Illustration by David Plunkert
Many an offbeat film is highlighted by the crafting of a cockamamie plan blessed with the endorsement, “It's so crazy, it just might work!” Leave it to San Francisco to make this notion the basis for establishing public policy.
In 2008, San Francisco found itself unable to properly staff its police force. The solution enshrined by city voters: Allow cops to simultaneously work and be retired — and earn both hefty salaries and pensions at the same time. The effectiveness of this plan is a matter of debate. Its craziness? Less so. “It appears you're paying people twice,” former city Controller Ed Harrington notes, “because, in fact, you are.”
The Deferred Retirement Option Program (DROP) was sold to the city and its voters as the cure for a police department that was unable to attract new recruits, yet losing cops who took advantage of 90 percent pensions at age 55. The San Francisco Police Officers Association — which pushed DROP onto the ballot via a signature-gathering drive — argued that the city needed to entice the oldest officers to stick around. The means: Offer them a financial windfall. Earning a salary and pension at the same time, commonly known as “double-dipping,” contravenes nearly every notion of fiscal common sense — and, not insignificantly, the city charter.
DROP participants, however, use some nuance to get around charter rules regarding double-dipping. While cops draw their pay, their pension payments are socked away in a tax-deferred account with a guaranteed 4 percent return. When they officially retire after up to three years in the program, they receive a lump sum payment — which can easily exceed $300,000. Then regular pension payments commence. For example, one inspector who drew $174,372 in take-home pay in fiscal year 2009-2010 walked away with a lump sum of $265,331 in June after two years in DROP — and then retired on a pension in the vicinity of $130,000 a year.
You'd think this would have been a hard sell, but DROP's backers knew the magic word: “cost-neutral.” Not only would the program stave off manpower shortages, argued the police union in its ballot measure, “it will do so without any cost to the taxpayers.” Not a single opponent chose to publicly differ with the influential union. Proposition B of February 2008 was, in fact, backed by the majority of the Board of Supervisors, which even referred to institutionalized double-dipping as “good public policy” in a union-funded voter pamphlet statement. DROP breezed to a victory with 65 percent of the vote.
Yet no city analysis was ever undertaken to back up claims of cost-neutrality — since the measure was brought before voters via signature-gathering, the city had no means to do so. “While the initiative states that the program shall be cost-neutral, no cost analysis is to be conducted until April 15, 2011,” reads a 2007 letter from Clare Murphy, then-director of the San Francisco Employees' Retirement System, to the Department of Elections.
In fact, unbeknownst to the police union, the actuary it hired was the target of lawsuits by several California government entities for scores of millions of dollars' worth of negligence at the very time he was crunching its numbers and assuring it DROP was, indeed, cost-neutral. Three years — and many millions of dollars — into DROP's existence, the city controller is slated to complete the first cost analysis of the program this week.
No cost analysis is necessary, however, to judge that DROP has been a rip-roaring success for the police who have participated in the program. Those who have already departed DROP have been handed retirement nest eggs exceeding a quarter of a million dollars on top of their forthcoming pension payments. The officers still enrolled are accumulating still tidier sums. It will now be up to the Board of Supervisors to determine whether DROP is working for the city and its residents. Or, perhaps more accurately in this political climate of exploding pension costs and rampant budget shortfalls, the supes will have to decide what it's worth to potentially incense one of the city's most powerful unions.
DROP is a policy encased in amber. It remains preserved, a snapshot in time — while the world around it has changed radically.
When the police union began pushing DROP in 2007, the police department, like many others, was unable to attract new blood. San Francisco cops' salaries were significantly lower than those doled out by neighboring cities — locales offering more sanguine working conditions than for those patrolling, say, Sixth and Market. Departed S.F. cops already earning generous pensions could, with relative ease, land spots in police departments in the Central Valley or elsewhere. And the notion of tossing an additional, unfunded burden onto the city's pension system was neither a political nor practical concern.
The times — they have a-changed. San Francisco has showered police with generous raises: The total compensation for a rank-and-file officer leaped from $92,844 in 2007 to $111,363 this year. Police salaries are now 2 percent over the pay rate for all Bay Area cops; as recently as 2004, they were 12 percent below. San Francisco's finest are due raises in June of this year and January of the next one, which will only push the city's pay rate that much higher than the regional average.
Older officers, meanwhile, are not running off to jobs in other departments — hardly anyone is hiring. And, just after the adoption of DROP, the bottom fell out of the city's pension fund (and everyone else's). Between June 2008 and June 2009, its value dropped from some $15.8 billion to $11.9 billion. Since DROP accounts are guaranteed a 4 percent return, the city has been forced to eat the difference when officers who enrolled during boom times cash out.
To date, the city has handed the 55 cops who left the program $6.9 million in lump sum payments. The 113 officers enrolled as of Jan. 1 have amassed $14.5 million — a total that grows with every month's deposit. Considering that pension payments for 30-year cops will be 90 percent of their final salaries, the city has spent $24 million or more on the wages of officers who are technically “retired” — at a time when police academy classes have been canceled because of budgetary concerns.
The result is a political paradox in which San Francisco's electorate has urged veteran police to stay and go — and paid for both.
In 2002, city voters approved the augmentation of police and fire pensions from 75 to 90 percent of final salary at age 55 — a measure that was politically unchallenged, and declared by the controller as unlikely to tap the general fund and city taxpayers (whoops!). Then the city enacted DROP — also politically unchallenged and given the controller's blessing. Astoundingly, San Francisco now awards police officers generous pensions to incentivize their early retirements — but simultaneously richly incentivizes them to stay past retirement age.
DROP “does nothing to deal with the long-term problem of staffing shortages,” says Theresa Sparks, the former president of the Police Commission. “When these people leave, you'll have the same situation again. You're not making new hires. And, from a budgetary standpoint, you're paying these guys a higher rate than new people from the academy.”
The program's defenders counter that the costs of keeping veteran cops working are economical compared to the price of hiring and training new ones. DROP prevents non-Medicare-eligible workers from entering the city's pricey retiree healthcare system. And while new recruits start at $86,600 and up, they must spend months in training. Yet this equation doesn't take into account the fact that the city is now poised to scoop up officers laid off from surrounding cities — and put them to work in a fraction of the time it takes to break in a raw recruit, and with a correspondingly lower training cost. And while DROP cops will be gone in three years at most, new recruits may work for decades. Establishing a carousel of older officers rewarded to extend their careers to fill in for the prior batch of older officers is hardly the ideal way to staff a police department. But it is a lucrative spin for those on the carousel.
When it comes to DROP, Police Officers Association president Gary Delagnes says it must stay — or cops will go. “We have 493 people who could retire tomorrow at just about a full pension,” he says. “There are no academy classes, so, on that basis, 25 percent of the department could walk out of the door tomorrow.” The only reason they don't, he says, is the knowledge they can enroll in DROP sometime in the future, and “bag this money.” If the Board of Supervisors pulls the plug on the program, Delagnes predicts a cavalcade of older cops heading to DROP before it sunsets in June, and retiring en masse by 2014.
Delagnes' assertion is debatable; only 165 officers have maxed out their pensions. But his talking point of 500 cops bolting if DROP is dropped is being bandied about the corridors of City Hall and the Hall of Justice. It remains to be seen whether his bizarre logic will take root as well: The program must be preserved, or people will use it.
The first DROP was devised in Baton Rouge, La., in 1982. By the 1990s, when pension funds were overflowing and public sector workers were shuffling off to early retirements, the plans began to proliferate across the nation. This was a fiscal decision many government officials would rue. Poorly structured plans and faulty actuarial assumptions led to multimillion-dollar overruns in locales such as Houston and Philadelphia. In Milwaukee County, seven supervisors were recalled, the county personnel manager was jailed, and the actuarial firm Mercer eventually agreed to a $45 million settlement.
San Francisco's DROP avoids some of the features that led to such debacles. It is open to a limited number of workers; its promised interest rate of 4 percent — which still stands to lose the city money — is less generous than elsewhere; participants continue to contribute to the pension fund; and, most important, it comes with a sunset clause. Thanks to that clause, the San Francisco Board of Supervisors can determine whether the plan should stick around — an out many of their colleagues across the country would kill for.
Assessing the price tag for DROP before its launch is a nigh-impossible task akin to fortune-telling. An actuary must forecast how many people will avail themselves of the plan, and crunch numbers based on complex scenarios regarding how workers would behave if they were offered different options, all while considering how the market will perform in years to come. Errors can result in staggering discrepancies and cost the plan dearly. Ira Summer, the actuary the Police Officers Association hired to work on its DROP, is a seasoned veteran in this regard.
Purportedly working out of his kitchen in a Piedmont cul-de-sac, Summer — who, in a brief phone interview, declined to answer most of SF Weekly's questions — cooked up numbers that led to his being sued, simultaneously, by retirement boards in Kern County and Fresno County, and by the San Joaquin Valley Unified Air Pollution Control District. Lawyers representing retirement boards in North Miami Beach and Palm Bay, Fla., told SF Weekly they, too, would likely have sued Summer — if he hadn't allowed his insurance to lapse, making the likelihood of collecting a judgment infinitesimal. Legal papers filed by the Fresno County Employees' Retirement Association accuse him of running a “sham company” out of his home — a firm with “a long and exotic history of failing to ensure that they have the assets or insurance necessary to satisfy the many claims against it.”
In late 2006, Summer was sued first by Kern County and its retirement board and then by San Joaquin. Kern County accused him of severely overestimating the plan's withdrawal rate — that is, the number of people who would leave it. This led to the county heavily underfunding its pension system. Meanwhile, San Joaquin claimed that Summer's actuarial prediction of the cost of upping its pension benefits was off by $580,000 — in its first year of implementation alone. In 2008, judgments were leveled against Summer's company, Public Pension Professionals, to the tune of $8.5 million for the Kern County retirement board; $17.4 million for Kern County; and $1.4 million for San Joaquin. Anne Holdren, the executive director of the Kern County Employees' Retirement Association, said a settlement has since been negotiated in which Summer pays $1,000 a month to both the county and the retirement association.
As Summer was being buffeted by lawsuits, he was brought in by the Police Officers Association to help on its DROP. In the early months of 2007, union members met with city officials in an attempt to sell them on instituting the program. But when the city asked to see Summer's analysis, they were brushed off. Some who attended these meetings recall union members vouching for his work, stating that the numbers surely added up, and assuring that this wouldn't be another DROP disaster. City officials claim that they were told “trust us.”
No one is claiming the police union didn't believe its claims of cost-neutrality. But “trust us” didn't cut it. The union got around the city by independently placing DROP on the ballot via paid signature-gatherers. By late 2007, Summer did produce an actuarial paper regarding the San Francisco DROP — but not before being sued by yet another pension system.
The Fresno County retirement association claims that for years, Summer contravened three decades of county policy and basic actuarial principles. He pushed costs onto employees that were traditionally shouldered exclusively by the retirement system — and, according to the subsequent lawsuit, failed to inform the retirement board of this step. As a result, the system was compelled to pay back millions to workers — with interest — and claims Summer's creative accounting led to a $99 million discrepancy. In 2009, Fresno accepted a $250,000 settlement — the best it figured it could get, considering the actuary's dicey insurance situation.
Summer, an MIT graduate, laughed out loud when asked whether his troubled background was relevant to his involvement in San Francisco's DROP. “It doesn't make my work in San Francisco a question anybody should care about,” he says. “The fact there was a lawsuit doesn't necessarily mean there's anything wrong.”
Summer continued to be a sought-after speaker at financial seminars, and obtained public sector work during and after his legal battles. He did so even after the Conference of Consulting Actuaries took the exceedingly rare step of publicly reprimanding him in 2009. (It claims he refused to assist an actuary who discovered a serious error in calculations Summer had made on a plan he formerly administered. The reprimand also notes that Summer was “repeatedly unresponsive” to communications from the Actuarial Board for Counseling and Discipline, which was investigating the case.)
The actuary's 2007 forecast for San Francisco's DROP, incidentally, is far from definitive. It offers scant analysis to back the plan's purported cost-neutrality, instead stating that “cost neutrality is almost impossible to obtain,” and “Sometimes, real-world experience does not match actuarial projections.” The latter is a statement with which a number of Summer's former clients would be inclined to agree.
Delagnes says he had no idea Summer was being barraged by successful lawsuits for gross negligence in the midst of his work on the city's DROP. But he says the actuary's pattern of bad decisions that led municipalities to bleed millions again and again doesn't mean the same thing will happen here: “Just because he was sued doesn't mean everything he ever did was wrong.”
At the very least, it was exceedingly convenient for the Police Officers Association that a supposedly cost-neutral solution for a serious city problem would lead to massive additional payments to its most longstanding members. On the face of it, floating such a plan past the city — the lack of any political opposition made a ballot proposition a slam-dunk — seems to be a spectacularly counterintuitive feat. But it isn't. In fact, it's a textbook example of how government works — that textbook being The Logic of Collective Action by Mancur Olson.
When Olson, an economics professor, wrote his seminal work in 1965, the prevailing theory of group action was that “The larger, more nearly general interest would usually tend to defeat the smaller, narrower special interest.” The general good — the will of that largest group of all — was “bound to win.” But that's not how things work at City Hall; Olson knew it, and so does the Police Officers Association.
Loosely affiliated movements pushing for “the general interest” are as easy to brush aside as the balding men with ponytails who castigate the powers that be during Board of Supervisors public comment sessions. Small, organized groups with a laserlike focus on providing benefits for their members — and only their members — are the real winners in our democratic system.
Take the Police Officers Association, a small and highly focused group composed of an exclusive membership. The union and its constituents have a tangible rationale to push for goals that directly benefit them. And other, larger entities don't have much of an impetus to push back.
Small groups can beat out larger ones — “even if the vast majority of the population loses out as a result,” as Olson put it — because of the nature of concentrated benefits and dispersed costs.
While the union and its membership are greatly enriched by a program like DROP, the bill, when divvied up among the city's taxpayers, is hardly anything to get worked up about. The police union and its members have every reason to protect payouts that could buy them a second home, but it's not worth average folks' time to get caught up in fighting something that is only costing them toothpaste money. Scores of millions of dollars are similarly infinitesimal to the San Francisco Employees' Retirement System. And our elected leaders may be reluctant to initiate a frontal assault on a powerful union over highly dispersed costs that pale in comparison to the city's gaudy budget numbers — especially if the union opts to defend its privilege like a mama bear separated from its cub.
Once entrenched, groups' benefits become entitlements. And they are defended with even more vehemence.
Lost among the dazzlingly complex arguments about actuarial reports or department staffing or city politics is the obvious question about DROPs: If you have to ply relatively young workers with spectacular rewards to keep them from retiring with yearly payments all but equal to their salaries, haven't you inexorably proven the system is in ruins?
“The whole program is absurd,” says Carl DeMaio, a San Diego councilman who has waged war against that city's DROP. “It's really an extension of a dysfunctional and unsustainable pension program. It's snake oil from the start.” Pension expert Girard Miller refers to DROPs as a “Mad Hatter meets Rube Goldberg scheme. … The mere existence of a DROP plan should signal that something is wrong with the pension plan,” he wrote in Governing magazine. “The idea of providing incentives to seniority workers to keep them in service — because their pension plan encourages a life of leisure well before age 60 — is a sign the pension benefit is simply too rich.”
To put it mildly, you do not find public figures talking this way in San Francisco, with the predictable exception of Public Defender Jeff Adachi. “The idea of a person being able to collect both a pension and a salary is just wrong, y'know?” says San Francisco's foremost pension crusader — who also happens to be involved in an ongoing beef with the police department and its union.
San Francisco supervisors — who will ultimately decide DROP's fate — are not willing to make an Adachi-like blanket statement. SF Weekly contacted every supe. We couldn't find one who wasn't waiting for the controller's pending analysis before deciding on the future of the program. “If you have experienced officers doing a good job, it's worth making an effort to keep them around,” says Supervisor Scott Wiener, who supported DROP at its inception. “If you're keeping around officers who are really ready to move on and are taking advantage of the program to have a benefit, that's not a good thing. In the end, is this benefiting the department and taxpayer or not?”
It's a good question — but one that could well go beyond the scope of the pending analysis. While the controller will certainly plumb the cost-neutrality of DROP, the report may not touch on its efficacy. Police Commission president Thomas Mazzucco says he's been asking for years about the caliber of personnel enrolled in DROP, and what measure of productivity the department is getting out of its participants. He's never gotten any answers : “There are not a lot of controls, not a lot of performance measures,” he says. The controller's report may not enlighten him.
Who participates in DROP and how they spend their days isn't just a sore point for police commissioners. Department higher-ups are traditionally cool on the program, as they have no say regarding who can enroll. Several messages for acting Chief Jeff Godown and his immediate predecessors, George Gascón and Heather Fong, were not returned. But two former San Francisco chiefs were puzzled by DROP. “It's always better to look at a person's work record and how the community perceives them and have some sort of selection,” says Frank Jordan, chief from 1986 to 1990. “There has to be some fair approach toward screening people who want to stay on for an extra three years, not just allowing anyone to do it.” Adds Fred Lau, chief from 1996 to 2002, “From my experience, it would be invaluable for someone to fully evaluate the efficiency and effectiveness of the persons in the program. That would make sense to anybody.”
It would also lead to a surefire discrimination lawsuit, assures Carol Calhoun, a lawyer specializing in pensions and DROPs. Like every plan across the nation she can think of, San Francisco's has no requirements for participation other than age and experience.
Barring a truly excoriating or beatific report from the controller, the supes will have to put on their thinking caps. It's a situation the plainspoken Delagnes encapsulates well: “You know what? If [the controller] stands up there on April 15 and says 'It ain't working!' then it's over. If they say, 'It's a good deal, we think it's saving money,' they probably will keep it. And if they say it's too close to call, then [the supes] gotta make up their minds.”
Indeed they will. And the board's decision on a matter that touches on labor relations, exploding pensions, and power politics could go a long way toward redefining just what is meant by “business as usual” around here.