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.”

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com. Posted 29 Jan 18

8 Responses to “Why $1.4 million payouts top annual pension list”

  1. Michael Genest Says:

    I would certainly quibble with the guaranteed return. Actual or risk-free (treasuries) would be better.

    But, the DROP program makes sense from the perspective, given the current retirement age. We really need to retain some of these folks.

    The underlying problem is that the police/fire retirement age is wrong. While it is true that many or most of these jobs require a younger body and many people can’t keep up with after 50 or so, that is no reason for having full retirement at 50.

    Nearly all cops and firemen continue to work after they retire, just at different jobs. So, the retirement age for them should be 65 or 70, but when they get to the point of not being able to physically handle their jobs, they need to be required to do other work. If that work pays less than their previous job, the retirement system could make up the difference.

    So, for chiefs and other management, it would no longer make much sense to take retirement at 50 or 55. They would wait until 65 or 70 since those kinds of jobs do not require top physical condition.

    Of course, the other scandal here is disability retirement. In many departments a substantial majority of cops and firemen, especially at the line level, take disability retirement. Same thing. They should be required to work at something their “disability” will allow. My guess is most would stay on the street at their old jobs because many of the disabilities are faked or exaggerated. But, for those who truly can’t keep up, even at younger ages, they would have to work or not receive any subsidy until full retirement age.

    This is a very reasonable way to deal with these special types of jobs. So, it will never happen.

  2. spension Says:

    As far as I know, the “pension hawks” in Wisconsin, San Diego, San Jose… etc… leave DB benefits for their political friends… usually safety employees. Proving that their pension worries aren’t motivated by true concern for DB being wrong, unfair, expensive, etc. Proving that politics is the underlying issue.

    No doubt lots of public pension gouging is going on, but purely political critics don’t want to fix the problem, they mainly want to whomp on their political enemies while keeping high DB pensions for their political buddies. That is why there is no “Transparent California”-like database for military pensions, for example. The point is to only beat up political enemies.

    DB pensions are sensible and economical (due to the vast reduction in longevity risk), when *payouts are kept modest*. The gouging of the last 20 years in California was largely rooted in the overly generous military pension system, which allows retirement with full benefits at age 37. Retirement like that is certainly OK for true combat veterans but not for beltway bandits whose battlefields are the revolving door into defense contractors.

    Any serious reform effort would look at *everything*, top to bottom, including the US military pension system that is about $1 trillion in debt… that debt is never mentioned by pension hawks.

  3. S Moderation Douglas Says:

    Michael,

    First, “Nearly all cops and firemen continue to work after they retire, just at different jobs.”
    Is there a source for that, or is it just speculation?

    For that matter, do you have better data on the actual retirement age of safety workers? The only thing I have seen is from the LAO, average 53 for CHP, 55 for local police and Safety, 60 for state firefighters and prison guards, 62 for teachers, and 60 overall average.
    That is from 2011, and questionable, at best.

    Second, we could probably debate indefinitely on the proper retirement age for safety workers. This seems to have evolved over the years. I’m sure you’re aware that, especially on the east coast, police and fire (and sanitation workers, in NYC) have “20 and out”. Fifty percent of FAS, much like the military (was, till recently). With family medical. (Much better medical for public workers, granted)

    But retiring at 37 gives a much better chance of a second career than retiring at 50 or 55. ( Why I question your previous statement.)

    I am neither a firefighter or LEO, (or military) but it seems there is something different there. Some people may be fair to excellent “troops” or technicians, but lousy, or very unhappy with leadership or even desk jobs. (Peter Principle, no shame in that. We are what we are) For these, retirement at 20 with 50% might make sense, or if they are above average health and psyche, tough it out till 55-60. Seems to me that even if higher level or admin retire in mid to late fifties, it will make room for promotion and new hires, keeping the overall average age lower. That in itself may be worthwhile. Keeping in mind that from 2000-2010, the average age for retirement in the U.S. was 60 (Gallup, up from 59 in the 1990s) mid to late 50s is not a stretch.

    Here is yet another way. There is renewed pressure to bring all public workers into Social Security. Bring safety workers in, allow “full retirement” (90%) at 57, as per PEPRA, then reduce pension at 62-67 so that total SS plus pension is still 90 percent.

  4. Michael Genest Says:

    On the working, it’s personal experience. I live in an active adult community, which has lots of retired cops and firefighters, generally captains or other management. Some retired from one department then went to manage another. I’ve known others who had side jobs, especially firefighters, and kept at those after retirement. Why not? Hard working people like to work, like being useful and active. Your plan and PEPRA both work better and make more sense that what we have. I’m not against these folks, I just think in this area we’ve gone too far.

  5. CalPERSon Says:

    Guaranteed 5% return? Nice perk. I wish my 457 had that.

  6. S Moderation Douglas Says:

    Michael,

    Fair enough, but “nearly all” sounds like a stretch. Which begs the other question. Do you know where to find recent data on actual retirement ages for public workers? It’s one thing to “be able” to retire at 50, but how many actually do that? One would be more likely to continue to work after retirement if they retire at 52 than at 58, I would think.

    Obversely, of course, I suppose one might be more likely to retire earlier if they had good prospects for other employment.

    What I’m getting at here is that we often hear that public workers “retire ten to fifteen years earlier than the private sector”. In my personal experience that isn’t so. Gallup has said that from about 2000-2010, average retirement age for all workers is 60. Up from average 59, pre 2000. Most of those I worked with retired in mid sixties. I believe 64-65 would be a safe average, and has been for the four decades I worked there.
    The big difference, of course, is those I worked with had average salaries below $50,000.

    Since 2010, by the way, Gallup says average retirement ages has been increasing. Other studies show nationwide the average retirement is at 62. 64 for California.

    No offense intended, but “almost all” still sounds suspect. Might there be some observation bias? Or, forgetting the “average” retirement age, might there be a big difference in retirement age between low income and higher income workers.?

  7. acc Says:

    LA Times, 2/3/2018: http://www.latimes.com/local/california/la-me-drop-20180203-htmlstory.html

  8. spension Says:

    Thanks acc. Also recently I found a discussion of some of the first pension… for Civil War veterans…. https://www.washingtonpost.com/news/made-by-history/wp/2018/01/18/how-work-requirements-for-medicaid-hurt-people-with-invisible-disabilities/?utm_term=.bfaaeafee50c … one of my ancestors was badly injured in the Civil War.

    The DROP program in this article and in the LA Times seems like quite a distortion of pensions for those truly injured in the line of duty.

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