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City Pension Funds in Red

— Drop dead. That's what City of San Diego employees, their retirement board -- and the mayor and city council -- are saying to taxpayers, as well as to current retired city workers.

DROP is an acronym for Deferred Retirement Option Plan, a gluttonous example of double-dipping that city employees near retirement have been getting for the past six years. To be awarded DROP and other wretched excesses, the employees, their unions, and the retirement board have reached agreement with the city council to allow a huge deficit in retirement plan funding.

Inevitably, taxpayers will be forced to drop their drawers and get stuck in the end with the bill. The city may well have to go bankrupt or sell its public land, warns Diann Shipione, a member of the board of administration of the San Diego City Employees' Retirement System. Many others who have studied the frightening retirement-fund deficits agree.

What very few San Diegans realize is that these egregious retirement benefits are based on a big lie: that city workers have low salaries and thus deserve generous retirement packages. In fact, their salaries are far higher than private-sector salaries. According to the San Diego Association of Governments, the average salary (not including fringes) for all San Diegans in 2001 was $36,240. The average for all local government workers was $38,997.

But according to the retirement system's own actuary, in mid-2002 the average salary for active City of San Diego employees -- all eligible for cushy retirements -- was a fat $51,413. Shipione points out that according to the system actuary, the number of employees has risen by 16 percent since 1992, while the total dollar payroll has zoomed to 71 percent.

On top of such bountiful pay, these employees get the job security that civil service bestows, cost of living adjustments, and the ability to retire early (age 50 to 55) with hyper-liberal packages.

The tit-for-tat council/employee relationship -- some call it a conspiracy -- got rolling in 1996, when city management was trying to figure how to fund the Republican convention, as well as future sports facilities for billionaire team owners. City management decided it could tap the workers' pension fund. One way was to skim the fund's investment income, dividends, and capital gains each year and use the money to help the city make its pension-fund contribution, and also to divert money to such plans as DROP, which was first adopted on a so-called temporary basis in 1997 and was made permanent last year, retroactive to 2000.

How does DROP work? Buckle your seatbelt: employees (average age 55) say they will retire in five years. They continue to draw their salaries. Then at the same time, every year for five years, their allotted retirement pay, 90 percent of their highest one-year salary, is also plunked into their personal kitty. Then, that kitty grows by 8 percent compounded yearly and is adjusted for cost of living. In effect, employees' pay is almost doubled in their final five years.

Ergo, they eventually retire with not only a monthly stipend, but also a tidy lump sum. By contrast, if you are lucky enough to get any retirement pay at all, you will probably have to choose between a lump sum and a monthly check.

Shipione figures that the average employee in today's DROP program will walk out with $50,000 annual retirement pay and a $300,000 lump-sum payment. A senior city attorney will get $162,816 a year, plus a DROP account of $996,933. In addition, the employees may get a 401(k) program, supplemental savings, and full retirement health-insurance benefits for life. (Retirement board officials say Shipione's estimates are very high, but after studying their rationale, I concluded they were misusing the statistics, not she.)

Robert Blum, a lawyer who has been fiduciary counsel for the San Diego pension system, said at a seminar last year that some municipal workers around the country are afraid of DROP programs because "They think that the perception is that it looks like double-dipping: you're both getting your retirement benefit and you're getting your salary. And they're saying, 'Whoa, there's just so far we can go, and if we go too far, we're going to kill the goose [with the golden eggs].' " San Diego's plan is "a highly enhanced DROP benefit," Blum said -- charitably.

When the City first toyed with DROP, it claimed -- and you've heard similar bunkum with purportedly self-financing sports stadiums -- that the cost would be offset by retirements of higher-paid people. The diminishing age of the average employee would make up the difference. Ha ha ha. According to the system's actuary, the average age has gone up, not down. "This is evidence of ongoing low employee turnover, not surprising in view of the high level of pension benefits" (italics mine), he said in his June 30, 2002, report.

DROP "is definitely a program that might have to be discontinued," says councilmember Donna Frye, who is distressed that last week the council moved to set up a committee to study the pension problem, "but there was no mention of asking the committee to look at the underfunding."

The actuary estimates that the pension is now underfunded by close to $1 billion, at least. Realists say that the pension fund is now definitely $1 billion under water, and health-care benefits are $1.1 billion in the red. By 2009, the pension plan will be $2 billion in the hole.

After 1996, the city, with the retirement board's concurrence, aimed to fund only 82 percent of the pension program. But the percentage fell below 82. So in November of last year, the retirement board and city council came up with "a plan to eliminate the trap door of 82 percent and let it free-fall," says Jim Gleason, a city retiree who served on the retirement board for a dozen years. Once again, there was a quid pro quo. The board okayed further underfunding in return for fatter benefits.

At that point, Gleason and fellow retiree Dave Wood decided to file lawsuits. The major charges are that pension reserves are deliberately underfunded. Also, the overwhelming majority of the 13 members of the retirement board are city employees or heads of unions representing employees. Thus, they are voting to enhance their own pocketbooks -- an obvious conflict of interest.

Gleason and Wood point out that city workers who enjoy DROP and other indulgences are hurting current retirees, who do not have benefits anywhere near as good. One reason is that current retirees get additional payments, such as the so-called "13th check," as a result of past lawsuits. But those extra benefits don't come through if the pot is underfunded, as it is now -- deliberately. It's "reverse Robin Hood," says Gleason.

Also last November, the council agreed to effectively indemnify the retirement board against lawsuits over the quid pro quo. Attorney Michael Aguirre says that under California public policy, a body cannot be indemnified so that it can breach its fiduciary duty. "The trustees of the retirement board could be facing potential criminal liabilities," says Aguirre.

Larry Grissom, chief executive of the retirement board, and Frederick W. Pierce IV, president, dispute the critics' complaints. For one thing, DROP is not double-dipping, they claim. "It would be the same thing in substance if they retire from the city and go to work somewhere else," insists Grissom. Hmmm.

They both refuse to comment on charges of retirement-board conflict of interest and deliberate underfunding in return for higher benefits on the grounds that these matters are under litigation.

They blame bear-market losses for most of the underfunding problems and assert that retirement benefits are not threatened. They think that talk of city bankruptcy or asset sales is folly. "Pursuant to the contribution agreement with the city, by 2009 the city will be contributing at a rate that will be sufficient to fully fund the system," says Grissom, although the deficit will likely be substantial. In 2009, "The deficit will be being fully amortized by industry standards," he asserts, acknowledging that this is not true today.

But, says Michael Conger, the attorney handling the lawsuits of Gleason and Wood, "The actuary says that city payments will ramp up over five years by $150 million to $200 million a year. But where is the money going to come from? They have never answered that question."

There are many suggestions. All critics agree the city must begin funding the system now. Shipione says San Diego should require a citizen vote if city-worker benefits are to be raised, as San Francisco does.

Retired superior court judge Larry Stirling says heads should roll at City Hall, traffic fines should go toward the funding problem, unfunded benefits should be revoked, and many other things. The whole disgrace is a "gift of public funds" under state law -- a felony. He further defines that felony: "megatheft."

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