GARY L. FERAMISCO 105 E. Anapamu Street, Room 109 

TREASURER-TAX COLLECTOR Santa Barbara, CA 93101

Telephone (805) 568-2490

Bernice James Telecopier (805) 568-2488

Assistant

Mailing Address:

M. Kay Yamada-Brown Post Office Box 579

Business Manager Santa Barbara, CA 93102-0579

 

 

 

 

 

August 25, 1998

 

 

Honorable Frank Ochoa

Presiding Judge of the Superior Court

1100 Anacapa St., Courthouse

Santa Barbara, CA 93101

 

Grand Jury Foreperson

1100 Anacapa St., Courthouse

Santa Barbara, CA 93101

 

RE: Response to 1997/98 Grand Jury Report

 

 

F1. 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.

 

F1. AGREE. Government Code Section 31520.2, relating to the County Employees Retirement Law of 1937 (CERL), does provide that the Board of Supervisors may establish by resolution, a Board of Investments.

 

F2. The assets of the retirement system currently exceed $800 million. It is reported to be in excess of $1 billion.

F2. AGREE. As of the close of the 1997/98 fiscal year the book value of the assets just surpassed the $800 million mark.

 

 

 

 

 

 

F3. Board of Supervisors has not established a Board of Investments to be responsible for all investments of the retirement system.

 

F3. AGREE. The Board of Supervisors has not implemented Government Code Section 31520.2.

 

R1. A Board of Investments should be established to oversee invested funds. [Finding 1, 2 and 3]

 

R1. NOT BE IMPLEMENTED. The creation of a Board of Investment is not necessary. The retirement system was established as of January 1, 1944, and over the 54 years the Board of Retirement has had the full fiduciary responsibility to administer the benefits and manage the assets to achieve the actuarial economic and non-economic assumptions to maintain the strong financial health the retirement system has enjoyed to date. The Board of Retirement is established under Section 31520.1, and current Board of Supervisor appointments to the Board of Retirement, have in the past included certain additional financial or actuarial qualifications, such as experience in investment trust, bank portfolio management, and actuarial insurance knowledge.

 

There are twenty Counties that fall within the scope of the CERL. The estimated combined assets total $51 billion, with multiple Global strategies and approximately 350 professional advisors. Los Angeles County represents approximately one-half of the assets with one-third of the advisors. Section 31520.2 was added to the statutes at the request of Los Angeles County, and they are the only County that has implemented said section. The remaining 19 Counties average $1.3 Billion in assets and 12 professional advisors.

 

F4. 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.

 

F4. AGREE. An article appeared in the Los Angeles Times.

 

F5. 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 1 5 years.

F5. AGREE. On two (1984 & 1994) occasions RFP's were issued to secure actuarial services to insure the soundness of the retirement system. On each instance, there was a change in the actuarial consultants, and an audit was conducted to determine the accuracy and consistency of the data transferred.

 

R2. Periodic in-depth actuarial audit of the retirement fund should be performed by an outside auditor. [Findings 4 and 5]

 

 

 

 

 

 

 

R2. HAS BEEN IMPLEMENTED. A examination of the actuarial economic and non-economic assumptions, should be conducted periodically to determine the "actuarial reasonableness", when one of the following events occurs: a) major change in actuarial assumptions; b) change in consultants; c) GFOA suggested standard of once every ten years.

 

F6. 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.

 

F6. PARTIALLY DISAGREE. Most service connected disability retirements are granted administratively by the Retirement Board without going to hearing before a hearing officer. Representation by counsel has no bearing on whether disability retirement is granted either administratively or after a hearing. At the administrative stage, even where applicants are represented by counsel, participation by counsel is minimal. Many applicants have participated without representation by counsel at all stages of the process including disability retirement hearings. It follows, therefore, that disability retirements are granted at all stages of the process to unrepresented applicants.

 

Nearly all of the service connected disability retirement applicants are represented in a Worker's Compensation case filed prior to applying for disability retirement. It is not uncommon for the representation by the Worker's Compensation lawyer to carry over to the disability retirement case.

 

F7. 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.

 

F7. WHOLLY DISAGREE. The Board of Retirement has no direct knowledge how applicants compensate their legal counsel.

 

F8. 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 for disability benefits is approved without a review and order by Superior Court.

 

F8. AGREE. Government Code Section 31536 provides that upon the reversal of denial by Superior Court, the Court may award reasonable legal fees to the applicant.

 

F9. 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.

 

F9. WHOLLY DISAGREE. Government Code Section 31452, provides that retirement allowances are not assignable or subject to execution.

 

 

 

 

R3. Disability retirement applicant's attorney fees should be paid by the retirement system when a decision is made in the applicant's favor. [Findings 6, 7, 8 and 9]

 

R3. NOT BE IMPLEMENTED. The payment of applicants legal counsel is not authorized in the CERL Government Code provisions, which clearly articulate the use of retirement funds for certain specified expenditures. There is no corresponding provision for an award of legal fees to the retirement system in the event denial is upheld. Under California law, attorneys fees may be awarded to the prevailing party where agreed to by contract or where authorized by statute. There is no statutory authority pursuant to the CERL Government Code sections or otherwise for awarding attorneys fees to the prevailing party in a disability retirement administrative hearing.

 

F10. The Board exclusively selects hearing officers without input from applicants.

 

F10. PARTIALLY DISAGREE. Government Code Section 31533 provides:

 

"Whenever, in order to make a determination, it is necessary to hold a hearing the board may appoint either one of its members or a member of the State Bar of California to serve as a referee. The referee shall hold such hearing and shall transmit, in writing, to the board his proposed findings of fact and recommended decision."

 

The members of the Retirement Board select and maintain a panel of hearing officers to make findings of fact and recommendations in disability retirement cases. In selecting hearing officers for the panel, all members of the Retirement Board review the qualifications of the hearings officers and vote on their selection. Hearing officers for specific disability retirement cases are assigned by the retirement office on a rotating basis subject to availability.

 

Of the eleven members of the Retirement Board, two are elected by general member representatives, one with an alternate are elected by safety member representatives, and one with an alternate are elected by retired member representatives. Members have input into the selection of the panel of hearing officers through their elected representatives on the Retirement Board.

 

F11. The Board's method of selecting hearing officers violates applicant's constitutional guarantee of due process of law. (Exhibit 2)

 

F11. WHOLLY DISAGREE. The selection of referees is in accordance with Government Code Section 31533. All referees selected by the Retirement Board to conduct hearings have experience conducting disability retirement hearings for other 1937 Act Counties. The selection process meets the due process requirements of both the Unites States and California Constitutions. To the extent that the Grand Jury relies on the Baer decision, Judge Frank Ochoa, the author of the Baer decision attached to the Grand Jury report, has modified his order to specifically state that "The issue of whether or not the new procedures the Board uses for selecting referees comports with due process is not contested

 

 

and therefore will not be addressed." The Board has changed its procedures regarding selection of referees since the Baer disability retirement hearing in 1993. While not conceding that previous procedures were constitutionally flawed, the Retirement Board is confident that its present selection procedures would pass constitutional review.

 

F12. 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)

 

F12. AGREE. Quoted finding is an accurate statement of law.

 

F13. 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)

 

F13. AGREE. Quoted finding is an accurate statement of law.

 

F14. The Board exclusively selects a panel of hearing officers (attorneys) from members of the State Bar, none of whom have their of office addresses in Santa Barbara County.

 

F14. AGREE. Government Code Section 31533 requires a referee to be a member of the State Bar, and does not require their place of business to be within the jurisdiction served.

 

F15. There are many members of the State Bar residing in Santa Barbara County who are qualified to serve as hearing officers.

 

F15. PARTIALLY DISAGREE. There are members of the State Bar residing in the County. However, membership in the State Bar is a minimal qualification, and the hearing officers that have been selected have extensive experience in CERL.

 

F16. 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)

 

F16. WHOLLY DISAGREE. The Retirement Board is made up of member employees (including a safety representative), a retired member, and public and government representatives whose interest is in serving the members and the Retirement System. The Retirement Board has a fiduciary duty to its members collectively and individually to either grant or deny service connected disability retirements based on the medical evidence. The above finding assumes that the Board is biased against granting disability retirements. On the contrary, the Board is interested in accurate fact finding and decision making. Accordingly, in selecting

 

 

referees, the Board seeks individuals with experience in retirement law. The Board evaluates referees based on the quality of decision making, not on whether a referee rules in favor of or against disability retirement. The Board, as a neutral decision maker in its own right, has no interest in biased findings and recommendations from its referees. Continued membership on the panel of approved referees, depends upon the satisfaction of the Board with the quality of the referee's work product not the result.

F17. 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.

 

F17. WHOLLY DISAGREE. Medical examiners are utilized based upon their medical training and recognized expertise in a specialty such as a Fellow, Diplomat, or Board Certified. Continued use of medical examiners is dependent upon Board satisfaction with the quality of the work product. Continued use has no connection with whether the medical findings and conclusions favor or disfavor service connected disability retirement.

 

F18. 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.

 

F18. AGREE. The Board of Retirement has made applicable the provisions of Government Code Section 31529.9.

 

F19. 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.

 

F19. PARTIALLY DISAGREE. Santa Barbara County is one of four counties to which Section 31529.9 is applicable, which provides for the retention of private counsel, counsel, or staff counsel, and the authorizes compensation for said legal service. There are other CERL provisions, such as Section 31529.5 which is available to any County, and Sections 31529.1/31529.6 specific to Los Angeles County. Under the provisions, all 20 CERL have the opportunity to retain private counsel. Ventura County is an example of a county which retains private counsel to conduct disability hearings.

 

Private Counsel are not involved in the selection of hearing officers broadly or for individual matters.

 

 

 

 

 

 

Further, the Board continues to use of County Counsel for all matters, including disability. The Board retains the exclusive option in the selection of Hearing Officers. Members have three representatives on the Board and through these representatives have input into the selection of legal counsel.

 

R4. Use of mutually approved medical examiners and referees should be required during the hearing phase of the application process. [Findings 10, 11, 12, 13, 14, 15, 16, 17, 18,and 19]

 

R4. NOT BE IMPLEMENTED. (Hearing Officers) Government Code Section 31533 delegates to the Retirement Board exclusive authority to appoint a hearing officer, and the Retirement Board has established a procedure by which a panel qualified of hearing officers is maintained. Members, through their three elected representatives on the Board, have input into the selection of hearing officers to the panel. The current panel of hearing officers has been approved unanimously by the Retirement Board. Further, as provided by this Section, any member of the Board of Retirement could serve as a hearing officer. When a matter is set for hearing, the next available hearing officer is selected by the Administrator from the panel.

 

NOT BE IMPLEMENTED. (Independent Medical Examiner) Government Code Section 31732 mandates the Board of Retirement to secure such medical, investigative and other services and advice as it deems to be appropriate and necessary. Further, Government Code Section 31723 gives the Board of Retirement the exclusive authority to order a medical examination.

 

F20. 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.

 

F20. PARTIALLY DISAGREE. The need for private legal services arose when the County Counsel withdrew from representing the Retirement System in certain disability retirement matters at the demand of a County department which became an interested party by vote of the Board of Supervisors. The conflict continues because County Counsel represents the Board of Supervisors, the County as an employer, County Departments, County Risk Management, and the Grand Jury, all of which may become parties to disability matters with interests differing from the Retirement Board and the Retirement System. Therefore, legal services have been contracted out pursuant to Government Code Sections 31723 and 31529.9. Under one contract, hourly rates are equal to those that would be charged by County Counsel. The second contract has a slightly higher rate, because the services involve more complex legal matters.

 

F21. 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.

 

 

 

 

 

 

 

F21. PARTIALLY DISAGREE. The need for private legal services was necessitated by a conflict of interest that existed when the County Counsel withdrew from representing the Retirement System in certain disability retirement matters at the demand of a County department which became an interested party by vote of the Board of Supervisors.

 

F22. 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.

 

F22. AGREE. The need for private legal services was necessitated by a conflict of interest that existed when the County Counsel withdrew from representing the Retirement System in certain disability retirement matters at the demand of a County department which became an interested party by vote of the Board of Supervisors.

 

F23. 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.

 

F23. WHOLLY DISAGREE. The role of counsel, whether private or county counsel, is to insure a complete record of evidence for consideration by the Hearing Officer, to facilitate the fiduciary responsibility of the Board in their decision process. County counsel advises and litigates in the same listed areas of practice as the private firms retained pursuant to the Government Code. Many of the counsel who represent disability retirement applicants practice in the workers compensation and plaintiffs personal injury areas. They are advocates who only proffer argument and evidence which in their view favors disability retirement. A balanced presentation of all the facts is important to the integrity of the process.

 

F24. 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.

 

F24. WHOLLY DISAGREE. Once again, the role of counsel has been stated in Finding #23. Further, Counsels compensation is not tied to the outcome of the Hearing Officer decision and finding of fact.

 

R5. Board should hire private law firms only when County Counsel has a "conflict of interest." [Findings 20, 21, 22, 23 and 24]

 

R5. NOT BE IMPLEMENTED. Private counsel has been retained to mitigate ongoing conflict of interest inherent in the organizational County structure.

 

 

 

 

 

 

F25. 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.

 

F25. PARTIALLY DISAGREE. Agreed, there are various reasons the 150 day time frame has not been met. However, the 150 day time frame is not exclusively for the purpose to be ready for a hearing. Available options at the 150 day threshold are five: a) grant SCD; b) grant NSCD; c) deny subject to hearing; d) refer for hearing; e) other action as taken by the Board.

 

F26. Additional investigator/staff would improve the ability to meet the time schedule of hearing within 150 days of the application being filed.

 

F26. AGREE. Additional staff may be necessary to improve the ability in resolving the merit of disability matters within expeditious time frame. However, the overall staffing requirements should be analyzed concurrently to address all of the administrative requirements.

 

R6. 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 [Findings 25 and 26]

 

R6. WILL BE IMPLEMENTED. Organizational staffing requirements of the retirement needs to be reviewed, to address legislative and judicial impacts, system implementations, benefit changes, GFOA actuarial/accounting requirements, and other necessitated workload. Job duties, classifications, and level of staffing should be completed within six months.

 

F27. Procedures to be followed by members filing disability applications are explained for the first time by the Retirement Investigator, an employee of the Retirement Of Office, rather than by a written procedure manual distributed to members, as is the practice in other counties.

 

F27. WHOLLY DISAGREE. General disability benefit information is contain in the handbook describing all of the benefits provided through the retirement system. Prior to the actual filing of a disability, most if not all applicants, have met with their assigned retirement representative to determine what benefits the member is eligible. As to disabilities, the applicant, when meeting with the Retirement Investigator, is provided detailed information as to the application process as outline in the by-laws, both verbally and in written form with a copy of the by-laws.

 

F28. Applicants' dependence on procedure information explained to them verbally by a Retirement Investigator results in confusion, delays, and stress for applicants.

 

F28. WHOLLY DISAGREE. A mentioned in findings number 27, a written copy of the by-laws are provided to each and every applicant.

 

 

 

 

 

 

 

F29. 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.

 

F29. WHOLLY DISAGREE. By-law 502 (a) does not contain language as quoted in this findings. However, the correct by-law section is 505 (a). Given the construction of the by laws and the CERL, Government Code Section 31529.9 is controlling, and the attorney in private practice is substituted for County Counsel. Further, the Board does not always adopt the administrative recommendation. On many instances the Board has referred the matter back for additional information.

 

F30. 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.

 

F30. WHOLLY DISAGREE. The Hearing Officer is required to weigh the evidence against the legal standards and reach a recommended findings and decision. The private counsel is not retained for the purpose of opposition to the application, but in contrast, is to insure through a comprehensive fact findings presentation without a basis to outcome.

 

R7. A pamphlet outlining the Retirement System and application procedures should be published and provided to employees regarding regular and disability retirement. [Findings 27, 28, 29 and 30]

 

R7. AGREE. Within the next six months, all of the basic Retirement Information brochures will be revised to include a summary of the retirement process.

 

F31. The Board may appoint one of its members or any member of the State Bar to act as a hearing officer.

 

F31. AGREE. Government Code Section 31533 provides for the Board to select either a board member or a member of the State Bar to serve as a hearing officer.

 

F32. 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.

 

F32. PARTIALLY DISAGREE. The Board has conducted hearings in disability retirement matters, and in accordance with Section 31533, the Board has also retained members of the State Bar as a hearing officers.

 

R8. 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. [Finding 31 and 32]

 

 

 

 

R8. HAS BEEN IMPLEMENTED. The Board on a number of instances has held closed hearings for the purpose of reaching a decision in a disability matter, through the acceptance of the administrative report, testimony/evidence from either the applicant or System counsel, and concluding by preparing and adopting a formal decision and findings of fact.

 

F33. 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.

 

 

 

 

F33. PARTIALLY DISAGREE. The Retirement System did not fail to report or complete the required LGFA 706 document that is annually submitted to the office of State Controller. The manner in which financial and or statistical data is reported and complied by each agency is not consistent, therefore, the manner in which it is presented in the report is subject to interpretation.

 

R9. Retirement Office should file with the state data for Annual Reports regarding the number of disability retirements granted each year [Finding 33]

 

R9. HAS BEEN IMPLEMENTED. The Retirement System has in the past and will continue in the future, to complete the LGFA 706 document in the manner outlined by the document.

 

Respectfully submitted,

 

BOARD OF RETIREMENT

 

 

 

Gary L. Feramisco

Treasurer-Administrator

 

cc: Board of Supervisors