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Local Government Employees on Local Government Pension Boards - An Important Court Case in California
Monday, November 2nd, 2009
Robert Wechsler
It's been over three years since I wrote about the
conflict situation of San Diego's pension board. Its members were
selected by the city government labor unions and by the city, and they
worked for the city. When an increase in their retirement benefits was
explicitly tied to their approval of a reduction in contributions to
the pension plan, the pension board members acted in their personal
interest and against the interest of the city's taxpayers in the responsible handling of the pension system. That is, the pension
board members voted for a deal that directly benefited them. And state
prosecutors brought an action against them for criminal conflict of
interest.
The wheels of justice move slowly, and the matter (which has not yet been tried) has made its way to the state supreme court, which will hear the case Wednesday, November 4. The briefs can be found here (Lexin v. S.C.), at least until Wednesday.
A state court of appeals, in Lexin et al. v. Superior Court 154 Cal.App.4th 1425 (2007), rejected a motion to dismiss, concluding that 'a reasonable person could harbor a strong suspicion of [petitioners'] guilt' ... under section 1090 based upon their actions in considering, discussing, negotiating and ultimately voting to approve MP2 [the pension deal] because the increase in pension benefits was, under the evidence presented, arguably conditioned on that approval."
There are other issues involved in the case, but for our purposes this is the most important one, because it brings to life the underlying conflict of having union and city representatives on a pension board, who are themselves city employees. If the pension board members lose this case, it might affect pension boards throughout California and, possibly, across the country.
According to an article in today's San Diego Union-Tribune, seventeen state and local California public pension systems have filed briefs urging the court to dismiss the case. This says something about the biases of public pension boards. They don't want things to change, despite the horrible mess that occurred in San Diego.
Another important issue here is whether the pension board members do not have a conflict because they benefit no more than any other employee. This issue arises frequently on school boards, where teachers' spouses often vote on teacher contracts or other benefits to teachers, thereby benefiting their households. Although the law on this differs, there is always at least an appearance of impropriety when this occurs.
Yes, pension board members do not benefit more than other employees, but this is hardly a class of citizens worthy of exception from conflict rules. There has to be an exception when a board member benefits (or is harmed) along with all other citizens, as with tax decisions, or even when a large group benefits, such as senior citizens. The one group in a locality that should never be included in this exception is local government employees, because conflict of interest laws are explicitly intended to protect citizens from local government employees acting in their personal interest. They are not just any group, but one of the two principal groups covered by the ethics code.
No matter what the decision, the question should be asked by good government organizations, elected officials, and local government managers whether a pension board that determines the expenditure of large sums of public money should be any different from other boards that spend or oversee the expenditure of public money. That is, why shouldn't they too be made up of independent individuals who have no interests in conflict with their obligations to the public? Should city employee union representatives sit on councils, police officers on police commissions, finance directors on financial oversight boards, developer representatives on zoning boards and, yes, teachers or their spouses on school boards?
Many local government pension funds are in trouble. Unfunded pension benefits were high before the stock market went down, and now they are even higher. One reason is that those with a personal interest in higher benefits were the ones in charge of the decisions. Elected officials know that they can keep taxes down by promising employees higher benefits, especially if those benefits go unfunded. Employees believe that, come their retirement, the money will be found somehow.
In San Diego, political and economic self-interest trumped fiduciary obligations to create a serious mess in the present. In many other cities, the mess will occur after the politicians are gone and the employees have retired. Will even one of them stand up and say, We shouldn't have accepted anything the city was not willing to pay for at the time of the decision?
Robert Wechsler
Director of Research-Retired, City Ethics
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The wheels of justice move slowly, and the matter (which has not yet been tried) has made its way to the state supreme court, which will hear the case Wednesday, November 4. The briefs can be found here (Lexin v. S.C.), at least until Wednesday.
A state court of appeals, in Lexin et al. v. Superior Court 154 Cal.App.4th 1425 (2007), rejected a motion to dismiss, concluding that 'a reasonable person could harbor a strong suspicion of [petitioners'] guilt' ... under section 1090 based upon their actions in considering, discussing, negotiating and ultimately voting to approve MP2 [the pension deal] because the increase in pension benefits was, under the evidence presented, arguably conditioned on that approval."
There are other issues involved in the case, but for our purposes this is the most important one, because it brings to life the underlying conflict of having union and city representatives on a pension board, who are themselves city employees. If the pension board members lose this case, it might affect pension boards throughout California and, possibly, across the country.
According to an article in today's San Diego Union-Tribune, seventeen state and local California public pension systems have filed briefs urging the court to dismiss the case. This says something about the biases of public pension boards. They don't want things to change, despite the horrible mess that occurred in San Diego.
Another important issue here is whether the pension board members do not have a conflict because they benefit no more than any other employee. This issue arises frequently on school boards, where teachers' spouses often vote on teacher contracts or other benefits to teachers, thereby benefiting their households. Although the law on this differs, there is always at least an appearance of impropriety when this occurs.
Yes, pension board members do not benefit more than other employees, but this is hardly a class of citizens worthy of exception from conflict rules. There has to be an exception when a board member benefits (or is harmed) along with all other citizens, as with tax decisions, or even when a large group benefits, such as senior citizens. The one group in a locality that should never be included in this exception is local government employees, because conflict of interest laws are explicitly intended to protect citizens from local government employees acting in their personal interest. They are not just any group, but one of the two principal groups covered by the ethics code.
No matter what the decision, the question should be asked by good government organizations, elected officials, and local government managers whether a pension board that determines the expenditure of large sums of public money should be any different from other boards that spend or oversee the expenditure of public money. That is, why shouldn't they too be made up of independent individuals who have no interests in conflict with their obligations to the public? Should city employee union representatives sit on councils, police officers on police commissions, finance directors on financial oversight boards, developer representatives on zoning boards and, yes, teachers or their spouses on school boards?
Many local government pension funds are in trouble. Unfunded pension benefits were high before the stock market went down, and now they are even higher. One reason is that those with a personal interest in higher benefits were the ones in charge of the decisions. Elected officials know that they can keep taxes down by promising employees higher benefits, especially if those benefits go unfunded. Employees believe that, come their retirement, the money will be found somehow.
In San Diego, political and economic self-interest trumped fiduciary obligations to create a serious mess in the present. In many other cities, the mess will occur after the politicians are gone and the employees have retired. Will even one of them stand up and say, We shouldn't have accepted anything the city was not willing to pay for at the time of the decision?
Robert Wechsler
Director of Research-Retired, City Ethics
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