The letter that landed in Bill Carnahan’s mailbox this week demanded he pay a six-figure debt he thought had been settled.
“Please send a personal check or money order, in the amount of $508,985.44,” the letter said, “made payable to CalPERS to satisfy the overpayment.”
It was the latest twist in an unusual double-dipping case that has put CalPERS at odds with a small Southern California power agency over who must reimburse the massive pension fund for wrongly paid retirement benefits.
A CalPERS audit found Carnahan, the head of the Southern California Public Power Authority, improperly took his pension while working full time for more than a decade. When the agency repaid the money on Carnahan’s behalf, CalPERS cashed the checks. But a year later, the fund reversed itself and demanded Carnahan and his former spouse make the payments.
“Everything was going along fine, everyone was happy,” said the 69-year-old Carnahan, who has been the power authority’s executive director since 2000, “until PERS came along and turned the world upside down.”
California law says government retirees taking a pension can’t work more than about six months a year for an employer in their pension system. The statute aims to prevent excessive “double dipping” by pensioners who also take home a paycheck.
But government agencies and retirees sometimes get around the law by setting up independent contracts that are really full-time employment agreements. Carnahan was director for Riverside’s public utilities department in 2000 when authority officials approached him about their open executive director position. He was 55 years old.
“When they came to me, the salary, quite frankly, was a lateral move,” Carnahan recalled. “It was below market for the position.”
Carl Mycoff, a utilities industry headhunter based in Colorado who helped the authority recruit Carnahan, said increasing the job’s pay “wasn’t politically palatable” to the board, which is comprised of the general managers from the authority’s members.
“But they could not hire anyone for the compensation they were offering,” Mycoff said.
So, after getting legal sign-off on the plan, authority board president Ron Davis said, the organization approved hiring Carnahan as an independent contractor so that his pension would supplement his contract wage to get his income closer to what similar jobs paid.
As Carnahan’s initial $2,800-per-month CalPERS’ pension checks came in, BD Carnahan Management Services Inc. entered its first annual contract with the power authority in 2000.
The agreement, one of more than two dozen documents obtained by The Bee through a Public Records Act request, paid Carnahan $194,100 – an annual base of $150,000, a $4,500 performance bonus and $39,600 to cover “overhead” – car expenses, medical and dental insurance, Social Security and retirement, among other things.
Carnahan took the helm of a joint powers authority through which 11 municipal utilities and one irrigation district pool their means to acquire energy-generation and transmission resources.
Over the years, the contract total rose to as much as $271,000. Carnahan’s inflation-adjusted pension also grew, reaching about $3,750 per month, according to CalPERS.
Fund auditors found out about Carnahan’s contracting arrangement during a routine audit in 2010. A CalPERS’ report the following year noted that Carnahan had replaced an executive director who was an authority employee. He supervised, evaluated, hired and fired employees. He had to ask the authority’s board of directors before he could take outside work. He had business cards that identified him as the agency’s executive director.
For those reasons and others, auditors concluded, “an employer/employee relationship existed and therefore, the retiree was unlawfully employed as a retired annuitant.”
The following year, CalPERS informed Carnahan he owed nearly $509,000 in pension overpayments. His ex-wife, who had been receiving a portion of the benefits, owed about $139,000.
At the behest of the power authority, Mycoff conducted a survey that concluded Carnahan’s earnings all those years, even with pension money, still lagged market pay by a hefty sum.
Authority President Ron Davis cited Mycoff’s work and said the board concluded that paying off Carnahan’s debt “wouldn’t cost us a dime more” than if he had been a CalPERS-covered employee for all those years.
“In fact, given the job market,” Davis said, “we still came out a little ahead.”
Last year, the authority made arrangements to pay the Carnahans’ debt, and CalPERS appeared to endorse the plan. A CalPERS staff member gave instructions in an email to the authority: “If (the authority) is paying the overpayments, it will be necessary to prepare two separate checks,” she wrote, one to cover Carnahan’s obligations and the other for his ex-wife’s debt.
The authority sent the checks in May. CalPERS deposited them. In February this year, CalPERS said the authority and Carnahan together owed an additional $625,000 in unpaid pension contributions. The agency issued another check, thinking the matter now settled.
Then after The Sacramento Bee this month asked CalPERS about the propriety of an employer covering an employee’s pension overpayment obligations, the fund told the power authority it couldn’t cover the Carnahans’ pension bills after all.
“In accordance with the law,” said CalPERS spokeswoman Rosanna Westmoreland, “the member must pay back the benefits received, not the employer.”
Westmoreland explained the apparent about-face as a processing oversight. The checks covering the Carnahans’ debts “came in with the member paperwork and were applied accordingly” because no one realized the employer submitted the money. A review of the account flagged the payment in February, she said, “at which time we began to research the legality of the situation.”
CalPERS can’t legally return the authority’s money, Westmoreland said, so the fund will credit the authority’s future contributions.
“I’m astounded,” said Richard Morillo, the power authority’s general counsel. “They know what the intent and purpose of that payment was. It’s wrong that they’re doing this.”
On Tuesday, CalPERS sent the demand letter to Carnahan. CalPERS officials are willing to work out a payment plan, and if Carnahan doesn’t repay the money, the letter said, “when you retire your entire retirement warrant will be held until the overpayment is satisfied.”
Authority officials declined to comment on the letter, whether they would arrange a loan for their employee, pay him enough money to cover the debt or make other provsions.
Carnahan said that he knows both his now-voided contract and his employer’s effort to cover his half-million-dollar debt will draw criticism, but he says everything was aboveboard and executed in good faith.
“I’m going to look like a big, bad public employee, but we didn’t do anything wrong,” he said. “It isn’t like I’m getting rich on the deal.”
Call Jon Ortiz, Bee Capitol Bureau, (916) 321-1043. Read his blog, The State Worker at sacbee.com/stateworker