible. As the Chief said, his officers have been stabbed, shot, runover and killed protecting this city and its citizens. Lansdowne added, "it's not an overstatement."
So here's your chance to do more than just complain. It's time to get involved. If nothing else, attend this meeting to show the members we are concerned. Fill out a speakers slip, become part of an organized presentation.

Let the committee members know what the City Attorney started, and SDCERS passed is just plain wrong.

Anonymous said...

Steve-- Great post on the PSC issue. Excellent review of the development of the PSC benefit and how this issue got to Court.

Here's some additional facts to chew on:

PSC's were sold over 5 separate periods combining in a total unfunded liability of $146 million.

The approx. 2 1/2-month window (Aug-Nov 2003)that Judge Nevitt focused his ruling on only accounted for $34 million of the $146 million of underfunding.

So, it doesn't appear that the underfunding is what really bothered him - it was the 60 day Grace Period. But, if that's what bothered him, why did he grant the City's petition to release the approximately 300-400 City employees who purchased PSC's during the period in question and who retired before the City filed suit in November 2007?

Interesting enough, because these individuals were within 4 years of retirement age when they purchased their PSC's (2003-2007) and they caused the great underfunding. As an example: a 53 year old general member with 25 years of service bought 5 years at just 15%, when he/she should have paid 39.1% Conversely, a 30 year old general member with 10 yrs of City employement (the average for a general member at that time) should have only paid 17%.

Where's the justice??

Anonymous said...

Where did Steve go?

Anonymous said...

Where are you?
We need you!
We miss you!

Anonymous said...

I am a 67-year old widow. Worked for the City since 1978. I entered DROP 3 years ago, then retired June 29, 2009. I get $2600 per month in retirement. Now I received a letter regarding this lawsuit, that I bought time during the 60 day window. Either I find about $50,000 to give the City of my pension will be reduced to about $1600 a month. I do not and will never receive any Social Security. Because the City left Social Security in 81 we also cannot collect spouse/widow/widower benefits, ever. I am scared to death. The City will not give me a job back. Please, all retired City people and DROP people need to get together and start legal action. At least if you are still employed by the City you can just work longer. We do not have this option. We need legal action for this specific group.

Anonymous said...

It’s been two months now without a post. Your fans are waiting as well as concerned. Are you OK? Have you been silenced? Have you been promised a better assignment if you stop posting on the blog? You speak the truth and your postings were refreshing and enlightening. I only hope you return to frequent postings soon. You are missed by many. You may not know how many cops looked forward to reading your blog postings. Let us know how you are. How your new assignment is. Your thoughts on current events. We want Sparky back.

Anonymous said...

You're going on three months now without a posting. A lot has happened in that time, and you remain silent. Shall we assume the Blog is dead?

Anonymous said...

..come back, Spark

Disintegrating said...