The state’s embattled pension system did not act four years ago when it learned about the city’s runaway salaries. The state attorney general and auditors express shock that nothing was done.

By Evan Halper and Marc Lifsher, Los Angeles Times
August 6, 2010

Reporting from Sacramento —

The failure of the state’s embattled pension system to take action after learning four years ago of Bell city officials’ runaway salaries has put the fund under another unwelcome spotlight.

The state attorney general says he is shocked that nobody at the fund alerted law enforcement. Professional auditors are perplexed by the lack of follow-up that even board members at the California Public Employees’ Retirement System are at a loss to explain.

During a routine audit in 2006, CalPERS learned that Bell City Manager Robert Rizzo had received a 47% salary increase the year before, driving his pay up to $442,000. CalPERS is supposed to stop pay spikes that can unduly enlarge retiree pensions, but officials signed off on Rizzo’s raise because Bell’s assistant city manager and City Council members were also getting enormous boosts. CalPERS took no further action. Rizzo’s salary would eventually grow to nearly $800,000.

“A 47% increase in salary should have set off alarm bells,” said California Atty. Gen. Jerry Brown, who is also the Democratic nominee for governor. “That kind of jump in pay is shocking and completely unacceptable. CalPERS should have told someone, and the attorney general’s office would have been a good place to start.”

Documents released by CalPERS on Thursday show that the fund was also informed of a 42% raise for the assistant city manager and nearly 38% raise for City Council members. That brought council members’ pay to $62,000 by 2005 for part-time jobs that in other small cities pay about $400 per month. The newly released records include Bell’s explanation to CalPERS of why its officials were worthy of such salaries.

Assistant City Manager Angela Spaccia told CalPERs in writing in October 2006 that the city manager’s salary was hiked “to reflect his contributions to the city,” which included helping Bell resolve a multimillion-dollar deficit. She said her own pay hike was “provided to reward her for her efforts and new responsibilities” related to a promotion the city had given her.

“It should also be noted that the City Council, also members of the Executive Management classification, were compensated accordingly for their contributions and efforts toward the City’s dramatic financial recovery,” Spaccia wrote.

CalPERS responded a week later that the city had provided sufficient documentation to authorize “a one-time compensation adjustment” for the officials. The fund conducted no follow-up audits, and Bell salaries continued to soar.

The pension officials’ handling of the audit has invited more scrutiny for CalPERS at a time when it is already reeling from a corruption scandal. Brown’s office earlier this year accused the fund’s former chief executive and a former board member of being engaged in fraud. A civil suit is pending in Los Angeles County Superior Court.

CalPERS has ordered a freeze on the pension benefits of the three highest-paid former Bell officials pending the outcome of an investigation Brown has launched. None of those former officials have yet applied to receive their pensions.

Brad Pacheco, a CalPERS spokesman, said there were no follow-up audits because Bell wasn’t scheduled to be looked at until about five years later. Asked why CalPERs did not alert authorities to the salary spikes, he said: “We’re not part of that chain of command. It was the elected city officials who negotiated, saw and signed the salaries and who are accountable.”

But some CalPERS board members say the fund mishandled the situation.

Among those critics is state Treasurer Bill Lockyer, who says CalPERS staff never alerted the fund’s board members to the audit’s findings.

“There were no red flags raised for the board,” said Lockyer spokesman Tom Dresslar. “That has to change.”

He said Lockyer would propose rules requiring CalPERS staff to report to the board any audits that spot excessive salary hikes.

State Controller John Chiang, also a board member, said he would call on CalPERS to require that local governments “immediately notify the pension fund of any proposed salary increase that exceeds a reasonable level, along with a justification and the pay history for that position.”

The controller’s staff said “reasonable” might be 10% or less.

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