Legality of DROP reignites pension benefit debates

In discussions over dropping DROP, the city’s Deferred Retirement Option Plan, the City Attorney’s Office interjected another opinion into an already-muddled debate earlier this week. In his memorandum, city attorney Jan Goldsmith found that the ordinance creating DROP, which was implemented back in 1997, never technically took effect.

Goldsmith’s memo is significant in that it preempts the need for the city of San Diego to negotiate with labor unions to discontinue DROP. The city sued the Police Officers Association (POA) in April of this year to force negotiations. Since the case is still in litigation, DROP was left out of labor negotiations in crafting the budget for fiscal year 2009-10. According to Councilman Carl DeMaio, that’s where the issue first surfaced.

“How this all happened was, they (the POA) brought up Section 143.1 of the City Charter,” DeMaio said. “Our attorneys looked into their claims, stumbled across these irregularities and discovered noncompliance with the charter.”

“The ordinance creating DROP never took effect under the San Diego City Charter or even under its own terms,” said the memo. “Simply stated, the labor unions did not get enough of their members to vote for approval of the ordinance.” Because it was not properly implemented, the memo goes on to say, DROP is not a vested right of current employees. The memo differentiates between a majority approval of those voting (obtained) and a majority vote of total members (not obtained). Section 143.1(a) of the City Charter is worded to require “approval of a majority vote of the members of said system” for an ordinance to take effect.

The POA’s position, and that of other labor bargaining units, has been that the city needed the majority approval of the San Diego City Employees’ Retirement System (SDCERS) to cancel the benefit. Joan Raymond, president of AFSCME Local 127, believes that DROP is a vested benefit and that Goldsmith’s interpretation of the charter was incorrect.

“We firmly believe that the opinion is wrong,” she said. “As far as majority votes, in this country—from the president down to the water boards—a majority vote means a majority of the people that cast their votes. This is a bona fide program that has been going on for 12 years, and to say it doesn’t really exist is ridiculous.”

DROP has been on the receiving end of criticism from DeMaio and other budget hawks in the past. DeMaio released a report in February saying that the $333 million in DROP accounts held by city employees has substantially contributed to the city’s 386 percent increase in pension fund liability since 2000. DROP’s unusually-high guaranteed interest rate of 7.75 percent made it an easy target for reformers looking for examples of excessive pension payouts.

“The city has the legal right to eliminate DROP, and that has always been our position,” DeMaio said. “What (Monday’s) determination raised is whether DROP was ever created in the first place.”

DeMaio released a follow-up memo in response to Goldsmith’s finding, asking for a thorough investigation of all benefits authorized after 1995. Since DROP was not created in accordance with Section 143.1(a), DeMaio surmises that there may be other programs deserving of pension reform.

“It seems as though, in the past, the clerk and the retirement board were very sloppy in their determination of compliance with this section,” DeMaio said. “As a result, I want the city attorney to expand his review—specifically of Manager’s Proposal 1 and Manager’s Proposal 2, which were voted on using the same section.” Those two deals, made in 1996 and 2002, contributed to the city’s pension liability by simultaneously underfunding the pension and increasing benefits.

The usual process for approval of an ordinance impacting the city’s pension obligations includes drafting, a vote by SDCERS members, and notification from the retirement administrator to the City Clerk that the members approved the ordinance. According to Goldsmith’s memo, that notice is also missing: “There is a good reason why the Retirement Administrator did not notify the City Clerk that the members of the Retirement System approved DROP — it did not occur.”

The POA has declined to comment on the memo, although it released a statement saying it is in the process of reviewing Goldsmith’s opinion. POA lawyer Michael Conger said simply, “”We expect the city to honor its promises. The SDPOA and its members will honor theirs.”

“We’ll have to see what the SDCERS wants to do with this,” Raymond said. “There’s going to be a certain amount of legal costs on something that, to me, is a non-issue…This is the mayor’s people’s way of trying to avoid putting it to a vote.”

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Also currently in litigation is a suit filed by the POA and Local 127 over the impasse declared by the mayor in labor negotiations earlier this year. The suit alleges that the city imposed a labor contract on the two unions by negotiating in bad faith. As a result of the contract, both unions will see their members’ DROP benefits decreased.

“If the lawsuit determines that (DROP) is a vested benefit, the city would stop questioning it,” Raymond said.

While unions are downplaying the finding—and Goldsmith emphasized that it has “a narrow legal application” in a press conference Tuesday—DeMaio believes it has important implications, both in the POA case and in long-term goals for pension reform.

“There will be hundreds of millions in savings to taxpayers and tens of millions realized immediately (if DROP is eliminated),” DeMaio said. “I fully expect labor unions to confess this in court… We’re closer to a resolution than we’ve ever been on pension issues, and we’ve got a strong argument to make.”

Gina Giacopuzzi writes for the San Diego News Room where this story originally appeared.

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