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Friday, April 15, 2011

DROP Program Could Add $52 Million in Pension Costs, Controller Claims

Posted By on Fri, Apr 15, 2011 at 4:59 PM

click to enlarge rsz_drop_cover.jpg

This week, SF Weekly's cover story explored a program that allows veteran police officers to simultaneously earn salaries and pensions -- the latter of which is collected in a lump sum payment which can easily exceed $300,000.

While the Deferred Retirement Option Program (DROP) was enacted in 2008, its first cost analysis was released to the public less than an hour ago. And here's the money shot:

"With its current design, and with the demographics and behavior of eligible members to date, it appears that the DROP program represents a net increase in the City's liability and is not cost-neutral."

In other words, institutionalized double-dipping is costing the city money.

Yet just how much money the city is out -- if it's out any money

at all -- is "difficult to state with certainty." That's because

estimating the cost neutrality of a program like this involves combing

through demographic data and estimating how people would have behaved in a number of different scenarios, including the real world.

With DROP, cops can sock away pension costs for up to three years while they're working and then retire to lucrative pensions. So if an officer is induced by DROP to work past the age at which he'd have retired if the program didn't exist, he's only earning pension money he was going to earn anyway. This is cost-neutrality.

But if he enters the program years before his intended retirement date and then heads off to the Bahamas on that date, he has earned hundreds of thousands of dollars he wouldn't have gotten if DROP didn't exist to shower him with moolah.

The pool of cops who've entered DROP in the past three years is small -- only 169. But charting retirement behavior before, during, and after voters enacted DROP, the controller's report states that more cops are now retiring young. Before the program, just 12 percent of cops aged 55 with 25 years or more of service retired. Now 33 percent do. "It appears from the data that most members enter DROP before they would have retired if no DROP existed." This is not a point in the program's favor.

And while DROP proponents -- namely the Police Officers Association -- claim that keeping on older cops defrays the costs of hiring new ones, the controller's report makes that a shaky point to base an argument on. Yes, keeping on veteran officers could save the city up to $3.75 million a year in costs associated with new recruits. But "under any scenario, the City's possible savings are exceeded by the Retirement System's liability costs." In other words, you're spending more than a dollar to save a dollar.

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Finally, how many dollars? Again, that's difficult to say with certainty based on largely unanswerable questions about when officers would have retired. But we do know, as noted in our cover story, that the 55 cops who left the program were given $6.9 million in lump-sum payments, and the 113 enrolled at the beginning of the year have amassed $14.5 million. Doing some back of the envelope math, that means these cops were paid at least $24 million in salaries while "retired" on DROP.

Today's controller's report employs several complex scenarios, but the most eye-catching is a prediction of how much DROP would cost the city if it is renewed. "If the program is continued under current conditions, the City would expect a resulting accrued liability of $52 million in retirement costs. Amortizing this liability over 20 years" would add around $6 million or so every year to the city's pension contributions.

If the Board of Supervisors doesn't lift a finger, DROP will sunset on June 30. If six supes decide to keep the program going, it can be renewed for up to three years.

This controller's report is hardly a compelling argument for action by the board. It remains to be seen if the police union can come up with something a bit more persuasive.

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About The Author

Joe Eskenazi

Joe Eskenazi

Bio:
Joe Eskenazi was born in San Francisco, raised in the Bay Area, and attended U.C. Berkeley. He never left. "Your humble narrator" is a staff writer and columnist for SF Weekly, which he has written for since 2007. He resides in the Excelsior with his wife, 4.3 miles from his birthplace and 5,474 from hers... more

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