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DeMaio moves to end piece of pension system

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San Diego City Councilman Carl DeMaio called a press conference Thursday to announce his plans to put an end to a controversial element of the city’s pension system.

The mayoral candidate, a champion of pension reform ballot initiative Proposition B, said he’ll pursue all viable avenues to eliminate the Deferred Retirement Option Plan (DROP), a program that allows employees to collect both a pension and salary while working for five years.

The program began in 1997 and is open to employees hired before July 2005. They’re able to remain active employees after retirement, collecting their salaries and pensions into a frozen account with a set interest rate that unlocks when they stop working for the city. Employees can collect the DROP account as either a lump sum or an annuity.

An actuarial analysis of the program conducted last year by Bucks Consultants for the city’s Independent Budget Analyst found it fit into the city’s technical definition of a cost neutral program, because the cost of keeping it was within 2 percent of the cost without it.

The report pegged the cost of DROP at $148.7 million, or 1.6 percent of the retirement system, without the program, spread across several decades. The 2 percent allowance to be considered cost neutral functions as a sort of margin of error for the analysis because it relied on a number of assumptions to arrive at its cost estimate.

DeMaio said there are currently 980 employees collecting DROP, with 1,200 participating in the program and another 5,600 with eligibility.

DeMaio has proposed a series of reforms to disincentivize participation in DROP.

The three reforms he’s isolated are legally justified based on previous court rulings, according to City Attorney Jan Goldsmith, who DeMaio called a “true partner” in the fight to reform city pensions.

DeMaio will introduce to City Council, first through the committee system, a resolution to eliminate the program’s guaranteed interest rate, increase contribution rates for participants to the maximum allowed and reduce participant salaries by the amount of their pension payout.

The first reform could be done immediately, while the other two would be subject to labor negotiations. DeMaio said he’d push to have them included in current meet-and-confer proceedings, which will soon end for the 2013 fiscal year.

“If we implement these reforms, no one in their right mind would enter DROP,” DeMaio said.

He said he doesn’t expect his fellow City Councilmembers to support his push, but said he’d nonetheless urge them to action through any vehicle he can find.

Though the Bucks analysis found the program to be cost neutral, it specifically stated that it was not cost free. The IBA report of the Bucks analysis specified five changes that could make the program cost free or potentially even produce cost savings.

It recommended increasing the age of eligibility, begin requiring employee contributions within the program, reducing or eliminating city contributions, eliminating cost-of-living increases during DROP participation, and crediting reduced pension payments to the employee’s DROP account.

DeMaio said he had no interest in those changes, even if they are said to produce savings to the retirement system.

He called the basic notion of DROP an offense to taxpayers, and said it was time to eliminate the program entirely.

“I have looked at report after report in the city’s history where city bureaucrats proudly proclaim that something is going to save money, but the opposite is true,” he said.

Michael Zucchet, general manager of the city's white collar union, the Municipal Employees Association, did not immediately respond to a request for comment on DeMaio's reforms.

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