Local Government
Why $1.4 Million Payouts Top Annual Pension List

Why $1.4 Million Payouts Top Annual Pension List

A half-dozen Los Angeles police and firefighters received pension payouts of $1 million or more in 2016 — two reaching $1.4 million, according to Transparent California, a watchdog database listing individual state and local government employee salaries and pensions.

The big payout is from collecting both pay and pensions for up to five years before retirement. During that period, the pension payments go into a Deferred Retirement Option Plan (DROP) account that earns a guaranteed 5 percent a year.

Then at retirement the pension payments received while still on the job, and their investment earnings, can be collected as a lump sum, a roll-over retirement account, or a combination of the two.

The top pension payment in 2016 listed by Transparent California is $1,473,823 for Earl Paysinger, deputy police chief. A link underlined and in red saying “(see note)” reveals the DROP payout: $1,338,232.

It’s the same with the second pension on the list. Earle Macke, an assistant fire chief, received a pension payment of $1,457,638. The DROP payment revealed by the link is $1,321,658.

Los Angeles voters approved the DROP program in 2001 when the city was having difficulty recruting and retaining police officers. The mayor then, Richard Riordan, and the police chief, Bernard Parks, were among the civic leaders urging approval.

“Many are leaving because they are not ready to retire; yet they have earned the maximum pension available,” said their ballot pamphlet argument. “Consequently, they work elsewhere to increase their retirement income.”

Other cities such as San Diego had similar programs that aided retention and morale, voters were told, and the proposed charter amendment requires the program be cost neutral to the city and reviewed in five years to evaluate its impact.

“This program will help us reduce the number of retirements for the next few years while we work to improve our recruitment results,” said the ballot argument.

A decade later questions about “double-dipping,” the continued need for recruitment aid, the removal of an expiration date in 2007, and the lack of an independent audit of cost neutrality were raised by KCET television, first in 2011 and in a followup in 2013.

A former Los Angeles chief administrative officer, Keith Comrie, told KCET the program might produce a poster child for ending pensions.

“That will be the campaign, the million-dollar man. Why did you give him a million dollars in the same pension? It doesn’t make sense to the public. The public will just go crazy,” Comrie said.

An in-depth report in November 2016 by the LA Times said: “The city’s general fund payments for pensions and retiree healthcare reached $1.04 billion last year, eating up more than 20% of operating revenue — compared with less than 5% in 2002.”

For the last 15 years, the Times said, a national survey by the Center for Retirement Research at Boston College and two other groups has found that Los Angeles police and fire pensions are among the highest of any state or municipal plan.

“In 2014 — the survey’s most recent year of complete data — the fund’s average pension of $62,964 exceeded those for New York City firefighters ($60,136), New York City police officers ($44,133) and Chicago police officers ($49,535), among others,” said the Times.

A major cost driver cited in the Times report was the adoption of a generous, trendsetting pension formula approved for the Highway Patrol by a landmark CalPERS-sponsored bill, SB 400 in 1999. The report did not mention the DROP program.

The city charter requires the DROP program to be cost neutral to the city as defined by the actuary of the Los Angeles Fire and Police Pensions fund, the DROP manager, May Simmons, said last week.

In addition, Simmons said, an actuarial study and review of the DROP program by the city, required at least every five years by the administrative code, was completed in February 2014.

Police and firefighters must have at least 25 years of service and (in most cases) be at least age 50 to enter the DROP program. On entry, their pensions are frozen. While in the program, pay increases and service time do not increase their pensions.

To help keep the program cost neutral, DROP members continue to make contributions to the pension fund, 7 to 9 percent of pay. Some do not make contributions to the pension fund during all of a five-year period in the DROP program.

Contributions stop when the members complete the full service period under their pension formula, usually 30 to 33 years. Simmons said the average DROP entry last year was near full service: 29 years for firefighters, 28 years for police.

Membership in the DROP program continues to grow. The annual pension fund report shows that last June 1,303 pensioners had DROP accounts totaling an estimated $267 million, up from 1,243 pensioners and $239.5 million the previous June.

The average DROP payout was about $400,000 for members who left the program between last July 1 and the end of this month, Simmons said.

A Los Angeles Fire and Police Pensions actuarial valuation as of last June 30 does not seem overly alarming, particularly when compared to many local governments now struggling with rising California Public Employees Retirement System rates.

The combined pension and retiree health funding level is 87 percent of the projected assets needed to pay future obligations. The combined employer rate is 46.6 percent of pay (34 percent pensions and 12.6 percent health). The combined unfunded liability is $3.4 billion.

Among the Los Angeles retirees at the top of the Transparent California list are a number of San Diego City Employees Retirement System members. Unlike the Los Angeles program, the San Diego DROP was closed to new members in 2005 and is phasing out.

At No. 12 on the Transparent California list of top pension payments in 2016 is Benjamin Castro, San Diego fire battalion chief, with $885,848. His one-time DROP payment was $816,760.

The list grows to nearly 350 before getting to a pension payment that does not have a (see note) explanatory link to a one-time payment. The CalPERS payment of $390,485 to Michael Johnson, a Solano County employee, apparently is the top annual pension.

The California State Teachers Retirement Sysem has a retroactive DROP with tight limits that allows a member to retire and set an effective date several years earlier, but only if the date is after they stop earning pension credits and not earlier than Jan. 1, 2012.

An example is the top CalSTRS pension payment in 2016 listed on Transparent California: $422,239 to Dennis Bailey of Eastide Union High in San Jose. He set an effective date in 2012, receiving four years of payments for a pension now about $87,000 a year.

The 20 county retirement systems operating under a 1937 act can offer a DROP to police and firefighters under a law enacted in 2003. Former Gov. Gray Davis vetoed four state and local DROP bills in 2000-2002, citing the increased cost.

A bill in 2009 to create a DROP for Correctional, Highway Patrol and other state safety supervisors failed. The CalPERS chief actuary then, Ron Seeling, told the board individual retirement decisions and other factors make cost neutrality nearly impossible to predict.

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

Originally posted at Calpensions.

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