City Attorney Mike Aguirre said today that he plans to file a lawsuit against the retirement system for not charging employees enough money for a special benefit program that allowed them to purchase years of service.

Under the “purchase of service credits” program, an employee could pay 15 percent of their annual salary in order to receive a year’s worth of credit. If, for example, that worker retired after working for 20 years, the employee who purchased one year would get credit for 21 years for the purposes of figuring his or her retirement pay. The program allowed workers to purchase up to five years of service credits, thereby boosting one of the three figures used to calculate their pension checks.

“The costs of these service credits were very substantially under-priced,” he said.

Further, employees could pay for the benefit early in their career at a lower cost and later draw pensions using the new benefit based upon their high one-year salary. For example, an employee who made $40,000 a year could buy five years at a cost of 15 percent per year, or a total of $30,000. But, if the same worker retired making $80,000, that employee could be owed much more than was paid for the benefit.

“The difficulty here is the mechanics of calculating the cost is extremely complicated,” Aguirre said, noting that studies attribute up to one-third of the $1.4 billion debt to actuarial miscalculations.

Aguirre detailed the allegations in the 29-page Interim Report No. 12 released by his office today. You can read it here.

Several elected officials have participated in the program and will start making more than they invested in just a few years, a study showed last year. Councilwomen Donna Frye and Toni Atkins have offered to divest from the program, but the retirement system has not processed those requests.

Aguirre railed against the program in a news conference today, saying the supposedly cost-neutral benefit accounts for $100 million of the city’s $1.4 billion deficit. The retirement board, he said, should either refund pensioners who took part in the benefit or hand the employees a bill with a new cost for purchasing service credits.

Within two weeks, Aguirre plans to sue the retirement system over the pricing issue, he said. He is already challenging the program as part of his major case against benefit increases, as he alleges that the service-credit program was part of a 1996 scheme that allowed the city to skirt its pension bill.

A future suit, he said, would concentrate solely on the retirement system’s alleged manipulation of the pricing, he said.


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