The CASA pension system is not a valid retirement program, a state investigation has found, and the Sacramento City Unified School District now owes millions in retirement contributions dating to 2000.

The conclusion was reached by the California Public Employees' Retirement System, which under state law oversees pension funds for most nonteaching school employees.

Investigators detailed the findings in a confidential memo to the school district dated March 8.

In the memo, CalPERS officials, who have long been skeptical of the pension plan's legitimacy, found no legal basis for the contention by the California Administrative Services Authority that its members could sidestep the state's huge retirement system. They said CASA's members must return to the state system, and the school district must repay about $3.2 million in back contributions.

About 100 Sacramento City Unified employees joined CASA in 2000 after being promised better benefits and higher returns by opting out of CalPERS and Social Security.

School officials said Tuesday they were reviewing the findings by CalPERS.

In another development, an attorney hired by the school district to analyze CASA's legality had more bad news. At a meeting last week, he told members of the beleaguered pension system that it has "many irregularities" and if it's disbanded, the district's potential liabilities far outweigh CASA's current assets.

The session was peppered with anxious questions from members as attorney Lou Lozano explained that those liabilities, including promised pensions, could range from $12.6 million to $18 million.

CASA's assets are $4.3 million, plus a $5.6 million pension obligation bond, Lozano said.

Kathleen Whalen, president of CASA's board of directors, said the latest revelations are "very, very troubling" and the board will meet with its attorney in a closed session Friday to determine its next steps.

Last week, the district's board of trustees announced that it will consider ending its operating agreement with CASA at an April 1 meeting. The reason, according to the board at the time, was that the district's pension contributions to CASA were scheduled to rise, making it more costly than CalPERS.

But school board President Rob Fong said Tuesday that the CalPERS memo, sent to district Superintendent Maggie Carrillo Mejia, will also be a factor in the board's decision. "This is very complex and we need to look at various scenarios. It's not just a yes-or-no thing."

Despite CalPERS' findings, the school district and CASA could challenge the directive in court or negotiate a long-term financial settlement with the state retirement system.

It likely will take the Sacramento City Unified board several votes to untangle all the issues, Fong said, including pensions already being paid out and fiscal liability.

Under CASA, members sidestepped CalPERS and Social Security requirements by taking leaves of absence from Sacramento City Unified. They then went to work for CASA, which contracted the employees' services back to the school district.

But CalPERS ruled that CASA employees are really employees of the school district under common-law tests, which means they are not exempt.

A recent decision by the state Supreme Court seems to back this assertion. The court found that a similar retirement setup by the Metropolitan Water District in Los Angeles illegally excluded employees from CalPERS.

Whalen and Fong said that court ruling has not yet become a factor in discussions by CASA and the school board.

When CASA launched in 2000, it secured a reciprocity agreement from CalPERS, which stipulated that CASA's members would retain their years of credit earned in the state system when they moved to CASA.

That reciprocity was nullified by the CalPERS investigation, though the agency assured the district that employees would receive credit for their CASA years if they return to the state system.

Still at issue is what will happen to sweetened pensions approved for a select few.

Critics contend CASA was created primarily to enrich the pensions of top school district administrators such as former Superintendent Jim Sweeney, who retired June 30, and the district's chief financial officer, Laura Bruno, who retired Dec. 31. Both left with pensions far exceeding benefits paid by the two state-run pension systems.

Sweeney, Bruno and general counsel Martin Fine were also granted 10 additional years of service credit at no cost to them, a move pension experts consider extraordinary.

Bruno, who created and oversees the CASA pension plan as an unpaid executive director, has not responded to requests for an interview since Dec. 16. She did not return phone calls Tuesday.

The Sacramento County grand jury has been in contact with CASA for several months, and the Yolo County grand jury recently contacted representatives of the pension system as well.

Because CASA is a government body known as a joint-powers authority, a dozen employees of the Yolo County Office of Education also are members.

Darin Hall, a spokesman for CalPERS, said the agency is carrying out similar investigations affecting those Yolo County employees as well as a similar joint-powers authority in the Long Beach Unified School District.

Social Security officials also are probing the pension plan, but Whalen said they have not yet contacted CASA administrators.