1997-1998 SANTA BARBARA COUNTY GRAND JURY

 

FINAL REPORT

 

COUNTY RETIREMENT SYSTEM 1998

 

Released June 8, 1998

 

BACKGROUND

 

The 1996-97 Grand Jury initiated an investigation of the Board of Retirement (Board) after it received complaints from county employees regarding policies and practices of the Santa Barbara County Employees Retirement System, specifically with regard to procedures relating to applications for disability retirement. When the Grand Jury attempted to question members of the Board regarding these complaints, the Board sued the Grand Jury in Superior Court, challenging the Grand Jury's authority to investigate Board decisions. The issue was settled by the Appellate Court affirming the Superior Court decision in favor of the Grand Jury in October 1997. (Exhibit 1)

The 1997-98 Grand Jury then proceeded with its own investigation, including the review and analysis of materials gathered by the previous Grand Jury, the 1937 Retirement Act and the Santa Barbara County Retirement System bylaws. The Grand Jury also interviewed Retirement Office personnel and Board members, applicants for disability retirement, present and former employees, as well as retirees and their counsel.

The 1997-98 Jury focused its investigation on fund investment practices and the disability retirement application process. We examined the following:

 

Fiduciary Responsibility

 

The County Employees Retirement Law of 1937 (’37 Act) states, "This trust fund is solely for the benefit of the members and retired members of the system and their survivors and beneficiaries." The bylaws of the Santa Barbara County Employee Retirement System were developed from the requirements and subsequent amendments set forth in the ’37 Act. Present law requires that the Board retain funds from the investment of county and employee contributions to the retirement fund sufficient to cover anticipated pay out to retirees entitled to a monthly check.

 

Board bylaws provide structure for local administration of the system and guidance to Board members in carrying out their responsibilities. Several Retirement Board members commented that the dual responsibility of protecting the retirement fund as well as granting valid disability retirement claims may give the appearance that the system is biased in favor of protecting the fund and that applicants do not face a "level playing field."

The ’37 Act places the burden of proof upon the applicant to show by a preponderance of evidence that he or she is permanently disabled and, where applicable, the disability was service connected.

 

Length of the disability retirement application process

 

The application process is spelled out in Article V of the bylaws and conforms to the requirements of the ’37 Act. A final decision should be made within approximately nine months from date of completed application (Attachment A). Actual process time is substantially in excess of the time specified in the bylaws. If decisions are appealed, the process can stretch out for years.

 

Role of the Retirement Office

 

The Retirement Office is responsible for daily operations, informing employees how to proceed with general retirement applications, service and non-service connected disability retirement claims, and preparing recommendations for Board action. Retirement office investigators gather sufficient background and medical data so that the retirement office, in consultation with County Counsel, can make an informed recommendation to grant a disability retirement, or deny it. The investigator prepares a confidential summary memorandum explaining medical information for Board members to review before they consider the retirement office recommendation.

 

Comparisons between counties

 

To compare the cost or value and number of beneficiaries in employee retirement systems between Santa Barbara County and similar counties, the Grand Jury utilized data contained in the "Annual Report of the Financial Transactions Concerning Public Retirement Systems of the Counties of California." We selected San Joaquin, Sonoma, Stanislaus and Tulare counties due to similarity in population size. This information is provided below (Attachment B). Briefly summarized, Santa Barbara County Employees Retirement System has granted the fewest non-service connected disability retirements over the past three years, and among the fewest service-connected disability retirements. Of counties similar in population, the Santa Barbara retirement system has the highest administrative cost per retiree (Attachment C).

 

FINDINGS

 

  1. The ’37 Act states that when the assets of the retirement system exceed $800 million, the Board of Supervisors may establish a Board of Investments which shall be responsible for all investments of the retirement system. Membership on the investment board shall consist of nine (9) members consisting of the county treasurer; two general employees of the system elected to the Retirement Board; a safety member who is also a member of the Retirement Board, as is the eighth member who shall be a retired member,. The fifth, sixth, seventh and ninth members shall be qualified electors of the county appointed by the Board of Supervisors, having significant experience in institutional investments. Such persons are apparently not required to be retirement Board members.
  2.  

  3. The assets of the retirement system currently exceed $800 million. It is reported to be in excess of $1 billion.
  4. Board of Supervisors has not established a Board of Investments to be responsible for all investments of the retirement system.
  5.  

  6. The April 8, 1998, edition of the Los Angeles Times reported that a first ever audit by an outside actuarial auditing firm found substantial calculation errors in the Los Angeles County Employees Retirement Association calculations resulting in $1.2 billion in unforeseen liabilities to the retirement fund.
  7.  

  8. Treasurer/Tax Collector has responded to Grand Jury inquiry as to whether an audit of retirement Board actuarial calculation has ever been conducted by an outside actuarial auditing firm, stating that such an audit has been conducted twice in the past 15 years.
  9.  

  10. Substantially all applicants who have prevailed in obtaining retirement benefits due to service-connected disability have found it necessary to retain legal counsel at their own expense to represent them in adversarial proceedings before the Board and/or hearing officers.
  11.  

  12. Applicants’ legal counsel are normally compensated on a contingency basis, i.e., no payment unless member is successful in obtaining disability retirement benefits. The legal fees typically are based on a predetermined percentage of benefits received by the applicant.
  13.  

  14. The Board pays legal fees incurred by an applicant only if the case has been successfully appealed to Superior Court, and if the court, in its discretion, orders the Board to pay legal fees. The Board does not pay legal fees if a member’s application
  15. for disability benefits is approved without a review and order by Superior Court.

     

  16. If the Board does not pay applicant’s legal fees, the applicant’s attorney can obtain a lien against the applicant’s retirement benefits to satisfy fees incurred in prosecuting the application.
  17. The Board exclusively selects hearing officers without input from applicants.
  18.  

  19. The Board’s method of selecting hearing officers violates applicant’s constitutional guarantee of due process of law. (Exhibit 2)
  20.  

  21. The United States Supreme Court has defined the scope of the right to due process of law in hearings which involve a vested right such as pension benefits. It includes the right to decision by a fair process, administered by a neutral and disinterested decision maker. (Exhibit 2)
  22.  

  23. California civil service and public employment law repeatedly recognizes the right to a neutral and impartial hearing officer as a component of due process. (Exhibit 2)
  24.  

  25. The Board exclusively selects a panel of hearing officers (attorneys) from members of the State Bar, none of whom have their office addresses in Santa Barbara County.
  26.  

  27. There are many members of the State Bar residing in Santa Barbara County who are qualified to serve as hearing officers.
  28.  

  29. Hearing officers/referees are compensated for their work and serve at will, subject to being removed from the panel, or simply by not receiving any further cases for hearings. Continued membership on the panel of approved referees depends upon the satisfaction of the Board, Retirement Administrator and their counsel. This results in a perception that the implication of a continuing personal financial interest by the hearing officer might be instrumental in that hearing officer confirming the Board’s rejection of member’s application for disability retirement benefits. (Exhibit 2)
  30.  

  31. The Board selects medical examiners in substantially the same manner as it selects hearing officers. This exposes applicants to the same procedures that they are confronted with before the hearing officers, who are exclusively selected by the Board, and who may have a bias due to personal financial interest in being selected and compensated by the Board.
  32.  

  33. On July 15, 1997, the Board entered into Attorney Service Agreements with at least two private Santa Barbara law firms, pursuant to a provision of Government Code Section 31529.9 which authorizes the Board to contract with attorneys in private practice for legal services.
  34.  

  35. Santa Barbara County is one of only four counties in the state to which Section 31529.9 applies. Since entering into service agreements with the private law firms, the Board has refused to retain the services of County Counsel for any purposes relevant to disability applications. This leaves the choice of hearing officers and Board retained medical examiners to be exclusively the result of referral and selection by the Retirement Administrator and the Board’s contracted private law firm/counsel.
  36.  

  37. Board has contracted with private law firms for legal services that are compensated at substantially higher hourly rates, paid by the system, than the rate at which the Board would incur fees by contracting with County Counsel.
  38.  

  39. While authorized by law, the Board’s use of private law firms, rather than utilizing County Counsel, has resulted in substantially greater legal fees being incurred at the expense of the system.
  40.  

  41. Legal services that are within the scope of duties, and in the past have been performed for the Board by County Counsel, have in all matters pertaining to disability applications been contracted instead to the private law firms.
  42.  

  43. The bylaws state that hearing and Board decisions are the result of administrative procedures, not adversarial litigious confrontations. The published areas of practice of the private law firms retained by the Board include civil litigation, lender liability, employment litigation and insurance defense. They are litigation advocates for the Board, not unbiased, disinterested administrative counsel.
  44.  

  45. The Board’s utilization of private law firms with a continuing personal financial interest in advocating decisions that favor the Board’s rejection of the member’s disability application can be perceived as a basis of bias in favor of the Board. This creates adverse pressure to the detriment of the applicant.
  46.  

  47. The Board has not complied, for various reasons, with the time sequences imposed by the bylaws to be ready for a hearing within 150 days of the disability application being filed.
  48.  

  49. Additional investigator/staff would improve the ability to meet the time schedule of hearing within 150 days of the application being filed.
  50.  

  51. Procedures to be followed by members filing disability applications are explained for the first time by the Retirement Investigator, an employee of the Retirement Office, rather than by a written procedure manual distributed to members, as is the practice in other counties.
  52.  

  53. Applicants’ dependence on procedure information explained to them verbally by a
  54. Retirement Investigator results in confusion, delays, and stress for applicants.

     

  55. The Retirement Office issues an administrative recommendation (memorandum) recommending rejection or acceptance of a member’s retirement application without input from County Counsel. This is contrary to by-law 502 (a) requiring consultation with County Counsel. According to Exhibit 2 (page 5), apparently, the Board has always adopted the Retirement Office’s advice.
  56.  

  57. When the Board first denies a member’s application for disability retirement benefits (based on the memorandum from the Retirement Investigator and the recommendation of the Retirement Office), the application is referred to a hearing. The Board’s exclusively appointed hearing officer conducts the hearing and the Board’s privately retained litigators represent the Board, in opposition to the member’s application.
  58.  

  59. The Board may appoint one of its members or any member of the State Bar to act as a hearing officer.
  60. No members of the Board are serving as hearing officers. The Board has exclusively used compensated California licensed attorneys to serve as hearing officers/referees.
  61.  

  62. Data regarding service and non-service connected disabilities granted annually was not easily available for Santa Barbara County because the Retirement Office failed to send requested information to Sacramento for inclusion in the Annual Report of the Financial Transactions Concerning Public Retirement Systems of the Counties of California. The Retirement Office has pledged to begin sending appropriate information to Sacramento for inclusion in the Annual Report.

 

 

RECOMMENDATIONS

 

  1. A Board of Investments should be established to oversee invested funds.
  2. [Finding 1, 2 and 3]

     

  3. Periodic in-depth actuarial audit of the retirement fund should be performed by an outside auditor.
  4. [Findings 4 and 5]

     

  5. Disability retirement applicant’s attorney fees should be paid by the retirement system when a decision is made in the applicant's favor.
  6. [Findings 6, 7, 8 and 9]

     

  7. Use of mutually approved medical examiners and referees should be required during the hearing phase of the application process.
  8. [Findings 10, 11, 12, 13, 14, 15, 16, 17, 18, and 19]

     

  9. Board should hire private law firms only when County Counsel has a "conflict of interest." [Findings 20, 21, 22, 23 and 24]
  10.  

  11. Retirement office should hire more investigators/staff to improve their ability to be ready for a hearing within 150 days of filing a disability application.
  12. [Findings 25 and 26]

     

  13. A pamphlet outlining the Retirement System and application procedures should be published and provided to employees regarding regular and disability retirement.
  14. [Findings 27, 28, 29 and 30]

     

  15. Members of the Board should serve as referees on one or two cases per year rather than using a non-Board referee. This would assure that Board members themselves more clearly understand what is required of everyone during the hearing process.
  16. [Finding 31 and 32]

     

  17. Retirement Office should file with the state data for Annual Reports regarding the number of disability retirements granted each year.

[Finding 33]

 

AFFECTED AGENCIES (Party or entity required to respond)

 

Santa Barbara County Employees Retirement System Board

[all Findings and all Recommendations]

 

Santa Barbara County Board of Supervisors

[Findings 1, 3, 4, 15, 19, 20, 22, 24, 31 and Recommendations 1, 2, 3, 4, 5, 7]

 

 

ALL AFFECTED AGENCIES PLEASE NOTE:

 

Section 933.05, Penal Code is summarized as follows:

 

A – Findings [Section 933.05 (a)]

For each finding in the Grand Jury report, the responding party must give one of following two responses:

1) That you agree with the finding.

2) That you disagree wholly or partially with the finding, in which case the response shall specify the portion of the finding that is disputed and shall include an explanation of the reasons for the disagreement.

 

B - Recommendations [Section 933.05 (b)]

For each recommendation in the Grand Jury report, the responding party must state that one of the following four actions has been taken:

1) The recommendation has been implemented, with a summary of the implemented action.

2) The recommendation has not yet been implemented, but will be implemented in the future, with a timeframe for implementation

3) The recommendation requires further analysis. If a person or entity reports in this manner, the law requires a detailed explanation of the analysis or study and timeframe not to exceed six (6) months. In this event, the analysis or study must be submitted to the officer, director or governing body of the agency being investigated.

4) The recommendation will not be implemented because it is not warranted or is not reasonable, with an explanation therefor.

 

C. Budgetary and Personnel Matters [Section 933.05 (c)]

If a finding or recommendation of the Grand Jury addresses budgetary or personnel matters of a county department headed by an elected officer, both the department head and the Board of supervisors shall respond if requested by the Grand Jury, but the response of the Board of supervisors shall address only those budgetary or personnel matters over which it has some decision making authority. The response of the elected department head shall address all aspects of the findings or recommendations affecting his or her department.

 

Advance release of Report is prohibited prior to public release.

Two working days prior to release of the Final Report, the Grand Jury will provide a copy of the report to all affected agencies or persons. No officer, agency, department or governing body of a public agency shall disclose the contents of the report prior to its public release.

 

1 - Public Agency. The governing body of any public agency must respond within ninety (90) days.

2 - Elective Officer or Agency Head. All elected officers or heads of agencies and departments are required to respond within sixty (60) days.

3 - In any city and county, the mayor shall also comment on the findings and recommendations.

 

The written response is to go to the Presiding Judge of the Superior Court. In addition the written response and a 3 1/2 inch computer disc with the response (preferably done in Word) is to be forwarded to the Grand Jury.

 

 

Attachments A, B and C

Exhibits 1 and 2

 

ATTACHMENTS AND EXHIBITS ARE IN THE PUBLISHED 1997-98 FINAL REPORT.