While America Aged

Trying to quell the barrage of lawsuits, Michael Leone, an outside attorney hired to defend SDCERS, pleaded with Conger to “stop throwing cherry bombs.”²What Conger couldn’t know was that Leone basically agreed with him. In his view, his client (or at least its board) was in the wrong. Its deal with the city was both indefensible and contrary to its own interests. Only in the upside-down world of SDCERS would a pension system conspire with the sponsor to deprive itself of contributions.

By early March, Leone and his partner, Reginald Vitek, were urging SDCERS to drop its opposition to Conger and file a counterclaim against the city.³Save for Shipione, the trustees gave the lawyers a cool reception. They were hardly about to abandon MP-2, which after all was their creation.

At this point, Vitek and Leone came to an important realization. The trustees’ personal interests were in conflict with those of SDCERS. The lawyers threatened to quit the case unless the board recused itself from directing the litigation. After some jawboning, a compromise was worked out, but the essential conflict of interest remained. SDCERS continued to oppose Conger’s suit, and to maintain that MP-2 had been absolutely proper—even though its own attorneys had reached a diametrically opposite view.⁴

As with other besieged organizations, the retirement system’s instinct when under attack was to stonewall. It worried not only about Conger’s legal cherry bombs but about attacks in the court of public opinion. The pension staff tried to keep discussion of the case to a minimum; the Daily Transcript called it San Diego’s “dirty little secret.”⁵As the in-house attorney for SDCERS directed in a memo, “The present strategy is to stress [the] importance of privilege.”⁶That meant keeping all information under wraps. The board increasingly skirmished with Shipione, whom they suspected of leaking. In a foolish pique, the board president even took out an ad in the Union-Tribune accusing an unnamed party (clearly Shipione) of behaving like “Chicken Little.”⁷In point of fact, Shipione was looking prophetic. By mid-2003, SDCERS’s funding ratio had plummeted to 67 percent—this for a system that had been almost fully funded three years earlier.

As its financial position weakened, the plight of SDCERS was beginning to create fiscal problems for the city. Local executives were fretting about its possible effect on business. San Diego, like other cities, was also coming to grips with the fact that it had a massive retiree health care liability, estimated at $1 billion. What the city fathers hungered for was some leadership on these issues at City Hall. But Murphy was passive and ambivalent. He didn’t defend the underfunding—but he didn’t move to correct it either.

The cloud over City Hall darkened in the spring, due to a tawdry political scandal. Three city councilmen, including Michael Zucchet, the former firefighters’ lobbyist, had accepted campaign gifts from a strip club owner, allegedly a bribe for promising to repeal the “no-touch” law. The three proclaimed their innocence and, for the moment, retained their seats. However, the prospect that a third of the council would be serving while under federal indictment, added to the trouble at SDCERS, gave rise to fears of generalized corruption, as though all of official San Diego was for sale.

Where the government was not corrupt it was simply ineffective. Nothing so demonstrated the point as the mayor’s pained deliberations with regard to his own future. In one bizarre month, Murphy announced he would run for reelection in 2004, then changed his mind, saying he preferred to focus on the problems of the city, then, after supporters pleaded with him to reconsider, declared he was back in the race. His lack of resolve dismayed ordinary citizens. San Diegans did not like expensive government, but they liked (or so they were discovering) weak government even less. The impression of irresolution was confirmed when the Chargers, who had not enjoyed a winning season in eight years, demanded a new stadium, without which they were threatening, again, to pull up stakes. Characteristically, Mayor Murphy created a task force to study the issue. Taking a definite stand seemed beyond him.

Fike urged Murphy to fire the city manager. Murphy replied that he had to get past “stripper-gate” (the Zucchet scandal) and the Chargers mess before considering changes. Soon after, a delegation from the Chamber of Commerce implored the mayor to enlist its help. Murphy spurned them, too. The mayor increasingly relied on a single adviser, his chief of staff and former campaign consultant, John Kern, to set his agenda, and his view of the city was increasingly blinkered.⁹

Murphy was particularly ill suited to dealing with the pension crisis. He preferred to act only when the facts were resolved neatly in a bow, and SDCERS was anything but. His instinct in such cases was to dither— especially when, in late summer, Zucchet and the other two councilmen were indicted. The only action Murphy took with regard to SDCERS was to create yet another deliberative group, a “Pension Reform Committee.”

WHILE CITY HALL seemed stalled, Conger was trying to force it to move on the Gleason case. He hit on a clever tactic. Municipalities are required to make full disclosure to the investors who buy their bonds (just as are corporations). In July, Conger reviewed a trove of the city’s disclosures, many of which contained the assertion, “The state legislature requires us to fund our retirement system at the actuarily determined rate.”¹⁰ In other words, the city was implying to investors that San Diego was current on its pension obligation—a blatant untruth. For Conger, this was a secret bullet.

Shipione, too, had been poring over the city’s financial records, often at home or at the gym on her stationary bike. One disclosure statement was of particular interest—in September, the city planned to sell $505 million of bonds for improvements in its sewer system. The lead underwriter was UBS Financial Services, Shipione’s employer. Perhaps prompted by Gleason, Shipione reviewed the prospectus for the sewer bonds and spotted a seeming error in the description of the pension liability. She brought the error to the attention of Grissom—as well as to Orrick, Herrington & Sutcliffe, the law firm that handled the city’s disclosures.¹²Bit by bit, the collateral damage from the pension system was spreading.

While Shipione was outing the faulty bond disclosure, she was also writing to the chairman of the San Diego Port Authority and disparaging SDCERS’s financial records.¹³At this point, it is hard to disentangle Shipione’s legitimate concern over SDCERS from her fury with the board. Her relations with the other trustees had deteriorated to open warfare. She was missing meetings, talking out of school, and regularly accusing her colleagues of ignoring their duty. Though she was not always wrong, her accusations were draped in self-righteous fervor, as though she were the lone honest trustee and a victim of the others’ persecutions. She even called them “criminals.” Roeder took her aside and said, “Diann, try not to make this personal.” The city trustees (Lexin most of all) despised her.

Even among SDCERS staffers, presumably a less conflicted group than the board, Shipione had few friends. She accused the staff—money managers, people who ruled on claims, and so forth—of incompetence and dishonesty. As a sign of her isolation from the system, she regularly challenged its decisions to deny disability claims to retirees. A few of these claimants were patent liars, such as a fireman who claimed to have been injured by the bouncing of the fire truck all the while he was competing in triathlons. Other cases were more nuanced, involving employees who claimed to have suffered job-related injuries, the exact origins or severity of which were often unclear. Shipione invariably took the employee’s side; what’s more, she treated them less as claimants than as martyrs, sometimes hugging them in front of the board and offering “apologies” for her colleagues’ rulings as though they had been deliberately prejudicial. She was a most trying and fragile trustee—after meetings she often burst into tears—yet she had a way of being right when it counted.

The sewer bonds were scheduled to go to market the second week of September. The day before the bonds were to be priced, Shipione shared her concerns with her manager at UBS, which of course was the underwriter. Her boss called New York. Before San Diego knew what hit it, UBS had postponed the underwriting. San Diego insisted that its mistakes were trivial; however, regulatory “mistakes” are not so easily put right. Orrick, its counsel, insisted that the city undertake a review of its past disclosures, and it soon became clear that the problem was larger than the city had let on.¹⁴In the meantime, San Diego was locked out of bond markets. Like a contagion, the pension scandal was infecting everything it touched.

AS 2004 (AN ELECTION YEAR) drew near, City Hall was increasingly eager to resolve potentially damaging litigation. In December, San Diego offered to settle the Gleason case. Its offer was woefully inadequate. Incredibly, under the terms of the offer, which had been crafted by Herring, the deputy manager, SDCERS would have received less in contributions than under MP-2. The “settlement” offer was in fact the city’s same old game of trying to perpetuate the underfunding.¹⁵

Conger was on the verge of taking it.¹⁶There is no good explanation for why, except that he was a solo attorney who hadn’t been paid in a year, and he may have misjudged what the plan was worth. But Vitek and Leone, the outside SDCERS attorneys, saw through the ruse and urged the board to reject it.

As if shocked out of an unconscious slumber, SDCERS finally realized what it had at stake in Gleason. As the lawyers had been saying, SDCERS was the victim—and had been all along. It promptly rejected the city’s offer. “Then we started going after the city in a classic adversarial sense,” according to Leone.¹⁹After seven years of being shortchanged, the retirement system had awakened.

The litigation reached a climax just before Christmas. An attorney for the city, hoping to nullify Conger’s basic claim, stated in court that San Diego was not required to contribute at the actuarial rate.²⁰This was a pivotal mistake—the one Conger had been waiting for. Remember, he had all those bond disclosures in which the city had been saying just the opposite.

Conger pointed out the inconsistency to the judge. The litigator played like Columbo, the television detective. “I’m a little confused here,” Conger said, as if it were a great mystery to him why the city would say one thing about its pension liability to investors and tell the Gleason court something else.²¹

The city had no good answer. In February, it agreed to a settlement— this time a fair one. In its next installment (in June) it would contribute $130 million to SDCERS, $45 million more than a year earlier. After that, contributions would be set at the actuarial rate—about $170 million. Just in case the city was unable to pay, SDCERS was awarded trust deeds on huge tracts of city property as collateral, including the parking lot at Qualcomm Stadium.²²

Taking a longer view, since the mid-1990s, when Mayor Golding had started cheating on the city’s pension obligations, the unfunded liability had soared from 22 percent of its payroll to an incredible 215 percent.²³ And of course, the city’s now much-higher benefit levels could not be rolled back.

But the responsibility for the pension had shifted. Thanks to the Gleason court, the daunting obligation was now the burden of the city. Thus, pension expenses, formerly only 5 percent of the general budget, soared to approximately 20 percent. With SDCERS squeezing out other agencies for funds, the pension debt exploded as a political issue.

Michael Uberuaga, the city manager, declared that San Diego faced a fiscal crisis; he called for sharp budget and payroll cuts. This put Murphy, who faced a primary on March 2, in a difficult spot. Murphy was running against Ron Roberts, an uninspiring county supervisor whom he had defeated in 2000, and two other contenders. He dearly wanted to win 50 percent of the vote so as to avert a runoff in November. But the mayor was battered by a series of humbling plagues, almost biblical in their grim foreboding. Two scorching wildfires blazed out of control, exposing the inadequacy of the city’s firefighting equipment, following which heavy rains produced one of the worst sewage spills in years. Then, early in 2004, the city admitted it was guilty of having issued dozens of false and misleading bond disclosures (most of them relating to the pension system).²⁴Honest bookkeeping being the coin by which Wall Street does business, Standard & Poor’s cut San Diego’s credit rating a notch and Fitch Ratings downgraded it by two notches.

Yet no matter how hard the mayor tried to contain the damage, it kept spreading to new and more ominous fronts. In February, Carol Lam, the U.S. attorney, opened a criminal investigation into MP-2. The SEC began a probe of the city’s disclosures. Before long, fourteen officials received federal subpoenas, and the FBI began to prowl through the city’s files.

Hoping to seem cooperative, San Diego hired Vinson & Elkins, a Houston-based law firm, to both conduct an internal review into its past disclosures and to represent the city before the SEC.²⁵Yet this showed a basic lack of comprehension of the true source of San Diego’s woes. By asking a single law firm to play the roles of both ombudsman and advocate, the city was creating the potential for a new conflict of interest.²⁸ Neither Murphy nor the city manager had grasped that such conflicts on the pension board had been the system’s original sin. Nor did they quite appreciate how corrosive such conflicts were—how they poisoned the well of trust.

MURPHY WON THE PRIMARY but fell short of 50 percent, meaning he would have to face the stubborn Roberts again. Now sixty-one, the mayor loathed the thought of another campaign. Murphy had a Methodist’s love of service, but the scent of the rabble repelled him. He did not have the common touch.

And his grip on the city was weakening. After the primary, Uberuaga, the city manager, resigned. KPMG, the city’s new auditor, remained dissatisfied with the condition of the city’s books and refused to sign off on its audit. Thus San Diego could not tap bond markets, and had to delay much-needed sewer and water projects. Fiscally, the city was frozen.

The pension mess, by now, had attracted a swelling (if oddball) chorus of critics: Aguirre, the left-leaning attorney, Councilwoman Frye, and Shipione. The most unlikely was Carl DeMaio, the Gingrich protégé who two years earlier had presented Murphy with a good-government award, and since then had become disenchanted with City Hall and launched a cloak-and-dagger investigation of its inner workings. DeMaio began to hold nearly weekly press briefings that amounted to potshots at City Hall. A political zealot with intense, gleaming eyes, he accused the city manager of concocting a budget with phantom revenue and exposed what he said were wasteful and lavish expenditures.

Murphy could slough off DeMaio as a political opportunist, but he could not face the voters without a plan for retiring the pension debt. He tried to take the high road, saying he would wait for the report of his Pension Reform Committee. The committee said the city should contribute $200 million (even more than was required by Gleason) a year. This was too much for Murphy. He wouldn’t fire cops and firemen to bail out SDCERS (nor would he raise taxes).²⁶He was still unwilling to impose sacrifices on the voters—the flaw from which the pension scandal had been born.

Murphy rejoined that Roberts, as a San Diego County supervisor, was hardly one to be throwing stones. San Diego County also had a serious pension-funding problem.²⁸Murphy’s point was that pensions were everybody’s problem, not just the city’s. Of course, he was right. No less than the governor, Arnold Schwarzenegger, was waging a war against state employee unions to phase out pensions for new state workers. This battle was occurring in various forms in a half dozen other states as well.

Then Aguirre, the tireless litigator, declared he was running for city attorney, with a mission to investigate the pension mess. In some ways, this took Aguirre back to his beginnings. Early in his career, he had been a prosecutor for the assistant U.S. attorney in San Diego and directed a probe of pension racketeering. Then, in the late ’70s, he had been assistant counsel to the same Senate subcommittee from which, during the 1950s, Robert F. Kennedy had investigated the labor rackets and Jimmy Hoffa. Bobby Kennedy was Aguirre’s hero. Like his idol, Aguirre was happiest when he was pursuing some perceived injustice—preferably one with societal overtones. Once, when the United Farm Workers were sued by a lettuce grower, Aguirre had rushed to Yuma, Arizona, to take up the case. The suit had the potential to bankrupt the union, which represents the poorest of migrants. Aguirre told the jurors, “You are being asked to judge history.” The UFW lost, but won on appeal.²⁹Aguirre thought the pension scandal had similar historic overtones. San Diego was a parable of America as his generation—the baby boomers—began to retire, and as companies and communities chafed under the demands of caring for them. Pension abuse was the cutting edge issue he had been looking for. He promised that if he were elected he would dig, and dig deeply, into the unfolding pension scandal.

TO MURPHY’S great discomfort, it was his own Pension Reform Committee that fully focused the mayoral election on SDCERS. The committee understood that conflicts of interest had undercut the board’s judgment, and it made a truly sensible recommendation: cut the board from thirteen to seven members with none of them city officials or union reps. Needless to say, this proposal was highly unpopular with the unions.

Saathoff immediately denounced it, as did the powerful municipal workers union. Rather quickly, this dampened the city council’s enthusiasm for reform. “The sad thing is these are serious problems,” Lisa Briggs of the taxpayers’ association told a reporter. “As soon as you turn these into political issues, all rational dialogue seems to disappear.”³⁰

Before the council voted on the proposal (which would go on the November ballot), Councilman Zucchet, the former firefighters’ lobbyist and now a defendant in the pending bribery case, added a clever amendment banning financial advisers from serving on the board. Zucchet’s amendment would affect only one current trustee: Diann Shipione.

Thus a measure intended to cleanse the board of the trustees who had orchestrated MP-2 was instead twisted so as to exclude only the trustee who had most vocally opposed it. “It’s an interesting conclusion that everybody gets to stay on this board—-unions, city people, retirees—except me,” Shipione, in a rare moment of understatement, observed.³¹

Saathoff and his union quickly repaid the favor and endorsed Murphy for reelection. This left the clear impression that the mayor had cut yet another deal. With the SDCERS deficit now estimated at a mind-numbing $1.7 billion, it was no longer clear that the city could stay afloat. For practical purposes, the election now became a referendum on the pension scandal.³²

Though San Diego’s losses were not as sharp as Orange County’s, bankruptcy had a superficial appeal; it proffered some sort of closure to San Diego’s season of torment. In the first national story on the crisis, the New York Times dubbed San Diego “Enron-by-the-Sea,” which seemed to reinforce the notion that San Diego was close to a collapse. The newspaper quoted Aguirre, who said that any corporation that had behaved like San Diego would be delisted from the stock exchange. John Kern, Murphy’s chief of staff, sounded downright Hooverish on the mayor’s behalf, insisting that San Diego was “on a sound fiscal footing.”³⁴

IN MID-SEPTEMBER, the electoral campaigns paused for the much-awaited report of Vinson & Elkins. It turned out to be a sweeping critique of San Diego’s pension practices. However, the law firm was more mixed in its appraisal of the city’s disclosures. Although it found that San Diego’s public reports had been deficient and often misleading, it did not find evidence of willful violation of securities laws.³⁵As V&E was also representing the city before the SEC on this very point, its conclusion set off a firestorm over the simmering issue of the firm’s independence.

KPMG, the city’s auditor, had been withholding its audit until it could determine if any laws had been broken; it quickly decided that the V&E report failed to settle the question. Steven DeVetter, KPMG’s partner in San Francisco, fired off a blunt letter to San Diego’s assistant city attorney. “Unfortunately . . . we do not believe [V&E’s] statement.”³⁶

The practical impact of this professionals’ quarrel was serious. KPMG would not complete its audit and San Diego remained shut out from capital markets, preventing it from raising money to build firehouses or complete federally ordered wastewater upgrades—or anything else. The city now faced a hornet’s nest of regulatory troubles.

With its fiscal crisis deepening, the city council voted to put on the ballot a measure to increase the hotel tax. Ironically, though the pension scandal made the potential revenue critical, it darkened the prospects for approval. Voters were wary lest their taxes be “wasted” on gold-plated pensions, and two well-heeled opponents—Doug Manchester, a local hotelier, and DeMaio, the right-wing consultant³⁷—played on their fears with an alarmist antigovernment campaign.³⁸As for Murphy, though the hotel levy was the one concrete measure that might have saved his budget, he stuck with the safe course for a San Diego politician and urged the voters to reject it.

Murphy was lucky to be running against a weak opponent. Roberts tried to score points by endorsing bankruptcy—a reckless step that helped Murphy to keep his core supporters in the business community. For all his faults, Murphy was personally likable; he had promoted downtown development, he had built the Padres’ stadium. And he got more support than he could have hoped for from Saathoff and the firefighters, who spent $100,000 on ads attacking Roberts.³⁹

Kern, his chief of staff, was deeply worried. Hoping to spark the mayor’s campaign, Kern had lunch with Councilwoman Frye, for the purpose of recruiting the onetime surfer to the mayor’s cause. A fifty-two-year-old recovering alcoholic with a voice silted with tobacco, Frye was an unlikely ally for the fastidious mayor. Earthy and coarse, she hugged perfect strangers and would show up at council meetings in blue suits with big floral pins and hammer away with questions. Murphy would nervously tap his watch and implore her, “Mrs. Frye, take it off line.” He liked to hush up discord, whereas Frye was hopelessly uncensored.

Frye was in some ways a perfect choice for a city hoping to recover its faded grace. Her life story read like a tawdry miniseries: beach girl leaves home, gets work as a short-order cook, marries badly, takes to drink, is allegedly abused as a wife, divorces. But then the tides turn: she meets a big-time surfer, remarries, operates (with Skip, her husband) a surf shop, becomes an environmentalist when Skip and his buddies repeatedly suffer from (she thinks) the effects of polluted water. And then some inspiring episodes: Frye tilts at corporate Goliaths; she pushes the city to investigate impurities in drainwater discharges and gets the state to pass a law that requires monitoring of coastal waters.⁴¹

However, Frye’s candidacy split the anti-Murphy vote. Ironically, it gave the mayor his best shot at winning. The election was incredibly close. With a third of the precincts counted, the Union-Tribune reported 35.3 percent of the vote for Frye, 32.6 percent for Murphy, and 32.1 percent for Roberts. It was obvious that San Diegans had registered a profound desire for change. Aguirre was elected city attorney and a proposition to transition to a “strong mayor” form of government was approved. So were two reforms of the pension system, though their effect was negligible. Predictably, the hotel measure met the fate of previous proposals to raise local taxes and went down to defeat.

As the votes for mayor were tallied, Frye retained a slim lead and the San Diego establishment, so used to controlling the city, was seized by panic. Then, after two and a half weeks, the registrar closed the book. Frye received an amazing 160,805 write-in votes to 157,459 votes for Murphy. Alas, state election law required write-in voters to inscribe their candidates’ names on the ballot and, also, to darken an oval bubble beside it. And 5,551 of those who voted for Frye had neglected to darken the bubble. The registrar refused to count them; Murphy had squeaked in.²⁹

No sooner was the election over than a fracas erupted at the pension board—which met in Shipione’s absence and voted to exclude her from private sessions, on the grounds of her repeated leaks (which she denied). If necessary, they agreed to call the police to escort her out. “Citizen’s arrest of Shipione weighed. Contingency not used in pension board fight,” the Union-Tribune breathlessly reported.⁴²

The significance of this juvenile squabbling, and of Murphy’s questionable victory, was that the epicenter for resolving the pension scandal was shifting. The catalyst for reform would be neither the mayor nor the hopelessly divided SDCERS. It would be the newly elected city attorney.

TRADITIONALLY, THE OFFICE of the city attorney served the governmentof San Diego. It was the city’s advocate in court, and was chiefly occupied with defending the city against lawsuits. Aguirre had a very different notion—that the office should represent the people of San Diego, even people who were suing the city. Since KPMG, the auditor, had requested an inquiry into whether city officials had committed illegal acts, Aguirre thought he had a mandate to look into the actions of city officials.⁴³

Aguirre’s instinct when involved in a case was to sue everyone in reach. He talked a thousand miles a minute, more or less ignoring the other party and directing the conversation where he wanted it to go. After his election, he ran into a city councilman named Scott Peters in the parking lot behind City Hall. Aguirre said, “Scott, I’m really looking forward to working with you on this pension stuff.”

But to Aguirre, all of official San Diego was at least a suspect in the pension disaster. He quickly informed SDCERS that, as the system’s lawyers were compromised, he, Aguirre, would serve as SDCERS’s counsel. (The SDCERS board utterly refused to go along with him.)⁴⁵Then he advised the city council members that they should hire personal lawyers.

Not that this slowed Aguirre down. In December, the newly confirmed official sent an assistant attorney, Robert Abel, to City Hall to oversee the work of Vinson & Elkins. Abel saw boxes and boxes of files labeled “SDCERS” that hadn’t been delivered under the federal subpoena.

When Aguirre heard about the files he exploded. Invoking his customary profanities, he ordered Abel to go back and seize every document that mentioned SDCERS. Abel returned to City Hall, but now the city officials had summoned a private attorney who refused to grant him access.⁴⁸

Eventually, they cut a deal. Aguirre was allowed to haul out the boxes (twenty-five in all) as long as they remained under seal. But once he had the files, he allowed Shipione to ransack them.⁴⁹He rationalized that since Shipione was a trustee, she should have access. Shipione went through the files as if she were possessed—tipping over cartons, spilling papers on the floor. Aguirre let Shea go through the files too. Meanwhile, he installed a padlock on his door and got into a spat with the chief of police when the latter refused to grant him police protection.

Not yet in office a month, Aguirre was at war with the pension system, the city manager’s office, the council, and the local police. He was preparing to file lawsuits against every aggrieving party he could think of and doing it all under the, to him, luxurious light of reporters and television cameras that Aguirre, now fifty-five and finally a public servant, so desired. Though his tactics were heavy-handed, they fulfilled a worthy purpose. San Diego’s government had flitted around like a bat intent on avoiding the sunlight for far too long. Now its people would learn the truth.

Aguirre divulged the results of his probe in serial fashion. In January 2005 he startled San Diegans with the publication of a sixteen-page brief bearing the improbable title “Interim Report No. 1 Regarding Possible Abuse, Fraud, and Illegal Acts by San Diego City Officials and Employees.” Soon, all of San Diego was awaiting his reports like the next installment of Harry Potter.

Though sketchy on details, “Interim No. 1” homed in on a pivotal moment of the pension scandal—the failure of the blue-ribbon report to come clean. “Had the public known that the City faced the very real prospect of having to pay hundreds of millions of dollars into the pension plan,” Aguirre allowed, “would the City have proceeded with its plan to increase employee pension benefits?”⁵⁰

Aguirre’s staff nervously tried to tone down his incendiary prose, which only fueled his fire.⁵¹While Murphy was trying to calm the city, Aguirre was working to raise its temperature—to push the drama to a climax. He so spooked the pension trustees that the board (exclusive of Shipione) took the extraordinary step of suing Aguirre to prevent him from turning over the files he had seized to the SEC and to the Justice Department.⁵²

On February 9, Aguirre published “Interim Report No. 2.” This one was a shocker that meticulously chronicled the pension plot—lurid emails and all. Aguirre accused Murphy and the council, and many others, of keeping San Diegans “in the dark” about the condition of the retirement system. He laid out the duty of fiduciaries according to the California Constitution—and accused both the council and the pension board of violating that duty. Most seriously, he presented evidence to suggest that the mayor and the council had authorized bond disclosures “that the Mayor and City Council Members knew to be false.”⁵³

Had Aguirre and the other officials not remained a part of the same government, a civil war might have ensued. But they all had to be concerned with the failing state of the city’s finances. San Diego was desperate for credit, access to which depended on satisfying the auditor, KPMG, that all evidence of wrongdoing was flushed out. As San Diego had gotten conflicting opinions from Vinson & Elkins on the one hand and Aguirre on the other, the city hired yet another investigator, Kroll Inc., to reconcile the two. Kroll recruited a high-profile regulator—former SEC chairman Arthur Levitt—to be part of a three-person “audit committee” to supervise the inquiry and serve as a single point of contact for the SEC.

The hope was that with Kroll on board, the various investigations would be consolidated and (quickly) completed. But Aguirre and Kroll immediately got into a nasty turf battle. (Aguirre ultimately sued Kroll’s attorney.) And official San Diego was not quite ready to cooperate. As late as March 2005, City Hall had yet to fully comply with year-old federal subpoenas. Local officials were summoned to the federal building and warned, presumably, that obstruction charges could follow. Similarly, the pension board voted not to hand over documents sought by the feds. Aguirre fumed that the board was “completely out of control” and moved to throw it into receivership.⁵⁵The pension mess was leading San Diego to the brink of civil anarchy.

Aguirre’s third report contained a splendid suggestion: that the council enact funding rules similar to those mandated by ERISA for private pension sponsors.⁵⁶Aguirre had hit on the beginnings of a solution to the entire problem of public pensions—hold them to the same or similar regulations as corporations.

But Murphy was simply too swamped by the escalating demands of the budget crisis to consider such a far-reaching reform. The mayor was trying to get the unions to agree to a pay freeze and also to benefit cuts for new employees (the same medicine that General Motors was prescribing for its workers). He was fretting over how to fund the library and sorely needed firefighting equipment. He had replaced the pension board with new trustees (Shipione was out, as was Saathoff). And Murphy was pushing ahead on the transition to a “strong mayor” form of government. Though personally ineffective, he had the sense to see that the mayor of America’s seventh largest city should be more than a coequal on the city council.

However, events were moving faster than he was. Donna Frye was preparing a recall drive to force the mayor from office.⁵⁷As Murphy’s approval rating had fallen to less than 10 percent, this was a serious threat. Aguirre, whose rating was 53 percent,⁵⁸said the mayor should simply resign.

It was at this troubled juncture, in April 2005, that Time magazine, in a cover story on America’s big-city mayors, named the likable judge with the sterling résumé as one of the U.S.’s three worst mayors. It was a devastating blow. Murphy was a decent man, but he had never shown the courage to confront the city’s pension genie, and it had turned his mayoralty into a nightmare. Eight days later, on April 25, he announced his resignation, to become effective in the middle of July.

Three weeks after this blockbuster announcement, the district attorney filed conflict-of-interest charges against six former pension trustees, including Saathoff and three city officials: Lexin, the human resources chief, Webster, the assistant auditor, and the city treasurer. Sometime later, a federal grand jury indicted Saathoff, Lexin, Webster, pension administrator Grissom, and another official on conspiracy charges stemming from MP-2.

Aguirre, who by summer had published six “interim” reports, spun them into a lawsuit against former trustees and pension officials. His case sought the unthinkable: a rollback of pension benefits prior to the enactment of MP-1 and MP-2. Typically, pension benefits are immutable; they can never be rescinded. However, Aguirre argued that the two underfunding deals in San Diego were illegal and that, therefore, so were the benefits that flowed from them.⁵⁹This was a novel and also a difficult case.

BY THE NATURE of the beast, pension fiascos cast long shadows. The effects reach far into the future, and perhaps inevitably, so did the attempts to adjudicate responsibility. The defendants (in the civil as well as the criminal actions) vigorously disputed the charges. The various cases turned not so much on the facts—which were not in dispute—but on whether MP-2 fit the applicable definitions of a crime or of a civil offense. SDCERS was eventually forced by a federal judge to turn over a trove of its papers, but the lawsuits multiplied, and San Diego labored for a long while without resolutions to either the indictments or the civil actions.

Regardless of what the courts decided, San Diego was in the throes of a budget crisis that was the pension scandal’s true offspring. In the aftermath of the debacle, library and after-school hours were shortened, the social services budget was slashed, swimming pools were closed, plans to provide wheelchair access to beaches were mothballed, and a program to feed AIDS patients was reduced by the equivalent of 25,000 meals. Capital projects such as the downtown library and new fire stations were put on hold, and head counts were reduced across the board.

San Diego was unlikely to solve its budget crisis overnight, but it did not have to wait to change its political cast. Mayor Murphy had anointed Councilman Zucchet as the deputy mayor, and thus the person in line to succeed him pending a new election. This was a most unfortunate choice. Zucchet was a product of the firefighters’ lobby, an organization as tainted as any in the pension scandal. Moreover, he was under federal indictment and, as Murphy’s exit neared, was awaiting a verdict.

Zucchet succeeded Murphy on July 16. Approximately forty-eight hours later, a jury ruled he had conspired to collect campaign gifts in return for changing strip club regulations—and convicted him of extortion.³⁰ That ended his “reign.” As a city clerk wondered aloud, “So, who’s the mayor?”⁶⁰

San Diego was now in the hands of the city council, as close to rudderless as a democracy permits. Eleven hopefuls jumped into the race for mayor, in a special election at the end of July. The predominant theme of the campaign was that government had created the city’s problems and ought to be shrunk down to size. One of the candidates, Pat Shea, said the city should file for bankruptcy. A libertarian entry wanted to privatize the fire department. Another candidate, who owned a Harley-Davidson dealership, said the city should spend “profits” instead of taxes, though how the city would get its hands on profits without taxing people was unclear. The candidates studiously avoided mention of a study by a local think tank that found that San Diego could raise $250 million annually, easily enough to pay the pension bill, by raising taxes just to the average level of California’s other big cities.⁶¹As a perceptive correspondent for the Los Angeles Times observed, “If a visitor from out of town wandered into a recent debate among leading candidates for mayor, he or she might have come away thinking San Diego is one of the most overtaxed, overregulated cities in the nation.”⁶²

The exception was the one candidate who thought she already should be mayor—Donna Frye. Much to her advisers’ chagrin, Frye refused to rule out tax hikes. She finished first by a wide margin anyway. But since she won less than a majority, Frye faced a runoff in November against the second-place finisher—for weary San Diegans, the fourth mayoral election in eighteen months.

Frye attracted a formidable team of advisers; they sensed that the moment for electing a Democrat, even a loose-haired environmentalist, might have arrived. Her challenger was Jerry Sanders, a former police chief, more recently head of the local United Way. Sanders was a moderate Republican. The son of a cop, he was less hostile to government than the Republican ideologues were. He had supported tax hikes in the past, though he was careful to avoid doing so now.

Frye campaigned for “openness”; Sanders for “leadership.” While each slogan addressed a failing of the Murphy years, Sanders’s was more soothing to established San Diego. Frye was a change agent; Sanders promised to run a tighter ship, but not to turn it upside down. Also, Frye was (to downtown San Diego) worrisomely close to Aguirre. Though unions supported her, business rallied for Sanders, which enabled him to outspend his charismatic opponent by three to one.

What little chance remained to Frye was buried by the Union-Tribune, which relentlessly savaged her as a would-be taxer. Her platform was anything but radical. She proposed to ignore the new pension benefits, on the basis that the deals were illegal, and if that failed (that is, if a court ordered the city to pay them) to raise the sales tax by half of 1 percent.

In San Diego, even this was too much. The Union-Tribune excoriated Frye for advocating the possibility of a tax hike. While conceding that the city was facing “a fiscal emergency of staggering proportions,” the newspaper intoned, “Our guess is, the unhesitating response of most San Diegans would be not only no, but heck no.” This was blatantly demagogic; indeed, it mirrored the attitude of politicians who, in refusing to pay the bills for benefits they had enacted, had brought San Diego to its current pass. Taxpayers would have to pony up. The only question was whether it would be today’s taxpayers or tomorrow’s.⁶³

Sanders won handily. He had no magic fix—nor did one exist—for a decade of pension shenanigans. San Diego still had no access to bond markets and, as the mayor-elect observed, “I can’t print money.” But Sanders took a sensible first step: he used San Diego’s portion of a giant settlement between tobacco companies and the states to chip away at the pension liability. And Sanders, who was not a man to be trifled with, restored a sense of authority at City Hall.

He inherited a SDCERS that was in brutal shape. On the date of Murphy’s resignation, the average funded ratio of the retirement plans of the ten largest cities in California was 94 percent; in San Diego it was 66 percent. SDCERS’s condition was greatly aggravated by employees who had purchased pension credits for time they had not really worked—an astonishing 13,000 years’ worth of extra credits that would be on the books for a lifetime.⁶⁴

The city’s benefits were not the highest in the state—that distinction went to liberal San Francisco. However, because of the San Diego system’s poor level of funding, the city’s burden was bigger by far. Pensions cost 26 percent of payroll in San Diego compared to 14 percent for the ten largest cities.⁶⁵Adding insult to injury, San Diego had been saddled with costs amounting to $25 million and counting for the various investigations. That alone would have paid the pension bill when McGrory first ducked it a decade earlier.

AS FOR THE VARIOUS OFFICIALS who helped to craft the underfunding deals, many moved on to other jobs and all would benefit from gold-plated retirements fattened by their own machinations. Uberuaga, the hapless city manager who spearheaded MP-2, got a lifetime pension (after having worked for San Diego for a grand total of six years) of $55,000 a year.⁶⁶McGrory, the wizardlike city manager in the ’90s, did even better—a pension of $86,000.⁶⁷And Bruce Herring, the long-serving deputy manager who helped to orchestrate both MP-1 and MP-2, retired in 2005, with an incredibly rich pension of $144,000 a year.³¹ ⁶⁸

Diann Shipione was toasted by the press for having blown the whistle on MP-2, and honored with a public service award from the League of Women Voters. But public recognition did not seem to bring her peace. She distanced herself from various proposals to help SDCERS regain its footing, and when the idea was aired of her rejoining the board, she balked and weirdly proposed that the entire system be "disbanded.”⁷⁰

Late in 2005, Shipione appeared in a black suit to testify in pretrial hearings against her former colleagues. She looked nervous and fragile. The former trustees in the dock—the defendants—fixed her with stares that may best be described as hateful. The defense attorney grilled her, and as Shipione replied—often evasively—the defendants mockingly rolled their eyes. Shipione began to sniffle and then to openly sob. She seemed utterly alone.

Among the political insiders who were habitués of the county court-house, Michael Aguirre had made even more enemies than Shipione. He continued his breakneck pace—quarreling with the city council and the pension board, as well as with Vinson & Elkins, KPMG, and even with the distinguished Arthur Levitt. He filed a pointless suit against Orrick, San Diego’s bond counsel, whose only crime was to have been deceived by San Diego. He tried to grab the additional job of SDCERS lawyer and was rebuked by a judge. He fought with, and fired, one of his best attorneys, and suffered an exodus of lawyers who were exhausted or fed up with his mood swings and accusatory tirades. He was unable to slow down, even between 2 and 5:30 a.m., which was the time he allotted to answering his mail.

But Aguirre wisely chose not to fight with the new mayor, who became his ally for a while, and this afforded him the capital to continue his crusade for honest pensions. Most of Aguirre’s suits did not accomplish anything, at least in a narrow legal sense. And Aguirre surely did not measure up to the politicians he revered, and whose photos adorned his office— Bobby Kennedy and FDR and Winston Churchill—but in his rare moments of calm, Aguirre could gaze out on a resplendent San Diego Bay and reflect that he had accomplished something. He had convinced the SEC not to punish San Diego—presumably because the agency was satisfied with Aguirre’s self-flagellations on the city’s behalf. He had educated the people to the dangers of living off the pension fund. And he had revealed to them their own recent history. It was a saga of greed, conspiracy, and political cowardice—as Aguirre wrote, one that sparked “the worst financial crisis in the history of the City of San Diego.”⁷¹