By Jim Schutze
By Rachel Watts
By Lauren Drewes Daniels
By Anna Merlan
By Lee Escobedo
By Eric Nicholson
"It doesn't pay to argue with him, because you are not going to win," Stalnaker says. "It's better to state your piece and then leave."
Although most city employees--and taxpayers--would not learn of it for several months, the battle between Randy Stalnaker and John Ware began percolating behind the doors of City Hall last June.
Towers Perrin, an actuary company hired by the pension board trustees, delivered a startling report to the board early last summer. The board had hired Towers Perrin to review the fund's books for the previous five years. As late as 1993, the trustees had been told the fund was carrying a $100 million surplus. But Towers Perrin concluded that previous prognosticators had been wrong about the retirement habits and life spans of city workers, and too optimistic about the fund's investments.
To remain sound, the fund would have to stop assuming it would receive an 8.5 percent rate of return on its investments, instead planning on an 8.25 percent return. At that rate, the consultants said, the fund would still lose $21 million a year. That meant the trustees might have to ask the city to put more money into the fund.
When Ware learned of Towers Perrin's conclusions, he was not a happy camper. Stalnaker told Ware about the findings weeks before the doomsday letter was mailed to fund members. Several hastily arranged meetings, including weekend gatherings, ensued.
At them, Stalnaker explicitly told Ware that the fund was in trouble. To cover the entire $21 million shortfall, the city would have to double its yearly contribution to the fund. Stalnaker instead suggested that the city chip in something less than an additional $21 million, and said the trustees could also cut some benefits. Stalnaker says he was looking for a compromise.
Ware balked. The city manager was 30 days away from submitting his annual budget to the city council, and was not prepared to recommend that the city up its pension ante. Ware wanted to know what happened to the $100 million surplus projected earlier. He wanted explanations, and he didn't like what he heard.
"We asked questions, and we couldn't get many answers," recalls Assistant City Manager Mary Suhm, who sat in on meetings between Ware and Stalnaker.
According to Stalnaker, Ware set a belligerent tone from the outset. Ware called the issue "a board performance problem," Stalnaker recalls. He told Stalnaker there was a good chance workers' benefits would be cut. The city manager argued that employees had been spared during the past few years of budget cutting, but maybe it was time for that to change, Stalnaker says.
Stalnaker says Ware also attacked him personally. Ware charged that Stalnaker had promised workers more benefits during his last campaign for the board. Stalnaker says he told Ware that the campaign pledge was to increase benefits only if the fund could afford it. (Suhm says she doesn't recall Ware bringing up the campaign pledge at their meetings.)
Ware turned his sights on the trustees, questioning their handling of the fund, and he found political allies in that camp. One city council member, who has been influential in the debate, says he believes the trustees have mismanaged the fund.
For the past few years, the council member notes, the investments trustees have made with pension fund money have done worse than the major stock market indexes. In the trustees' defense, that is not uncommon among pension funds, which tend to follow a more conservative, lower-yielding investment strategy.
But the council member believes the trustees over-invested in Latin America, for instance, and could not get out when the peso began dropping. The board was also paying high costs on many of its market transactions, the council member says.
Stalnaker doesn't deny that the fund's administration needed a shakeup, and says that as board chairman, he had begun to make changes. In August 1994, Stalnaker spearheaded the effort to hire John Kloehr as the fund administrator. Kloehr, who has a background in both public and private pension funds, reduced the number of investment firms for the fund and hired Bankers Trust as master custodian, replacing a smaller regional firm that had done the work in the past.
Despite the friction between them, Ware and Stalnaker agreed in June that they would work together in pursuing a possible lawsuit against the fund's previous actuarial advisors, Illinois-based Sedgwick James. Ware and the fund trustees blamed the previous actuaries for providing erroneous, overly optimistic projections about the fund's health.
In a written statement, a spokesman for Sedgwick James said the company continues to believe that the pension fund is sound. "We dispute the allegations made by the plan trustees," the statement said.
The trustees hired the Dallas law firm of Jenkins & Gilchrist to look into suing Sedgwick James, and also signed a joint prosecution agreement with the city manager's office in which both sides pledged to help each other provide information necessary for a possible lawsuit. In December, however, Ware had the city drop out of the agreement as he launched a public crusade against the fund managers.
Ware's staff says the trustees asked that everyone, including city council members, refrain from talking publicly about the potential shortfall in order to prevent such statements from interfering with the proposed litigation. The self-imposed gag order would become a sore point when Stalnaker leaked word of the fund's problems to the Morning News. The trustees have not yet filed a suit, and are negotiating with Sedgwick James to see if the matter can be resolved without litigation.