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Council wrongly received hundreds of thousands in benefits, report says

Crescent City Council members wrongly received hundreds of thousands of dollars in benefits for nearly 15 years, according to a confidential legal analysis obtained by The Daily Triplicate.

Exactly how much money council members received from these health and welfare benefits remains undetermined. But according to the city's payroll and accounts payable records, council members from January 2003 to December 2006 were paid more than $250,000 in addition to their salaries.

"This is a government that made the wrong choice, that was doing something illegal," Crescent City Payroll Administrator Deb Snodgrass said about the distributed benefits. "I have a really difficult time when elected officials in a small town decide to take an elective benefit ... We have very limited resources." 

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How Much They Received

Timeline: How the Benefits Evolved

In 1992, the City Council created a classification of employee that could be reimbursed for medical costs and could receive a monthly contribution toward a retirement fund. These benefits were available to city employees who met strict criteria for which only council members qualified. This is a violation of California law, according to the legal analysis.

For the next 14 years, council members received these improper benefits, many of them oblivious to their questionable beginnings. No current council member served when the benefits were established.

"I had no idea about any of this until it all started being discussed a couple of months back," Council Member Kelly Schellong said. "I don't think that the council was aware that it was unlawful."

In November 2006, city staff discovered these payments. The city hired Richards, Watson and Gershon – a San Francisco legal firm specializing in municipal law – to investigate the legality of the council's benefits, specifically council members' health insurance and medical care reimbursements, and contributions made to annuities. The city paid the firm nearly $35,000.

In the 20-page analysis delivered April 7, 2007, to Crescent City Manager Eli Naffah, the firm urged the city to stop all payments, which may be in violation of state law, to council members.

"We recommend the City discontinue the annuity payment and any payment for alternative insurance coverage that is not also available to City employees," the report reads. "Amounts currently held by the City in the annuity accounts should be retained by the City and not paid ... .

"The monthly contributions toward a group annuity benefit and the group annuity are not an authorized health and welfare benefit ... Cash may not be provided to City Council Members in lieu of authorized benefits because cash is not a health and welfare benefit, as defined under the statute."

City suspends payments

The city ordered all improper benefit payments to council members to stop in November 2006. But some payments continued through December of that year.

Following Richards, Watson and Gershon's recommendations, the city also seized all annuity funds that were still held in the city's name. The amount seized so far is between $200,000 and $250,000, but city officials say there is still more money that needs to be transferred back to the city's control.

The Daily Triplicate filed a California Public Records Act request with the city to find the total amounts paid to council members. On Thursday, the city denied the request.

Whether the city can recover money already paid to past council members remains uncertain. "The applicable statute of limitations will depend on the legal theory used for recovery," the legal report states, adding that the limitations period for recovery typically is three years.

"For us to recover for the past three years is good that we could even recover any thing at all," City Finance Director Joei Sanches said.

If the city doesn't end the annuity funds or stop the payments, she said, it could be in violation of the law.

"It could be construed as misappropriation of funds," San-ches said. "This is public money and we have to act as good stew-ards of the money."

The city has placed the seized annuity funds into a temporary account where it will earn interest until the council decides what to do with the money.

"The money is being transferred from the city-controlled annuity funds into a city-controlled savings account," Naffah said. "Until it's determined that the money belongs to the city, and not to somebody else, then we as a city cannot do anything with it."

Naffah and Sanches declined to comment specifically on the Richards, Watson and Gershon report, citing attorney-client privilege. But Naffah said he expects more direction from the firm and other attorneys on what the full remedy for the city should be.

"They've given us some information, and we're still waiting on some (other) information," he said, including that the city might hire a tax attorney to analyze the benefit policy as well. "So, it is still evolving."

‘No one thought it was illegal'

The April 7, 2007, analysis lists current council members, Mike Scavuzzo, Kelly Schel-long, Mayor Dennis Burns and Irene Tynes, as well as former council members Ray Martell, Glenn Gary and Herb Kolodner, as receiving unauthorized payments. But the document notes that any council member receiving the benefits since they were created in November 1992 should not have received them.

Some current and former council members said that when they learned of Richards, Watson and Gershon's report, they were surprised – either because they were victims of circumstance or because they didn't agree with the firm's conclusions.

"No one thought it was illegal. Everyone spoke to the contrary, that it was legal and appropriate," former council member Herb Kolodner said. He resigned from the council for health reasons in May, and in the law firm's report had more than $50,000 in his annuity fund.

"If the city attorney, the city manager and the finance manager all say that this is the correct thing for everybody, I don't see that the burden of what is proper or improper falls on the individual person," Kolodner said. "Now it's boomeranging to our detriment."

Schellong said she did find the benefits a little unusual. She said when elected in November 2006 she accepted the city's in-surance coverage because it was better than her other employer's.

"They (city staff) told me I chose (my coverage) from the benefits package," Schellong said. "When I did, they paid me the difference in cash, and that's when I thought it was unusual."

But even then she said she had no idea that the benefits might be considered unlawful.

"I didn't run for office to receive illegal benefits," Schellong said. "I just think we need to correct it and move forward."

Like Schellong, Burns said he was offered the benefits when he first was elected.

"When I first began as a council member, it was pretty simply put to me that, ‘Do you want to have that (benefit) as an annuity or as insurance (coverage)?'" he said, and since he was already covered he took the annuity. But Burns said he had no idea that it was questionable at the time.

"It would have been nice to have," Burns said of the money, "but I'm more concerned with doing the right thing."

Former council member Gary said he unsuspectingly signed up for the benefits too, though he had no idea that they were improper.

"I already had a full-time job with benefits. I was (a council member) because I love helping people," Gary said. "I never did it for the benefits."

And though current council member Richard Enea is not mentioned in the Richards, Watson and Gershon report, payroll records indicate that he also received improper benefit payments. But like the other council members, Enea was unaware of their questionable nature.

"It was just a matter of fact when you were signing up for work your first day," Enea recalled, "then it was never thought about again."

He added that if the payments are deemed improper, then the corrective action should be taken by the city and the council.

"If that money was illegal, then probably we're going to have to recover it," Enea said, "because that's the public's money."

But Scavuzzo, who received a majority of his payments in cash, said he doesn't think Richards, Watson and Gershon correctly analyzed the benefits' legality.

"To me this is much ado about nothing, taking up time, and they've cost us a hell of a lot of money," Scavuzzo said. "They screwed up everything ... if you look at it (the report) it's done erroneously."

Scavuzzo said he believes the law firm was given inaccurate information from the outset of its investigation into the council's benefits and, because of this, came to the wrong determination.

"There's so much confusion (about the report) ... The council is not getting anything different that any of the other employees are getting," Scavuzzo said, referring to the fact that – even though the council members' retirement plans were structured and paid out differently – other city employees were allowed to have their own retirement plans through the Public Employee's Retirement System, or PERS.

"To me (the money) was legally given to me, just like anybody else," he said. "Why would I give it back?"

Tynes could not be reached for comment, and Martell declined to comment. Former council member William Youngblood, who is listed in city payroll records as receiving improper benefits payments, also could not be reached.

‘They were dead on'

But Snodgrass says she believes Richards, Watson and Gershon was correct in its findings. She was the one who alerted city staff to the improper benefit payments in the first place.

Snodgrass, who has worked in payroll at California public agencies for 25 years and is a certified payroll professional, was only working at Crescent City for two months last fall when she discovered the payments that "absolutely surprised" her.

"I said, ‘What is this?' And my eyes just about fell out of my head," Snodgrass said. "I just said, ‘This is not right, and it needs to be corrected.'"

After researching the payments, she learned that it had been going on for 14 years.

"The more I looked into it, the more my mouth dropped open," she said. "How were we allowing this to happen?"

Snodgrass said after her discovery she brought it to the attention of Naffah and of City Attorney Thomas French. At that point, the city suspended the questionable payments and hired Richards, Watson and Gershon to conduct an analysis.

Though Snodgrass said she could not comment on what the law firm's specific findings were because of attorney-client privilege, she said she agreed with its synopsis.

"They were dead on, right on, extremely dead on," she said. "It's a very well written document ... extremely truthful."

Benefits grew

The benefits began in 1992 when the City Council – without any present-day members serving – passed a resolution providing medical insurance or reimbursement for medical costs and a $150 per month annuity, Richards, Watson and Gershon's report stated. These benefits came in addition to the monthly salary paid to members for their service on the council. But at this time, the amount council members received in medical cost reimbursements is unclear.

For the benefits to comply with state statutes, however, they also must be available and paid for by the city for its employees. They also must be provided to a large number of employees, the report stated.

The resolution limited the benefits to include only a specific set of city employees – those who were an elected official or supervising employee that was paid less than $300 per month in salary.

"City staff has been unable to identify any employee of the City who has ever met this criteria," according to the law firm's analysis. "Thus there is no employee who has actually received the City Council benefits by application of the selection criteria."

In 1995, state statues further limited benefits, so that council members elected on or after Jan. 1, 1995, could not receive benefits greater than those provided to the city's non-safety employees, the report stated.

Despite this change, council members continued to receive the benefits.

In fact, in 1998 the council amended the original resolution to give the benefit to any elected official and employee earning $400 per month. This occurred following an increase in council salaries to more than $300 a month.

Two years later, when the Public Employees' Medical and Hospital Care Act allowed the city to create a flexible benefits package for health care coverage, the council doubled to $300 the amount that the city would contribute monthly to the annuity.

But funds should not have been directed into an annuity fund because other employees were not provided that same option, Richards, Watson and Gershon's report stated.

Council members received that benefit until it was suspended last November.

What's next?

The City Council will revisit its benefits on Monday. The agenda for the council's meeting states the council will consider and discuss a cafeteria-style benefit plan and other council benefits.

Naffah said he hoped to have a resolution ready for the meeting, but is still waiting for a draft from Richards, Watson and Gershon.

He said the new resolution will probably include a 457 deferred compensation plan into which council members could transfer their health benefit reimbursements into.

"It would be similar to the same plan as the other employees have," Naffah said. "It would take the health benefits that the council receive and (those funds) would go into that 457 plan."

But he also said the city plans to pass other resolutions regarding its benefits as well in order to fix the problems Richards, Watson and Gershon found with the original benefits plan.

"That's part of it, to be consistent with the employees' (benefits)," Naffah said. "And over the years the employee M.O.U.s (Memorandums of Understanding) have changed, and we want the benefits to be consistent over time."

Burns said he doesn't know what the new resolution will look like, but that it will be based on what the law firm decides is correct.

"We're just waiting on what the attorneys (Richards, Watson and Gershon) come up with," Burns said. "I'm assuming the resolution will just amend the previous one to make us comply with all the government codes, state law and federal laws."

 

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