Purchase of Service Credit Update, First Quarter of 2011
As many of you already know, MEA sponsored an informational meeting at the Balboa Park Club on November 18, 2010, related to the purchase of service credit controversy. This was followed by a City Council session on November 29, 2010. At that time, representatives of SDCERS presented the Council with an update on its efforts to comply with the final decision of the Fourth District Court of Appeal in June 2010 holding that SDCERS could not lawfully include the unfunded liability associated with “window period” PSC contracts in its annual bill to the City. SDCERS has concluded that this ruling requires it to collect this unfunded liability from employees/retirees who were parties to these “window period” contracts because SDCERS has only two sources of direct funding – either the City or the plan participant – such that, if the City cannot lawfully be required to pay, the employee must do so.
As you also likely know, the SDCERS Board has adopted a Resolution identifying a list of “correction options” designed to conform to the requirements of the Court’s decision (as it has interpreted the decision and applied it to the facts here). SDCERS’ representatives presented the highlights of these options to the City Council on November 29th – together with certain hypotheticals to demonstrate the impact of each. In sum, while the options will produce different results based on individual circumstances, the “bottom line” is that an employee/retiree will either forfeit service credits (and, in some cases, become ineligible for a service retirement – whether already retired in fact or retired as an active DROP participant), or be permitted to preserve the original PSC contract and pay an additional amount for the service credits with interest. Another option is to elect to rescind the prior contract – with the amount previously paid being fully refunded with interest (calculated at the assumed rate of return for the system – i.e., 8% or 7.75% depending on the period involved), and enter into a new PSC contract based on current salary and purchase rates. However, this option may prove to be more expensive for most employees because SDCERS has adopted a matrix of purchase rates based on the employee’s age and years of service at the time of purchase. Since all employees are now roughly seven years older than they were in 2003 — with seven more years of service earned since the date of their original “window period” PSC contract — being forced to enter into a new purchase contract at the new rates will be harmful to employees and will not restore them to the position they would have been in had there been no “window period.”
In addition to its “informational” update, SDCERS’ representatives asked the City Council to decide whether to exclude any group of affected employees/retirees from the “correction” process. While SDCERS does not believe that the Court decision leaves it any room to exclude anyone on its own, SDCERS does believe that it can ask the City Council, acting on behalf of the City, to do so by agreeing to pay the unfunded liability associated with some or all of the affected PSC contracts. This question has now been asked and the City Council will answer it after a closed session discussion with the City Attorney in January – likely on January 25, 2011. After the City Council informs SDCERS of its decision, SDCERS will begin implementation of its “correction” plan — with or without changes. This means that each affected plan participant will receive a letter from SDCERS describing the impact of each option with a deadline for making an “election” of the options before SDCERS imposes a “correction” on the employee/retiree by unwinding the affected PSC contract.
I addressed the City Council on behalf of all affected MEA-represented employees to raise the issues which demonstrate that viable legal claims can and likely will be made against SDCERS and the City based on the facts and law.
Among other points, I informed the City Council that, when the SDCERS Board voted to approve the “window period” on 8/15/03, three City representatives served on the Board and voted in favor of the “window period” – the City Manager’s designee, the City Auditor’s designee and the City Treasurer. These City representatives were joined in their favorable vote by former SDCERS trustees of some fame – Dick Vortmann and Diann Shipione. If these trustees acted unlawfully – as the City has since asserted – the City must defend and indemnify them against the claims which will likely be made because the City agreed by Resolution to do so (and the Courts have previously enforced this Indemnification Resolution). I also noted that City employees relied on the lawfulness of the SDCERS Board’s action since SDCERS employed and was regularly advised by its attorneys on all matters related to the proper administration of the plan. Among those legal advisers when the 8/15/03 action was taken was Deputy City Attorney Roxanne Parks who was SDCERS’ Associate General Counsel. Since she now works for City Attorney Jan Goldsmith, I urged the Council to inquire whether she could shed light on the decision-making process at SDCERS and where and how it went wrong to the detriment of so many employees and retirees. Moreover, I explained that both SDCERS and the City – through its managers, supervisors and many payroll clerks – gave notice to employees regarding the deadline for entering into PSC contracts at the “old rates” without an iota of a suggestion that acceptance of this invitation would be improper for any reason. Indeed, if the City had disagreed with the SDCERS Board’s interpretation of the Charter or Municipal Code when making its 8/15/03 decision, the City, through the City Attorney’s Office, surely had the opportunity (and the duty) to say so and to do something about it. Instead, the City did the opposite – encouraging employees to sign these PSC contracts, to make the significant financial investments involved, and to rely to their detriment on the legality of doing so. Furthermore, the City – including the City Attorney, Mayor and City Council – had actual knowledge of the fact that PSC contracts, including the “window period” contracts, were creating an unfunded liability and that the SDCERS Board may have acted in violation of the Municipal Code. The fact of this knowledge was included in a confidential attorney-client privileged Memorandum which the City has since disclosed pursuant to a waiver of privilege. Moreover, the Mayor, City Council and City Attorneys discussed this matter in closed sessions of the City Council as early as January 2004; they made the determination to use this issue as leverage against SDCERS in getting a settlement of the Gleason Class Action case – on which judgment was entered in July 2004. The City never took any other action to address the issue – nor did the City inform its employees that it contested the validity or legality of the PSC contracts they were then and there signing and believing in good faith to be valid. Nor did the City raise this issue during the McGuigan Class Action case when the City was compelled to do so in response to employee claims that the City had underfunded its pension plan. Judgment in McGuigan was entered in December 2006.
In short, I urged the City Council to understand that viable legal claims are available to employees and retirees under the circumstances, and that a prudent and business-like approach to this controversy should involve an effort to identify “compromise” or “settlement” options – to be added to the limited options which SDCERS has identified and which place the entire burden of this situation on the employees/retirees. Such “settlement” or “compromise” options would be designed to resolve these legal claims by a release or waiver in exchange for a better outcome than what SDCERS has proposed. I will continue to work on this issue in preparaton for the Council’s closed session in early January, and will keep will keep you updated as events unfold.
In the meantime, I hope you all had a wonderful holiday season and I wish you all the best in the year ahead.
Warm regards, Ann M. Smith