Ct.App. 4/1 D049251 San Diego County Super. Ct. No. SCD190930. Judge: Frederic L. Link and Roger W. Krauel.
The opinion of the court was delivered by: Werdegar, J.
This case is a residuum of the fiscal crisis that swept the City of San Diego (City) over the last decade. That crisis, arising from the City's failure to fund its employee retirement system adequately, led to federal investigations of the City's bond disclosures, suspension of the City's credit rating, class action lawsuits against the City for underfunding, the mayor's resignation, and amendments of the City's charter to change the composition of the board overseeing the retirement system.
The six defendants below, Cathy Lexin, Mary Elizabeth Vattimo, Teresa Aja Webster, Sharon Kay Wilkinson, John Anthony Torres, and Ronald Lee Saathoff (collectively the Lexin defendants), were trustees of the board administering the City's retirement system. They have been charged with felony violations of state conflict of interest statutes (Gov. Code, § 1090 et seq.)*fn1 for allegedly voting to authorize an agreement allowing the City to limit funding of its retirement system in exchange for the City's agreeing to provide increased pension benefits to City employees, including the Lexin defendants.
The Lexin defendants brought a Penal Code section 995 motion to set aside the information against them because, they argued, Government Code section 1090*fn2 and its exceptions were not intended to criminalize the making of contracts by parties whose only financial stake was their interest in government pension benefits. The trial court denied the motion because it concluded pension benefits were not "salary" of the sort the Legislature intended to excuse when it created the government salary exception to section 1090. (See § 1091.5, subd. (a)(9); hereafter section 1091.5(a)(9).) The Court of Appeal rejected this reasoning, but affirmed the denial because it found section 1091.5(a)(9) inapposite for other reasons and because it further concluded the public services exception (§ 1091.5, subd. (a)(3); hereafter section 1091.5(a)(3)) did not apply.
We reverse as to five of the six defendants. We conclude that, with one exception, the defendant trustees' actions fall within statutory exceptions to section 1090, and accordingly their motion to dismiss the information against them should have been granted. This case turns on our conclusion that the trustees of the City's retirement system board were not burdened by a conflict of the sort section 1090 prohibits: a division in the loyalties of public servants between the public interests of their constituents and private opportunities for their own personal financial gain. Rather, by intentional legislative design, many of the board's trustees were members of the retirement system and thus had interests in common with the membership as a whole. That the Lexin defendants were financially interested in the agreement here - like thousands of their fellow retirement system members - was a consequence of this fact. The public services exception to section 1090 - section 1091.5(a)(3) - recognizes that financial interests shared with one's constituency do not present the dangers the state's conflict of interest laws were designed to eradicate. Accordingly, it excepts such interests from section 1090's purview.
As applied here, the provision covers the actions of five of the six defendants. The sixth, Ronald Saathoff, could on the preliminary hearing record reasonably be suspected of having obtained a unique, personalized pension benefit as a result of voting to approve the retirement board's contract with the City. Such individually tailored benefits pose genuine conflict problems and do not fall under any statutory exception. Accordingly, we affirm as to Saathoff, reverse as to all other defendants, and remand for further proceedings. Factual and Procedural Background
I. The San Diego City Employees' Retirement System
San Diego is a charter city. It maintains a pension plan for its employees, the San Diego City Employees' Retirement System (SDCERS). (San Diego City Charter, art. IX, § 141; San Diego Mun. Code, § 24.0101.) SDCERS is a defined benefit plan in which benefits are based upon salary, length of service, and age. (San Diego Mun. Code, §§ 24.0402-24.0405.) The plan is funded by contributions from both the City and its employees. (San Diego City Charter, art. IX, § 143; San Diego Mun. Code, § 24.0402.) Membership is compulsory. (San Diego Mun. Code, § 24.0104, subd. (a).) As of June 2008, the plan had nearly 20,000 members. (SDCERS Comprehensive Annual Financial Rep. (2008) p. 29.)
The pension fund is overseen by a 13-member Board of Administration (SDCERS Board or Board). (San Diego City Charter, art. IX, § 144.) Although established by the City, the Board is a separate entity. (Ibid.; Bianchi v. City of San Diego (1989) 214 Cal.App.3d 563, 571.) The SDCERS Board is a fiduciary charged with administering the City's pension fund in a fashion that preserves its long-term solvency; it must ensure that through actuarially sound contribution rates and prudent investment, principal is conserved, income is generated, and the fund is able to meet its ongoing disbursement obligations. (Cal. Const., art. XVI, § 17; San Diego City Charter, art. IX, § 144.) Consistent with that central mission, the SDCERS Board has a range of ancillary obligations, including but not limited to providing for actuarial services, determining member eligibility for and ensuring receipt of benefits, and minimizing employer contributions. (Cal. Const., art. XVI, § 17, subds. (b), (e); San Diego City Charter, art. IX, §§ 142, 144; San Diego Mun. Code, § 24.0901.) To carry out these duties, the Board is granted the power to make such rules and regulations as it deems necessary. (San Diego City Charter, art. IX, § 144; San Diego Mun. Code, §§ 24.0401, 24.0901; see generally Bianchi, at p. 571; Grimm v. City of San Diego (1979) 94 Cal.App.3d 33, 39-40.)*fn3
The composition of the Board is fixed by San Diego's charter; as of 2002, the charter provided for three ex officio positions (the city manager, treasurer, and auditor), one trustee elected by fire safety members, one elected by police safety members, one elected by retired members, three elected by the active membership, and four appointed by the city council. (San Diego City Charter, art. IX, former § 144.)*fn4
All six Lexin defendants were trustees of the SDCERS Board. Cathy Lexin, Mary Elizabeth Vattimo, and Teresa Aja Webster were the ex officio designees; Sharon Kay Wilkinson and John Anthony Torres were elected from the active membership; and Ronald Lee Saathoff was the fire safety representative. The six were also City employees: Lexin was the City's human resources director, Vattimo was the City treasurer, Webster was the City's assistant auditor and comptroller, Wilkinson was a City management analyst, Torres was a fingerprint examiner for the City police department crime lab, and Saathoff was a City fire captain.
II. Contract Negotiations
A. City Manager's Proposal 1
Until 1996, the City made contributions to the SDCERS pension fund according to an actuary's annual determination of the rate. In 1996, the City proposed, and the Board approved, an agreement modifying the method of calculating the City's contribution. Under this agreement, commonly known as the City Manager's Proposal 1 (MP1), the City contributed at a set rate, which was less than an actuarially determined rate, under an agreed-upon schedule. The schedule required the City's contribution rate to increase by 0.5 percent per year as a percentage of payroll until the City's annual contribution rate equaled the actuarial rate. At the time the MP1 was adopted, the retirement system was 92.3 percent funded.*fn5 As part of the MP1, there was a safety valve provision, known as the "trigger," that called for a balloon payment if the funded ratio of the system dropped below 82.3 percent.
In 2001, in part because of the "dot-com" stock market crash, SDCERS earnings began falling significantly. (See Perry, Fall from Frugality Puts San Diego on Fiscal Brink, L.A. Times (Sept. 1, 2004) p. 1.) By October 31, 2001, the fund had earned only $14.1 million dollars, a decrease of 87 percent from the previous year. In February 2002,*fn6 SDCERS actuary Rick Roeder completed a draft actuarial report showing the funded ratio had dropped from 97 percent to 90 percent in one year. The City was concerned the 82.3 percent trigger would be met, which would have required it to make an additional contribution to the pension fund of approximately $25 million within one year.
At the same time, the City entered meet-and-confer negotiations with its municipal unions over new labor agreements (memoranda of understanding or MOU's), with defendant Lexin, the City's Director of Human Resources, acting as lead negotiator. The County of San Diego had agreed in February to increase the retirement multipliers for its employees.*fn7 The City's four municipal unions, the San Diego Municipal Employees Association (MEA), San Diego Police Officers Association (POA), San Diego City Firefighters IAFF Local 145 (Firefighters), and American Federation of State, County and Municipal Employees Local 127 (AFSCME), sought comparable improvements in the City's retirement benefits.
According to Assistant City Manager Lamont Ewell, if the SDCERS funded ratio had continued to fall and the trigger had been reached, the resulting balloon payment would have seriously hampered the City's ability to deliver services and would have led to layoffs. Consequently, the City elected to condition any increase in pension benefits on its obtaining relief from the SDCERS Board from the effect of hitting the trigger. In May, it reached agreements with the MEA, the Firefighters, and AFSCME that included enhanced retirement benefits, but each agreement was expressly conditioned on the SDCERS Board's granting the City contribution relief by lowering the MP1's trigger to 75 percent. The City was ultimately unable to agree on a contract with its fourth municipal union, the POA, and so declared an impasse and imposed its last, best, and final offer; like the agreements with the other unions, that offer included an SDCERS Board contingency.
Negotiations with the Firefighters and its president and lead negotiator, defendant Ronald Saathoff, involved a unique issue. Union presidents received a salary from the City and were also paid by the unions for serving as their presidents. Beginning in approximately 1989, the POA president began contributing to his pension based on both the president's salary paid him by his union and his salary as a police officer, in exchange for having his pension calculated based on his combined salary. In 1997, the MEA president secured the same right.
During the 2002 negotiations, Saathoff sought the same treatment. Concerned about potentially higher pension payments for union presidents, the City considered discontinuing the existing program. However, the city attorney advised that the unions would sue and might prevail based upon their presidents' detrimental reliance on years of informal agreements. Ultimately, the city council, acting on the advice of the city attorney, decided to provide equivalent rights to the union presidents of POA, MEA, and Firefighters, but only as to those presently holding that title and certain former POA presidents; future presidents would not be eligible.
Michael McGhee, a principal negotiator for the City with the Firefighters, testified that he understood at the time that this incumbent union president benefit was contingent on the Board's lowering the trigger. On cross-examination, however, he indicated he had never heard anyone say that the incumbent union president benefit was contingent on anything the SDCERS Board did, nor was there a document that so stated.
C. Initial Discussions with SDCERS
On May 29, 2002, City Manager Michael Uberuaga presented the SDCERS Board with the City's proposal to modify the MP1 to (1) lower the trigger to 75 percent and (2) add a five-year phase-in period for the payment of increased contributions to reach the full actuarial rate if the trigger was hit. Uberuaga told the Board a reduction in the trigger was a contingency of the tentative labor agreements with three of the four municipal unions in the City.
The proposal ran into opposition. After the meeting, Board President Frederick Pierce requested a meeting with Deputy City Manager Bruce Herring. On June 7, Pierce, Herring, defendant Lexin, and SDCERS administrator Lawrence Grissom met, at which time Pierce objected to the linkage between the Board's actions and union benefits. Herring indicated he thought the city council would refuse to drop the linkage. The Board's fiduciary counsel, Robert Blum, also criticized the City's proposal, warning the Board in a draft letter dated June 12 that adoption of the proposal would pose a "material risk that a court would find that approval by the Retirement Board of the proposed amendment[,] including the reduction in the `floor' in [MP1] to 75 [percent] was not a prudent exercise of the Board's fiduciary responsibilities, particularly if insufficient mitigating actions were taken by the Board."
In response to criticisms of the City's proposal, the City modified the proposal so as to accelerate the presumptive rate at which it would increase its contribution in the event the trigger was not hit, offering a 1 percent of payroll annual increase in lieu of the 0.5 percent the MP1 called for. Deputy City Manager Herring presented this modified proposal to the Board on June 21. Following a lengthy discussion of the City's proposal, the Board elected to defer a vote and to seek more information and analysis. A decision on the proposal was trailed for a future special meeting.
In advance of that special meeting, the City was aware that a Board trustee might offer a counterproposal to the City's proposal. Lexin and Deputy City Attorney Elmer Heap wrote the mayor and city council, explaining that they "anticipate[d] a motion from a Board member which would further modify the proposal before the Board, by eliminating the request to lower the funded ratio floor [the trigger], and including the five year phase-in if the trigger (82.3% funded ratio) is effectuated." Lexin and Heap sought and obtained authorization to agree to this counterproposal.
D. The July 11 SDCERS Board Meeting
At the July 11 special SDCERS Board meeting, the Board discussed in detail the merits of the existing MP1, the City's proposal to reduce the trigger to 75 percent, and an alternative funding mechanism presented by the Board's actuary, Rick Roeder. Roeder was concerned, as he had been at the June 21 meeting, about the effects of the City's request for contribution relief. Fiduciary Counsel Blum was of the opinion that if the Board accepted the City's proposal, there was a "material risk" that a court would find the Board had not properly exercised its fiduciary responsibility. Others spoke in support of the City's proposal.
Lexin made a motion to accept the City's proposal to lower the trigger to 75 percent, and Webster seconded it. Several Board trustees, including Saathoff, expressed an intent to vote against the City's proposal. As Saathoff put it: "[T]his proposal as it[']s currently written doesn't appear to pass muster in terms of fiduciary counsel's opinion and[,] frankly, the actuary's." He told the Board that the City's proposal was not within what he considered a "fiduciarily prudent guideline and should the motion not be successful, I will have another motion to make that hopefully will address the [C]ity's concerns and give us comfort that the actions we are taking are fiduciarily prudent as members of this Board."
Trustee Diann Shipione made a formal motion to continue the matter. Saathoff opposed the motion, indicating he thought it important to move forward. Shipione's motion was not seconded.
Saathoff then made his substitute proposal, which, with some changes, ultimately came to be known as City Manager's Proposal 2 (MP2). Saathoff moved that (1) the 82.3 percent trigger be kept in place; (2) if the trigger was not hit, the City would increase its contribution rate at 1 percent per year until it reached the full actuarial rate; and (3) if the trigger was hit, the City would have until 2009 to increase its contributions to reach the actuarial rate, in lieu of a balloon payment of $25 million or more. The substitute proposal would be subject to the fiduciary counsel's and the actuary's approval, as well as to negotiation of a formal written contract with the City.
After substantial further discussion, the motion to adopt the City's proposal was withdrawn and the Board adopted Saathoff's proposal by a vote of eight to two. Board President Pierce, John Casey, and the six Lexin defendants - Lexin, Vattimo, Webster, Wilkinson, Torres, and Saathoff- voted in favor of the proposal. Thomas Rhodes and David Crow opposed the motion. Ray Garnica abstained. Trustees Shipione and Richard Vortmann left the meeting before the vote.
E. Final Approval of Benefit Enhancements
From July 11 to November 15, Fiduciary Counsel Blum negotiated with the City to memorialize Saathoff's counterproposal as a written agreement. During this time period, according to Deputy City Attorney Heap, there were "sticking points," and an agreement, though likely, was not absolutely certain. For example, Blum and Heap debated a nullification clause Blum wanted inserted that would allow the Board to unilaterally rescind the agreement in the future, with Blum ultimately prevailing.
On October 7, the POA, the Firefighters, and the MEA signed finalized MOU's with the City, each effective retroactively to July 1. These final MOU's eliminated any contingency requiring action by the SDCERS Board for benefit increases to take effect. On October 21, the city council voted unanimously to adopt and approve the MOU's.
The city council also enacted the incumbent union president benefit without any reference to contingencies or action by the SDCERS Board. The City agreed to base retirement benefits for incumbent union presidents on their highest one-year combined City and union salary. In contrast, pension contributions for future union presidents would be based solely on their City salary.
Under the MOU's, defendants Wilkinson and Torres, who were classified general City employees,*fn8 received the same benefits as all other classified general employees, including an increase in their age-55 pension multipliers from 2.25 percent to 2.50 percent, with corresponding 0.25 percent adjustments of the multiplier for each year above age 55. Defendants Lexin, Vattimo, and Webster were unclassified general employees but received the same increased retirement benefits under a City policy that afforded unclassified employees the same benefits as classified employees. Defendant Saathoff, as a classified safety employee, did not receive an increased multiplier but did receive the pension increase accorded incumbent union presidents.
F. Final Approval of the MP2
On November 15, the SDCERS Board was presented with a draft of the MP2, which, with some minor changes, essentially reflected the terms of defendant Saathoff's counterproposal.
Fiduciary Counsel Blum gave a presentation to the Board emphasizing the MP2's advantages over the MP1, including an acceleration of increases in the contribution rate and a date certain by which the City had to accomplish full actuarial funding. The finalized MP2 also granted the Board the right to nullify the agreement "to the extent required by its duties established under the California Constitution" and required the City to pay any costs incurred to secure enforcement of the agreement's terms. Blum had tried, but failed, to get the City to agree to language precluding it from "bargain[ing] additional benefits conditioned on some approval of . . . funding relief" going forward. Blum opined that the MP2 represented a "proper exercise" of the Board's fiduciary duties. Actuary Roeder offered a series of opinions about the positive and negative aspects of the proposal but no bottom line conclusion.
A vote on the MP2 was taken, and the Board approved it, 10 to 2. Defendants Vattimo, Webster, Wilkinson, Torres, and Saathoff, as well as trustees Casey, Crow, Garnica, Pierce, and Vortmann, voted for the contract. Trustees Rhodes and Shipione voted against it. Defendant Lexin was absent. The final MP2 agreement was approved by the City and signed by the Board on December 3, 2002, and by the City on December 11. Under its terms, the 82.3 percent trigger would be kept in place, but in the event the trigger was hit, the City would be given until 2009 to reach the actuarial rate, rather than having to pay a $25 million balloon payment within one year.*fn9
In May 2005, the Lexin defendants were charged with felony violations of section 1090. After a preliminary hearing, a magistrate found probable cause to suspect the Lexin defendants had violated the conflict of interest laws.
The magistrate concluded the Lexin defendants had participated in the making of the MP2. He also found sufficient evidence had been presented to support a reasonable suspicion that the Lexin defendants were financially interested in the MP2 because pension benefit increases were contingent on its approval. As to defendant Saathoff, the magistrate specifically found that whether Saathoff's individual union president benefit was also contingent on the Board's granting the City contribution relief was a question of fact, and at least one line of evidence supported the conclusion that it was contingent. Finally, the magistrate rejected the Lexin defendants' defense that a statutory exception to section 1090, the government salary exception (§ 1091.5(a)(9)), applied because he concluded pension benefits were not "salary" within the meaning of the statute. Each Lexin defendant was bound over for trial.
After an information was filed, the Lexin defendants moved to set it aside (Pen. Code, § 995), alleging inter alia that (1) section 1090 did not apply to their actions, and (2) even if it did, their interest in the contract, i.e., pension benefits, constituted government salary and was permitted under section 1091.5(a)(9).
The trial court denied the motion. In holding there was probable cause to believe the Lexin defendants had violated section 1090, the trial court explained that, in its view, by participating in discussions concerning MP1 modification at a time when the City's tentative MOU's made enhanced pension benefits contingent on rate relief, and by approving a counterproposal modifying the MP1 trigger, the Lexin defendants had made a contract in which they had a financial interest. The trial court also rejected the Lexin defendants' section 1091.5(a)(9) defense, concluding that the defense applied only to a financial interest in government "salary, per diem, or reimbursement for expenses" (§ 1091.5(a)(9)), categories not intended to include pension benefits.
The Lexin defendants filed a petition for a writ of prohibition with the Court of Appeal, seeking the issuance of a writ ordering the trial court to grant their motion to set aside the information. The Court of Appeal summarily denied the petition. We granted review and transferred the matter to the Court of Appeal for issuance of an order to show cause. On remand, the Court of Appeal again denied review, this time in a published opinion. Recognizing that retirement benefits are just a deferred form of employment compensation, the appellate court disagreed with the trial court's conclusion that under section 1091.5(a)(9) pensions were not salary. It nevertheless rejected application of section 1091.5(a)(9) because, it concluded, the benefits of the contracts at issue flowed to the respective individual departments of the Lexin defendants, and section 1091.5(a)(9) was inapposite when one's own department was directly involved in a contract. It further rejected the Lexin defendants' ...