Friday, October 21, 2005 | San Diego retirement system administrators have advised their overseers to hand a legal hot potato over to the City Council, a move that would postpone a decision on an already controversial employee retirement benefit.
The move would protect, for now, a retirement benefit worth thousands annually to city employees approaching retirement.
The administrator of the San Diego City Employees’ Retirement System has recommended that the pension board avoid changing the 8-percent rate of return on employees’ so-called Deferred Retirement Option Program, or DROP, accounts without first getting more direction from the City Council on the issue.
The retirement system’s trustees will consider that recommendation on Friday after some trustees have expressed concern that the interest earned by employees is overly generous.
The program allows city employees to initiate their retirement five years before they actually leave city service. During that time, the employees collect a pension in addition to their regular salary. The pension builds up in an account that also earns interest and can be accessed upon the employees’ retirement.
Those accounts have always earned 8 percent in interest – the same amount of return the retirement system expects its investments to earn every year.
Few investments provide a guaranteed rate of return as high as 8 percent.
When the city implemented DROP in 1997, the City Council decided the pension board – populated in part by city employees – by should have the right to change that interest rate.
Now, amid charges that the board has unlawfully wielded influence over pension benefits in the past – most notably in a now-notorious 2002 arrangement known as Manager’s Proposal 2 – Retirement Administrator Larry Grissom says the board should ask the City Council before it considers doing something that would, in effect, lower some employees’ pensions by thousands.
The city’s municipal code explicitly gives the pension board purview over the interest rate credited to DROP accounts.
But, Grissom wrote in a memorandum to the pension board, the board shouldn’t trust that authority.
“It is not clear, however, that the City Council understood that it was thus delegating plan design to the SDCERS board,” Grissom wrote.
According to the City Charter, it is illegal for the City Council to allow any other person or body in the city to decide on city employee compensation levels. Under city law, the charter takes precedence over the municipal code.
Grissom could not be reached for comment Thursday.
Bill Sheffler, a member of the pension board, has been pushing his colleagues to lower the interest rate on DROP accounts for months. DROP, he says, has long been structured like a savings account. And no savings accounts have guaranteed annual interest rates as high as 8 percent, Sheffler said.
“This is a risk free investment for them,” Sheffler said. “Although our investments are expected to earn 8 percent, they may not. Yet we will still have to credit those DROP accounts at 8 percent and I have a great deal of trouble with that.”
Pension Trustees Richard Kipperman and Bill Lopez have expressed similar concerns.
Lopez, however, sits in one of five of the seats on the pension board reserved for city employees and he has said he would recuse himself from any discussion about the DROP interest rate. To do otherwise, he said in a previous interview, may bring up questions about a conflict of interest.
And Sheffler said that conflict of interest issue may be what’s driving the push to ask the City Council to deal with DROP accounts.
“The board has had no problem in the past approving the 8 percent,” Sheffler said.
Last month, the trustees had to deal with separate, pressing concerns from the Internal Revenue Service about the way employees collected their DROP accounts.
Because of new IRS regulations, the pension board recently sent out letters to the 807 city employees participating in DROP advising them that they had until December to choose whether, upon actual separation from the city, they wanted a lump-sum check from their DROP account or a plan to receive it over 240 months.
Staff at the retirement system has in the past said the board of administration had the option to lower the DROP interest rate to as low as 5 percent. For employees with $100,000 in their DROP accounts – and if they choose to take it out over 20 years – lowering the interest rate to 5 percent would cost them more than $2,000 a year.
In his memo to the board, Grissom said the questions about the plan had been encouraging more city employees to retire or cash out their DROP accounts.
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