Inside pension scandal

When private attorney Lawrence Reich first asked the

Baldwin School District to put him on the payroll so he could earn a public

pension, board members didn't think much about it. He offered to lower his

retainer fees to offset the costs of health benefits and pension contributions,

and assured them the arrangement was proper.

"It wasn't a big deal. We were fairly sure it was legal, and it was being

done by other lawyers," said former board member Lorraine Deller.

Little did Baldwin school officials know that in making that seemingly

innocuous decision in 1978, they were setting the stage for a scandal that

would explode 30 years later with statewide and even national repercussions.

Since February, federal, state and local investigators have launched

wide-ranging probes; Reich and scores of other private attorneys on public

payrolls have lost all or parts of their pensions, and the state Legislature,

with the help of New York Attorney General Andrew Cuomo, unanimously passed

landmark pension reforms.

"It's our own version of the insider wheeling and dealing that goes on at

Wall Street," said former Suffolk County Executive Patrick Halpin. "Until this

was exposed, people were perfectly willing to accept it under the guise that

this is just the way it's always been."

To date, state investigators have won more than $1.5 million in

settlements, revoked pensions or rescinded pension credits of at least 45

lawyers and requested records from more than 4,000 local governments.

How the story began

At Newsday, the story began when an anonymous reader told an editorial aide

that Reich was a private lawyer getting public benefits for free. That led to

a story in February. Records showed that five Long Island school districts

falsely reported him as a full-time employee at the same time, enabling him to

secure a public pension of nearly $62,000 a year, as well as health benefits

for life. In one year, records showed, he was reported as having worked 1,286

days.

While the school districts reported Reich as an employee, they also were

paying his law firm millions of dollars. That raised legal questions because

the Internal Revenue Service taxes employees and independent consultants

differently.

Although Reich defended the arrangement as a "common practice," the story

set off a firestorm. The FBI and IRS subpoenaed the school districts' records

the next day; a few days later, Cuomo launched a parallel investigation.

More stories followed about other lawyers with similar arrangements. One,

Carol Hoffman, defended the practice, saying, "Hundreds and hundreds of people

over thousands of years have been doing this."

Stunned and furious

But other attorneys at the affected law firms said privately that they were

stunned and even furious. Although some knew a few details of the employment

arrangements, they did not know everything.

By March, Newsday reported that 23 school districts - nearly one-fifth of

school districts on Long Island - had improperly reported private attorneys as

public employees, entitling them to rich benefits packages.

Meanwhile, Cuomo's investigators, holed up in a corner office in Manhattan

piled high with subpoenaed records, expanded their probe statewide. By April,

Cuomo declared there had been "multiple acts of fraud."

Federal investigators, however, were not so sure. To establish criminal

fraud, prosecutors must prove intent. Moreover, because past rulings by the

state comptroller appeared to tacitly allow the employment arrangements, they

felt a criminal case wouldn't succeed, people familiar with the probe said.

Cuomo's investigators were undeterred. They said the law was clear: Only

public employees are entitled to public pensions. Outside contractors are not.

On a separate track, state Comptroller Thomas DiNapoli announced his office

would review every attorney on a public payroll statewide. Over the following

months, his auditors methodically took away pensions or pension credits from

dozens of attorneys.

"Double-dippers"

By May, Newsday uncovered a different kind of pension practice that stunned

the public with its scope and cost. At least 40 Long Island school

administrators were "double-dippers" who had retired and then returned to work

as so-called interim employees. Records showed they earned six-figure paychecks

on top of equally lucrative pensions, collectively earning at least $11

million a year.

Several state legislators from Long Island said they were both appalled and

chagrined. They could hardly make the case to their colleagues in the

Legislature for more state aid for local schools when people were gaming the

system, said state Sen. Kenneth LaValle (R-Port Jefferson).

In response, Cuomo organized a legislative hearing at Farmingdale State

College, where legislators heard testimony. A number of school administrators

sat in the audience. Several shook their heads, and one muttered within earshot

of others that the hearing was a sham.

"It's not in their vocabulary to say, 'I feel badly for the people paying

taxes,'" LaValle said of some school superintendents. "I never hear that."

By then, newspapers throughout the state, as well as national law journals,

had picked up the story. The Albany Times-Union dubbed Long Island "the heart

of pension abuse country."

Lawsuit pending

Several attorneys who had gotten public pensions fought back, filing a

class-action lawsuit, arguing that the pensions were a constitutionally

protected benefit. The suit is pending.

Behind the scenes, Cuomo staffers met with state legislators to hammer out

a wide-ranging pension reform package. At the same time, other Cuomo staffers

were negotiating settlements with law firms throughout the state.

Pension reform

On June 24, the state Legislature unanimously passed sweeping pension

reforms. Among other things, the new law upgrades the penalty for pension fraud

to a felony.

Perhaps the most controversial element of the package bars a public-sector

retiree from returning to work in the same or similar position for one year.

Law enforcement groups railed against that because many agencies hire retired

police officers as investigators. But Gov. David A. Paterson did not bend to

the pressure.

Through the summer and fall, Newsday expanded its investigation, Cuomo's

office announced more settlements, DiNapoli's office revoked more pensions and

Nassau District Attorney Kathleen Rice launched her own probe. By December,

there were no signs of any of the investigations abating.

Last week, Eric Phillips, a spokesman for Rice, said the district

attorney's office will likely issue a grand jury report early next year on its

investigation.

"Some people just haven't gotten the message yet," said Cuomo spokesman

John Milgrim. "And if they need the attorney general's office to explain the

law to them, we're more than happy to make it clear."

Staff writer Eden Laikin contributed to this story.

NEWSDAY REPORTED THE FOLLOWING STORIES

FEB. 15, 2008

Five school districts falsely reported private attorney Lawrence Reich as a

full-time employee at the same time, which helped him secure an annual pension

of nearly $62,000 and free health benefits for life.

MARCH 6, 2008

Hewlett-Woodmere school officials more than doubled the salary of attorney

Jerome Ehrlich in his last two years, substantially boosting his pension, while

also paying his law firm more than $400,000 in additional fees.

MARCH 23, 2008

At least 23 school districts - or about one-fifth of all Long Island school

districts - improperly reported private lawyers as employees, enabling the

lawyers to get public benefits worth hundreds of thousands of dollars.

APRIL 3, 2008

The state comptroller's office retroactively gave attorney Albert

D'Agostino 21 years in the state retirement system - even though he had been

paid as an independent contractor all those years - enabling him to get a

public pension of $106,702 and health benefits.

MAY 5, 2008

Commack Superintendent James Hunderfund retired with a pension of $316,245

- the largest in the state - and then went to work as the Malverne

superintendent for an additional $200,000 a year.

MAY 6, 2008

Frank Tassone, the former Roslyn school superintendent currently in prison

for stealing $2.2 million from the district, collects a state pension of

$173,495 and is among the top 20 highest pension earners in New York.

MAY 11, 2008

At least 40 Long Island school administrators are "double-dippers" who

retired and then returned to work as so-called interim employees. Records

showed they earn six-figure paychecks on top of equally lucrative pensions,

collectively earning at least $11 million a year.

JUNE 24, 2008

The state Legislature unanimously passes a sweeping package of pension

reforms.

JULY 27, 2008

At least 14 special districts and one authority report private attorneys as

public employees, allowing them to receive benefits.

OCT. 27, 2008

Hundreds of state officials are allowed to earn coveted pension credits

without having to keep time sheets of the hours they worked.