By Ashly McGlone.

After years of controversy and in the midst of market turbulence, the county’s employee pension system is going through an overhaul, replacing nearly all key employees and doing so now with new clarity on how much they can pay them.

A Superior Court judge ruled in May that pension officials could not earn more than the limits for county employees. Under that restriction, the system has been recruiting employees from the city of San Diego’s pension system and beyond to rebuild its investment team.

The new recruits from the city might have something to do with the interim leader of the county’s plan — David Wescoe, the former head of the city’s pension system. He is credited with reforming and improving that system.

But right now he earns $25,000 a month as part of a consulting contract deal with the county. That’s higher than what he could make as an employee and an illustration of the conundrum as the county rebuilds its pension system while still trying to be creative about how much it can pay people.

That’s what motivated the power play last September in which the San Diego County Employees Retirement Association suedSan Diego County in an effort to break free from the county’s pay limits.

Of primary interest were the pay rates set for the pension fund’s chief executive officer, chief financial officer and chief investment officer, currently capped at $255,000, $193,000 and $357,000, respectively.

The pay scales have been a source of contention at the system, known as SDCERA, in recent years as more employees approach the pay ceiling. The limits also motivated the outsourcing of the chief investment officer job in 2009 to Texas consultant Lee Partridge, who was initially paid more than $1 million in his first year on the job — and millions more in the following years — to replace former CIO David Deutsch, who earned just $209,000 a year.

Pension officials believed their state-mandated oversight of the $10 billion retirement fund for 39,000 county employees and retirees included setting pay rates for the system’s 80 employees.

Employee selection cannot be effective “in the absence of compensation-setting authority, which is a central and necessary element in the selection, retention, evaluation and management of employees,” they argued in the lawsuit.

But the county and Superior Court Judge Judith Hayes said SDCERA employees are county employees, and as such, their pay is rightly determined by the County Board of Supervisors.

“SDCERA is tasked with the investment and financial protection of assets for the benefits of its members,” Hayes wrote. “The California Constitution, applicable statutes and authorities do not support plaintiff’s position that it has the authority to set the compensation of the County employees who work at the Retirement Association.”

Pension officials could have amended the complaint, but the case was dropped by the nine-member Board of Retirement instead. The board is made up of member-elected officers, county supervisor appointees and elected officials, including County Supervisor Dianne Jacob and County Treasurer-Tax Collector Dan McAllister.

The end of the rare lawsuit against the county is just one of the latest events at the agency where a new guard and new priorities are taking hold.

Jacob calls it “back to basics” and “common sense.”

The county pension system is currently being led by Wescoe, who took over as interim leader after CEO Brian White abruptly resigned in March after 18 years in the top job. White’s final salary was nearly maxed out at $250,000; he took home a $250,000 severance package.

White was a staunch supporter of Partridge’s methods, which included betting billions of dollars SDCERA doesn’t have, even misleading the public about the level of risk involved.

When Partridge’s firm Integrity Capital Services merged with Houston asset management firm Salient Partners in late 2010, Partridge remained the county’s pension czar and fees rose, reaching $8 million last year.

All told, payments to Partridge’s firms since 2009 total $22.3 million so far with more to come, SDCERA officials said.

The compensation and risky investment decisions eventually put the fund in the national spotlight. Upheaval in the executive ranks followed, leaving the agency without a CEO, CFO or general counsel in the last six months.

The agency is now in the midst of bringing its investment work back in-house and changing its strategy toward more conservative methods traditionally used by public pension funds. Salient’s work ended entirely Aug. 15.

The board hopes to adopt a new investment policy by early October, and announce a new CEO in the next two months.

“The top management, we needed a house cleaning, so we cleaned house and we have one job left to do. We need a new CEO,” Jacob said.

“The problem that you saw with Lee Partridge was a lack of transparency and a lack of trust. … There is going to be a very thorough fiduciary audit just to make sure everything was done appropriately, legally and fiscally prudent.”

Partridge said in a statement he was “fully transparent with the SDCERA board throughout our tenure. At all times, SDCERA had the benefit of an independent investment consultant, which evaluated and separately reported on the portfolio strategies Salient was implementing at SDCERA’s direction. Furthermore, we took extensive measures to proactively provide detailed information regarding the plan’s various investment options, risks to consider and portfolio exposures. We also provided extensive education both individually to board members and to the board in group settings throughout our five-and-a-half year tenure.”

In May, SDCERA hired Stephen Sexauer away from Allianz Global Investors to be its new internal chief investment officer for $285,000 a year.

A few weeks before his hire, county supervisors unanimously voted to increase the pay scale for the position from $218,774 to $350,000 as part of “the ongoing effort to manage and maintain a skilled, adaptable, and diverse workforce dedicated to sustaining operational excellence and serving the public,” county records show.

McAllister said Sexauer was their “top prospect.”

“I think we need to move forward now that we have a great team in place and try to reach for those positive regular returns that will ensure our abilities to pay those benefits that are promised to the beneficiaries,” McAllister said.

Greg Bych was hired away from the city of San Diego and began work as the system’s chief financial officer in June for $185,000 a year.

Former contracted general counsel Steven Rice — who filed the employee pay lawsuit — left San Diego earlier this year to take a job at the Los Angeles County Employees Retirement Association. His replacement, Elaine Reagan, was hired earlier this month from the city pension system and began Aug. 21. Her pay – at $204,000 a year – is at the top of the salary scale approved by county supervisors when they created the employee position in May.

Employment lawyer Michael Conger was not involved in the employee salary case, but has successfully sued the city and county pension systems in the past regarding other matters.

He said the salary case, “never had a chance. … They were suing on an issue that had already been decided by the courts saying they can’t do that.”

The county is seeking $1,500 in costs from SDCERA, court records show.

SDCERA spokesman Dan Flores said the agency spent more than $49,000 in legal fees on the case.

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Originally posted at Voice of San Diego.