A city legal filing says eliminating the Deferred Retirement Option Plan would shave between $250 million and $350 million from the pension deficit. But it’s not clear where that number comes from.
San Diego’s lawsuit against the Police Officers Association — meant to determine whether DROP is a vested benefit — says ending DROP for all employees would “result in savings to the City’s ARC between 2.5%-3.5% of covered payroll, or $16 million-22.5 million in the City’s ARC by 2012.” It goes on to say:
The City is informed and believes that if the City eliminates DROP, effective July 1, 2009, the City’s Annual Retirement Contribution (“ARC”) will be reduced by $16 million in FY11 and by $22.5 million in FY12. Further, by July 1, 2012, the [pension system’s unfunded liability] will be reduced between $250 million and $350 million.
The Mayor’s Office told me those numbers came from the pension system’s actuaries, Cheiron. But San Diego City Employees’ Retirement System officials said Cheiron hasn’t estimated the potential savings from eliminating DROP.
Mark Hovey, the chief financial officer for the retirement system, said he did talk with the city about the estimate that it would knock 2.5 percent to 3.5 percent of payroll off the ARC. But he didn’t know where the $250 million to $350 million figure came from.
When I caught up to the city’s Chief Operating Officer Jay Goldstone earlier this week, he didn’t know either but said he would check with the city’s outside counsel. I’ve also placed calls to the city’s outside attorneys but haven’t heard back yet.
Workers who insist DROP saves the city money typically point to a 2005 analysis that claimed the program saved the city $45 million. But that analysis is far from definitive for a number of reasons — among them, it only looked at the city’s side of the ledger, not the retirement system’s, even though SDCERS’ costs are ultimately borne by the city.
Other analyses have found that DROP costs millions, but those have focused on the pension system’s side of the ledger. Back when I reported on DROP in February, Goldstone said there hadn’t been a comprehensive study of DROP’s costs at least since Mayor Jerry Sanders took office.
The City Council, in approving the budget this week, included a recommendation that the mayor pursue a study of whether DROP costs the city money. Councilwoman Donna Frye, who recommended the measure, said it makes sense to get a clear opinion since the city code says the program is “intended to be cost neutral.”
“I’m sure there are different opinions,” she said. “I would just like to put this to rest.”
Frye doubts that DROP is “cost-neutral,” but says it’s important to get a study to find out for sure. Some retirement system board members also made similar comments when they voted to lower the DROP return rate, with one calling the idea that the program could ever be cost-neutral “a myth.”
Some unions say they have long been in favor of a study. Police union President Brian Marvel today sent a letter to SDCERS Administrator David Wescoe asking what such an analysis would cost. Marvel said the union could fund all or part of a study.
As it happens, Wescoe sent a letter to Frye on Thursday indicating that the Mayor’s Office or the City Council — not the retirement system — would be the right ones to do a full analysis.