Pocket Change: a DROP in the bucket

Read Legality of DROP reignites pension benefits debate

The hard-earned money you pay in city taxes is being siphoned from city services into an excessive retirement fund that would be hard to find in the private sector.

Services are already being cut because of this program, and you likely don’t even know it.

Lately, the city has been getting lambasted from all sides for the amazingly lucrative DROP, Deferred Retirement Option Plan for city workers. Amazingly lucrative for the workers — not the taxpayers, that is.

Big news came last week — the legal opinion of City Attorney Jan Goldsmith that the DROP benefits were not properly enacted and are therefore invalid. If the legal opinion plays out in court, it could save the city a reported $350 million, a big step in shrinking our $2.3 billion pension deficit.

The astounding DROP benefits package allowed city workers  to begin receiving retirement pay at age 50 and work another five years while collecting a regular paycheck.

The retirement checks are put into the city’s pension plan, which pays a guaranteed 7.75 percent in compounded interest. When workers actually retire, they are given the funds in their DROP account as well as their regular pensions.

This system, compounded by other benefit perks has allowed some city workers to walk away with lump-sum DROP earnings of more than $1 million, inflation-adjusted pension checks as much as 133% of their last salary for life, and health coverage for life. Good luck finding that in the private sector.

Goldsmith’s legal opinion is that the 1997 ordinance never legally took effect. According to the memo “the labor unions did not get enough of their members to vote for approval of the ordinance.” Section 143.1(a) of the City Charter requires “approval of a majority vote of the members of said system” for such an addition to retirement benefits.

The San Diego City Employees’ Retirement System (SDCERS) quickly rebutted Goldsmith’s memo with their own, citing City Attorney John Witt’s 1996 legal opinion that “election law consistently holds that a ‘majority vote’ means a majority of the actual votes cast.”

Will this legal tactic help the city, or muddy the waters of negotiation even further? Let the experts guide your opinion:

Murtaza Baxamusa, Ph.D., AICP, director of Research and Policy, Center on Policy Initiatives:

The city attorney’s opinion itself is a legal question mark. His argument is that the majority of an electoral membership, rather than the majority who voted in an election, is required to pass something. If we held our politicians and propositions to that standard, democracy would grind to a halt. The “yes” votes on Prop 13 (People’s Initiative to Limit Property Taxation) constituted only 43% of all registered voters, in an election in which voter turnout was 69%. In the revisionist Goldsmithian logic, Proposition 13 in 1978 that is the root cause of our statewide fiscal distress, never passed.

Erik Bruvold, president of the National University System Institute for Policy Research:

The DROP program is a testament to the adage that one has to look at all the moving parts.  Adopted by local and state governments throughout the U.S., on the surface it can — and I stress the word can — be an attractive program.  Obligated to make the pension payout anyway, the employer can retain a valued and experienced employee and cap pension payouts.

The actuarial issues can give one a headache.  But at their heart is the question of whether the specific DROP program works in concert with other benefits to encourage employees to retire at an earlier age and, if so, whether that earlier retirement age is balanced by reduced pension payouts so that the total lifetime payout to the employee remains generally the same.  Well-constructed plans coordinate the various aspects of the retirement benefit plan so as to ensure that the plan remains cost-neutral.

Then there is San Diego.

Taxpayers in San Diego are presently burdened with a plan where nearly all the incentives encourage an earlier and earlier retirement but which do not also reduce benefit levels.  The laundry list of features encouraging early retirement include allowing many employees in the past to buy extra pension credits at an artificially low price, lifetime retiree health benefits which are 100% protected against inflation, very generous guaranteed rates of return for the money employees put into their DROP accounts and caps on pension payouts after employees work a certain period of time.  Together these can allow a public safety officer who started with the city at age 20 and who purchased five years of service time to enter DROP at age 45 and retire at 50 receiving a pension payout of 90% of his or her final salary, a DROP account comprised of 5 years of that pension payout guaranteed to earn 7.75% interest, and lifetime guaranteed healthcare.

The results are scary for taxpayers.  By one estimate San Diego’s DROP program costs has added hundreds of millions of dollars to the city’ pension liability.  Politically, it has set taxpayers and workers at each other’s throats, reducing to nil the opportunities to have a constructive dialogue about taxes, benefits, and what the city needs to do to be a competitive employer providing high-quality services.

Ultimately DROP is going to end up in court which will determine whether or not the program can be modified.  For those of us concerned about the ability of the city to sustain a retirement system that works for both employees and taxpayers, here is hoping that the courts move to quickly answer that question in the affirmative.

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Steven Bartholow is the SDNN multimedia editor and a political writer.

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This entry was posted on Monday, June 8th, 2009 at 6:16 pm and is filed under Columns, Local News, Pocket Change, Politics & Government. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.