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

Comments

  1. Take leadership?

    The same elites running Sacramento called Democrats set this up as an intentional bonus to government employees who supported every high tax socialist scheme.

    Unfortunately the taxpayers are the ones who eventually get the shaft.

  2. Why should we the taxpayer bitch about giving money to those who had a job and showed up for work every week (forgive sick time etc.).
    How could a politician vote against a Police Or Fireman after all they have the ability to deliver union votes.
    Add to the above the public really don’t care if the roads require maintenance and other services go to hell.
    Go CalPers the best failed investment association in the country.

  3. What is so appealing about this is that you give state employees the best possible package in the world and then every one of them lies awake nights trying to figure out how to game the system even more.a

  4. Used to be that “public sector ” jobs didn’t pay as well as private sector jobs, so we had to make up for that by incentivizing public sector employees by providing generous retirement benefits to compensate them for their years of service…
    Well, with the rise of their public sector unions, they’re now getting sweetheart deals during their working years and devise all sorts of spiking schemes to game the system for insanely generous pension benefits as well….
    You can’t have it both ways, boys and girls….pick one or the other and enjoy your new 401k retirement plans, like I have to make do with…the days of gold watches and lavish pension plans have passed in the private sector so interest of the “fairness ” that your Democratic party enablers always bleat incessantly about, you need to be “fair” and not feed at the public trough….the numbers just don’t pencil out any more….they never did…

  5. Rainbow Snow says

    What you fail to share is that when an individual “DROPS”, yes, they are considered ‘retired’ for pension purposes only and their monthly pension is deposited into their DROP account (for a 5 year max). However, they give up 3% of a potential pension increase for every year they are in DROP. Example, if they DROP at 25 years, their pension is 65% of their annual salary. If they had not DROPPED, at 26 years their pension is 68% of their annual salary, 27 years = 71%, 28 years = 74%, 29 yrs = 77%, 30 yrs = 81%…all the way up to 33 yrs at 90% max. Consider that the last 5 years of your career normally represents the highest earning years you experience and when in DROP, you’re frozen to the percentage designated for the # of years of service when you DROPPED. It’s not a SCHEME. You’re a Certified Financial Planner! Do your research and your math. The city SAVES money in the long term by not paying that additional 10% of an increased annual salary 5 years later, in pension payments for the lifetime of the retiree. Another way to look at it:

    Officer has been on the job for 25 years, and is considering joining DROP. If he current annual salary is $75,000k…..
    – Earnings: $75,000 * 65% = $48,750 annual pension

    The officer decides NOT TO DROP. 5 years later, at 30 yrs services, this officer has received an annual increase in salary of 3% (not even assuming promotions occur) every year. He is now earning $86,945 per year…
    – Earnings $86,250 * 81% = $69,862

    A difference of $21,112 per year less in pension payments (as well as the 3% COLA on that amount that is lost every year in retirement) for the lifetime of that retiree.

    Again, you could very easily look up the DROP plan specifics on the City’s pension website.

Speak Your Mind

*