We Still Need to Reform Deferred Retirement Plans

pension-2In these waning days of the 2018 legislative session, pension reform once again was shoved into the future. That can’t last forever.

One bill I hope to bring back in an upcoming legislative session is Senate Bill 1433, concerning a clever retirement postponement gimmick called a Deferred Retirement Option Plan, or DROP, for police and firefighters. But it’s a DROP kick for taxpayers, and an expensive one.

Let me explain this scheme. In an employee’s last five years with the municipality, they receive their salary and their pension. The pension benefits are deposited into a trust where it earns an attractive rate of interest. At the conclusion of the five years, the trust distributes the final balance along with the compounded interest income.

As the Los Angeles Times reported, new Los Angeles Police Department Chief Michel Moore was given a lump sum of $1.27 million from his DROP plan by first retiring, then being rehired in his new position. “Moore said in an interview that the plan to have him retire and then return almost immediately to work was proposed by former Chief Charlie Beck and approved by Mayor Eric Garcetti.”

I fully understand the motivation and the implementation of this plan. I can see why it is used and how politically difficult it is to discontinue allowing DROP plans as a management alternative.

And I am in no way inferring that Chief Moore and others who take advantage of DROPs are abusing the system. As someone who has earned a Certified Financial Planner designation earlier in my career, I certainly would advise anyone who qualifies for a DROP to take it.

It is the system that is wrong. It needs to be fixed.

Unfortunately, SB 1433 would not affect charter cities such as Los Angeles, which have a great deal of autonomy on such matters. But it would affect what are called ’37 Act counties, short for the County Employees Retirement Law of 1937. SB 1433 would prohibit altogether such a county or district from starting a new Deferred Retirement Option Program, or a public employee in a DROP jurisdiction from now participating in one.

Let’s stop the perception of abuse. Let’s eliminate a temptation that should never have been there in the first place. The experience of DROP participants in Los Angeles between July 2008 and July 2017 is not pretty.

Five points on that from an earlier Los Angeles Times story from April 15:

  1. Police and firefighters in the DROP program were nearly twice as likely to miss work for injuries, illness or paid leave.
  2. Those taking disability leave while in DROP missed a combined 2.4 million hours of work for leaves and sick time, and were paid more than $220 million for the time off.
  3. More than a third of police officers who entered the program, 36 percent, went out on an injury leave. At the fire department, it was 70 percent.
  4. The average time off for those who took injury leaves was nearly 10 months. At least 370 missed more than a year. This comes at a very steep cost.
  5. In addition to the salary and pension payments, leaves taken by DROP participants create a third cost for taxpayers. The fire department pays overtime to fill their vacant shifts. The Police Department requires other officers to cover their work.

Los Angeles is realizing that DROP plans are a mistake after costing the city an estimated $1.6 billion since 2001. Our state legislature should too. It should take a leadership role and totally discontinue allowing this unique strategy.

Sacramento needs to help local governments help themselves in addressing the pension crisis. This year would have been good. Next year, with a new governor and many new legislators, it is critical.

California State Senate, 37th District.

This article was originally published by Fox and Hounds Daily