Gov’t workers: Getting the DROP on retirement

Some government employees can collect a paycheck and a pension during their last five years on the job.

Is it an outrageous double-dipping giveaway to powerful labor unions or an innovative management tool that keeps workers on the job and cuts costs?

The city of San Diego filed a lawsuit this month to force a police union to negotiate to eliminate the program under a proposal by Mayor Jerry Sanders, who says $350 million would be trimmed from the city’s $2 billion unfunded pension liability.

“They are holding up the entire bargaining process by their refusal to meet and confer on this critical proposal, and that’s simply not fair to San Diego taxpayers,” Sanders said in a prepared statement.

A state Assembly committee approved a bill last week that would create a program for supervisors in the Highway Patrol, Corrections, CalFire and other public safety units. Backers said state savings would average $1,800 a month per employee.

“I think it’s a good program,” Assemblyman Charles Calderon, City of Industry, the author of AB 704, told the committee. “I think it’s a win-win situation.”

The program that lets government workers collect their salary and their pensions during the last five years on the job is called a Deferred Retirement Option Program or DROP.

As the worker continues to earn a salary, the monthly pension payments go into a government fund that pays interest. When workers leave the job, they collect the money that has accumulated during the five years and begin receiving pension payments.

The DROP is a relatively recent supplement to government pensions, beginning several decades ago. The work-retire programs, which have several variations, are not in wide use.

A large DROP is operated by the Florida Retirement System. A newspaper story last month said the program is an important supplement for modest-income teachers, but is abused by some high-salary supervisors, elected officials and judges.

In California, a law enacted in 2003 allows the 20 county systems that operate under a 1937 law to offer a DROP to police and firefighters. Former Gov. Gray Davis vetoed four state and local DROP bills in 2000-2002, citing the increased cost.

San Diego began its union-backed DROP in 1996 to retain experienced workers. The program was closed to new hires in 2005 after a huge pension unfunded liability surfaced, reportedly the result of deals that increased benefits and lowered contributions.

Attempts to prosecute five pension officials are pending in state and federal courts. The city had its credit rating slashed, preventing bond issues for a time. Pension contributions have soared, cutting funding for other programs.

The DROP came under fire from Councilman Carl DeMaio, who said five employees received lump sums last year of more than $1 million each. One of the issues was the high interest rate paid in the DROP accounts, 7.75 percent a year.

Defenders argued that the rate is what investments in the city pension fund are assumed to earn. They said there were no complaints during economic good times when pension fund earnings were in double digits, much higher than the DROP account rate.

But critics said retirees can leave their money in the city DROP account for up to 20 years, drawing 7.75 percent interest, and the result can be annual pension benefits that total much more than the final salary.

Last February, the board of the San Diego City Employees Retirement System voted to drop the interest rate on the DROP accounts from 7.75 percent to 3.54 percent, effective July 1.

The sponsors of the Calderon bill, the California Correctional Supervisors Organization, are aware of the criticism that DROPs are costly. The organization’s Ford Canutt told the committee state savings per employee would average $1,800 per month.

“Basically, the state’s not paying into the retirement for that person to keep on working,” said Canutt. “To replace that person would cause the state to have to pay retirement benefits for the person that takes that position.”

Canutt said the DROP would help the taxpayer, the employer (the state) and the employees. The bill requires the CalPERS actuaries to conduct a study every two years to ensure that the DROP program is cost neutral.

“So we don’t see a downside to it,” said Canutt. “That’s why we proposed it to Mr. Calderon.”

Another member of the organization, Paul Curry, began to tell the committee of “compaction issues” that make young rank-and-file correctional union members reluctant to move up to non-unionized supervisor positions because they would earn less money.

“I don’t mean to cut you off, my friend, but you gotta move,” said Assemblyman Warren Furutani, D-Long Beach. The six-member committee was down to just two members as legislators temporarily left to work on bills in other committees.

“I don’t mean to rush you,” said Furutani, who was handed the gavel by chairman Ed Hernandez, D-West Covina, as he left. “We don’t have many people here. Let’s get this stuff going out of here.”

The absent members posted their votes later. Calderon’s AB 704 moved on to an uncertain fate in the appropriations committee, clearing the retirement committee on a 4-to-1 vote.

Later that day (April 22) as the board of the California Public Employees Retirement System was briefed on legislation, the DROP bill caught the eye of trustee George Diehr, a San Marcos State faculty member familiar with the San Diego situation.

Diehr asked the CalPERS chief actuary, Ron Seeling, for his view of the bill.

“My No. 1 comment is this bill talks about being cost neutral,” said Seeling, “and I want to go on the record that it’s almost impossible to certify or state from the beginning that such a program is cost neutral. You are guessing at people’s behavior.”

Seeling said there may be savings from a worker who stays on and requires no pension contribution costs. But others who intended, for example, to retire at age 62 may retire at 58 if given the option of a DROP, increasing their total cost to the system.

“The question is — there is no actuarial magic here, your guess is as good as mine — how many of each type are there?” he said.

Seeling said the picture gets even murkier when you include other factors that may change retirement behavior, such as an economic downturn. He said he was the actuary in Louisiana when the first DROP was launched in 1984.

“I have had friends working within that program since that time,” he said. “When I asked them does the DROP cost money or save money, their answer is ‘I don’t know.’”

Seeling’s view of a DROP: “I think it costs money, but I can’t prove it.”

Among the “political ramifications” of a DROP are news headlines saying, “Police chief retires with $300,000 lump sum plus $75,000 a year,” he said.

A Texas city allows entry into a DROP after 20 years on the job, resulting in some 42-year-olds drawing pensions, Seeling said. There are record-keeping problems tracking interest and wages.

“The list of topics goes on and on and on,” he said. “Maybe you can tell I’m not the biggest fan of DROP.”

Ed Mendel is the editor and publisher of Calpensions, a new online news source for government pensions. Mendel, an expert on the state
budget and finance, covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. All of his stories are available at http://calpensions.com.