San Jose taxpayers will shell out $1.4 million to fight retirees lawsuit

Fighting a lawsuit from a group of prominent San Jose retirees who say the city started shortchanging their pensions five years ago could cost San Jose taxpayers $1.4 million — and those costs could keep rising.

The San Jose City Council voted in September to spend up to $1.4 million on an existing contract with law firm Hanson Bridgett LLP, increasing the amount the city will pay the outside attorneys for the fifth time in less than two years.

Twenty former city employees hired Oakland labor lawyer Bob Bezemek to file the lawsuit after they allege the city illegally reduced their benefits by invoking federal limits on the annual amount some retirees can collect from certain types of pension funds.

The retired plaintiffs are a high-profile group of top San Jose leaders, many of whom have widespread name recognition and shaped the policies that govern City Hall today. They include Leslye Corsiglia, a longtime director of the city’s Housing Department who now runs Silicon Valley at Home; former Planning Director Harry Freitas; former Public Works Director Barry Ng; the family of former Planning Director Joseph Horwedel, who died in 2016, and longtime Planning Director Gary Schoennauer.

Schoennauer, who retired in the 1990s after more than 30 years, told San José Spotlight that he and his fellow plaintiffs had hoped the city would settle the lawsuit and pay the retirees what they’re owed, but the city has decided to keep fighting.

“I joined my colleagues in the lawsuit to get what is rightly owed to us,” Schoennauer said, declining to say how much he was shortchanged from his retirement or to discuss the case further.

The lawsuit centers on a change to the Internal Revenue Service code Congress adopted in 1990 that places a cap on the amount some retirees can receive annually from a pension fund. Two other plaintiffs, Wayne Tanda and Joseph Bass, in 2016 were accused of being overpaid in their pension plans by $216,405 and $172,397, respectively, above the IRS limits. Both retirees said it was money they earned and were entitled to, according to a Mercury News article.

Raymond Lynch, a Hanson Bridgett lawyer defending the city, said Friday the federal cap applies to all of the plaintiffs in the lawsuit and the city had no choice but to abide by the IRS code.

“Fundamentally this is a matter of law and how the IRS limits apply,” Lynch said. “And in this case, it is a term of the pension plan and in my view it is completely clear that the limits are part of the plan and they were correctly applied with respect to the plaintiffs.”

Federal lawmakers carved out exemptions for some public sector workers who frequently retire early, such as law enforcement, firefighters and other emergency service workers, and grandfathered in everyone who retired before 1990. A 1996 revision of the IRS code allowed for public sector workers whose pension benefits exceeded the limit to be collected through separate funds. But attorneys representing the retirees have argued in court that many of their clients should have been grandfathered in, and all of them should be allowed to collect their pensions above the federal limits by other legal means.

But the city attorney’s office says the City Council has declined to create such an ‘excess fund’ in the past because it would draw more money from the general fund, which already pays for most of the city’s pension obligations.

“There is a lot at stake,” said Assistant City Attorney Nora Frimann in an interview. “And the reason we hired outside counsel is that everyone who is inside the system has some kind of conflict.”

According to the complaint, the San Jose retirees started working for the city between 1957 and 1991. Most of them were also promoted several times throughout careers that spanned 30 consecutive years before retiring between 1985 and 2015, according to the lawsuit.

“The city, by its unlawful action, is impairing its promises to a number of particularly loyal and long-serving civil servants,” the lawsuit says. “While the city is legally entitled to impose limitations on newly-hired employees, it is forbidden by law… from imposing such limitations retroactively.”

Bezemek is asking the court to force San Jose to turn over more than $470,000 — the amount he says his clients have been shortchanged since 2014 — and require the city to create a preservation fund, to ensure that retirees who earn pensions above federal limits are allowed to collect everything their contracts entitle them to.

“Nearly every public jurisdiction in California and in Santa Clara County has created such an ‘excess’ or ‘preservation’ fund,'” the lawsuit says. “But the city has stubbornly refused to do so, despite recommendations… over the years that it should create such a fund.”

In 2005, the complaint notes, the city’s retirement board brought the issue to the attention of the council, “going as far as drafting a proposed ordinance.” But it was nearly a decade later the city started clawing back so-called “excess” benefits, Bezemek argues, rather than putting the money into another fund where retirees could access it legally under the IRS code.

In its quest to squash the litigation, the city hired Hanson Bridgett in Dec. 2017 for $175,000 and increased the firm’s contract fives times up to $1.4 million, eight times the original contract amount.

“It is expensive to defend the case,” Frimann said. “But it is a complicated lawsuit and Hanson Bridgett has been paring it down and winning arguments.”

The council approved the latest increase just a week before responding to a grand jury report that found the city’s pension funds would only generate about 20% of the money needed to cover the city’s obligations, including cost-of-living adjustments (COLA) over the next decade.

Contact Adam F. Hutton at afhutton.sjspotlight@gmail.com or follow @adamfhutton on Twitter.

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