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The board of the San Diego City Employees' Retirement System this morning (Feb. 20) lowered the interest rate on the Deferred Retirement Option Plan (DROP) to 3.54 percent, according to Councilmember Carl DeMaio. I was not able to get confirmation from SDCERS or other sources. SCDERS had held that DROP interest rate at 8 percent for five years and then edged it down to 7.75 percent as markets around the world crashed. Under DROP, an employee will announce intention to retire in five years. He or she then draws a regular salary, as well as a similar amount in the DROP account that compounded at 8 percent a year -- classic double-dipping. Now, that should be brought to 3.54 percent. As DeMaio recently reported, some employees built up $1 million-plus nesteggs from DROP alone. Last year, the Reader reported that a SDCERS board member said it was time to lower the rate substantially. More reforms have to be made, according to DeMaio. According to the municipal code, DROP is supposed to be cost-neutral. The City's actuary, Cheiron, says that it is not cost-neutral.

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Don Bauder Feb. 20, 2009 @ 1:41 p.m.

Response to post #1: There is still much to do. The worst thing that could happen is San Diegans thinking there has been reform, and now the problem can be put on the shelf. This is just a small step.Best, Don Bauder


JustWondering Feb. 20, 2009 @ 2:06 p.m.

I suppose this is merely a matter of semantics, but to be as accurate as possible, when an employee enters the DROP program he or she is technically retired from the City. No additional SDCERS credits accumulate and the City no longer contributes to the employee's "Pension" account.

The SD muni-code says in section 24.1401 "DROP is intended to be cost neutral." I would argue two points here.

  1. The word "intended" is a far cry from "shall" and not even in the same ballpark as "MUST", legally speaking. (Blacks Law Dictionary)
  2. The muni code is not clear as to WHO should be cost neutral, the City of SD, SDCERS, both? As with other issues of that era, the legal work is very sloppy.

SDCERS Board Member, and former board President Peter Provolos said in today's meeting that "cost neutral" is a myth. The program is flawed and could not be cost neutral. Another board member added cost neutrality to whom? SDCERS or the City.

Remember, the Boards actuarial, Gene Kalwarski, of Cheiron, only reports on SDCERS. Has there every been an independent study of the DROP program's cost neutrality to the City of San Diego?

This raises another new issue. The Board voted to review the interest crediting rates each November and implement in January of the following year. To accomplish this they must adopt new board rules at next month's meeting.

Proposition B, passed by the voters, REQUIRES a vote of the electorate, to enhance pension benefits. Here's a probable hypothetical.

Inflation takes off a direct result of the STIMULUS plans... interest rates on the indexes SDCERS used to calculate the rates climbs too. November comes, and the Board set new crediting rates to match the rate of return. Is this NOW a pension benefit enhancement that requires a vote of the people to approve it?

Oh what a tangled web we weave...


JustWondering Feb. 20, 2009 @ 3:02 p.m.

OK here's the data on the new interest crediting rates voted on today and effective July 1, 2009.

For active DROP accounts the rate is 3.54% down from 7.75% For DROP Annuity accounts the rate is 5% down from 7.75%

Here is the logic adopted by the Board.

DROP active accounts should be consider a short term no risk deposit. So they tied it to a blend of the 12 month averages of three indexes. 1. 5-Year Treasuries rates 2. 5-Year IRA CD rates 3. 5-Year High Quality Corporate Bonds as reported on the IRS website.

Two of the indexes are weighted at 100% the other index, the 5-Year HQ Corporate Bonds is weighted at 50%.

Using the period from Feb 08 through Jan 09 of these indicies returns a rate of 3.54%.

The same method was used for calculating the Annuity Rate of Return except one new index was used.

  1. 20 year PBGC "immediate" annuity rate
  2. 20 year Treasury Rate
  3. 20 year High Quality Corporate Bond rate.

The same 12 month time period and averaging method was applied, with the 20 year HQ bonds weighted at 50%.

Using the period from Feb 08 through Jan 09 of these indicies returns a rate of 6.12%. However since the crediting rate IS NOT the assumed rate of return then SDMC ordinance overrides rate of return capping it at 5%.

Obviously those nearing the end of the 5 Year DROP period, who are leaning toward selecting the DROP annuity program will, most likely choose to leave by June 30th to take advantage of the 7.75% annuity rate.


Don Bauder Feb. 20, 2009 @ 3:53 p.m.

Response to post #3: Was that legal work deliberately sloppy? As in San Diego smoke and mirrors sloppy? Best, Don Bauder


Don Bauder Feb. 20, 2009 @ 3:57 p.m.

Response to post #4: Remember when the purchase of service credits methodology was found to be flawed. So employees were permitted to purchase their years of time under the old flawed method for an extended period. The till was tapped -- drained, really. Best, Don Bauder


JohnnyVegas Feb. 20, 2009 @ 4:35 p.m.

I suppose this is merely a matter of semantics, but to be as accurate as possible, when an employee enters the DROP program he or she is technically retired from the City.

If you're on the payroll you're not retired.

You can call it whatever you want, but if it looks like a duck, waddles like a duck and quacks like a duck, then it's a duck. Or in this case a double dip scam.


Don Bauder Feb. 20, 2009 @ 4:43 p.m.

Response to post #7: Good point. How can you be retired if you continue to work for five years? It's double-dipping. Best, Don Bauder


JustWondering Feb. 20, 2009 @ 5:57 p.m.

Regarding PSCs, I agree the methodology used to calculate the cost to purchase service credits was flawed. But, as of January 23, 2009, any new purchase will be calculated using several factors which were not used in the past.

I, like JF, believe they should have never been allowed except for their original intent, to correct continuous service time when city employees were recalled by the Gov't for other services.


JF Feb. 20, 2009 @ 9:34 p.m.

How can you be retired if you continue to work for five years?

Well, from a financial standpoint, the city no longer has to pay a percentage of your salary into the retirement system. This is a huge savings to the city. I believe that back in '05 or so the city figured out that it had saved in excess of $43 million in pension payments.

Remember -- entering DROP locks in your retirement benefits at least 15% lower than they would have been otherwise. Unless, of course, you're already capped at 90%. And we know how rare that is...


JohnnyVegas Feb. 20, 2009 @ 10:39 p.m.

Well, from a financial standpoint, the city no longer has to pay a percentage of your salary into the retirement system. This is a huge savings to the city.

It's not a huge savings, and even if it were it is still morally corrupt.

And entering DROP does NOT lower your retirement 15%, where did you pull that BS out of.

You are paid a DB based on two factors-years of service and a multiplier for those years and there is no 15% reduction or discount. If you do the max number of years then you are at the top and that is not reduced.

The notion that the 90% max rate is "rare" is a joke. Everyone hits the 90%, after all it is only 30 years to reach it.


Don Bauder Feb. 20, 2009 @ 11:05 p.m.

Response to post #9: Agreed. Purchase of service credits was an abuse from the beginning, with the exception that you point out. Best, Don Bauder


Don Bauder Feb. 20, 2009 @ 11:08 p.m.

Response to post #10: HUGE savings? And who in the City came up with that number? Somebody unbiased? Best, Don Bauder


Don Bauder Feb. 20, 2009 @ 11:10 p.m.

Response to post #11: Defenders of DROP, PSC, and other examples of excessive pay and benefits are going to have a tough time converting the populace to their view. Best, Don Bauder


JF Feb. 21, 2009 @ 6:52 a.m.

It's not a huge savings, and even if it were it is still morally corrupt.

Really, Johnny? Aren't you the one who said that pension payments are 100% of salary? Of course, that's not true, but there's still a savings of around 25% of salary.

Now let's look at your other assertions. As you stated, retirement is based on years of service multiplied by the factor. Since I'm speaking of public safety the factor is 3.0%. The average employee is hired at age 27 and enters DROP at age 52. They then work for 5 more years. So let's see, five less years * 3% = 15% less. There's no "discount". The savings is in that they'd get 15% more if they kept in the system for five more years.

You claim that everyone reaches 90%. Sorry, but you're delusional. I suggest that you do some research. In fact, Don, why don't you look it up yourself on the SDCERS website and get back to me so maybe Johnny believes it. Again, the average safety employee is hired at 27, enters DROP at 52 (75%) and leaves service at 57.


Don Bauder Feb. 21, 2009 @ 7:07 a.m.

Response to post #15: You're up, Johnny. Best, Don Bauder


JF Feb. 21, 2009 @ 9 a.m.

You're up, Johnny.

Actually, you're up Don. Why don't you find out the average age of entry into the retirement system and average age of entry into DROP -- for safety members. That will help settle this "everyone gets 90%" bit. Another Johnny Vegas fabrication.


Don Bauder Feb. 21, 2009 @ 10:29 a.m.

Response to post #17: I am going to be doing some research into the pension system -- another but related topic. If I come up with an answer, I will let you know. Best, Don Bauder


JohnnyVegas Feb. 21, 2009 @ 12:20 p.m.

All need need to cure this scam is to put all new hires into Social Security.

No more DROP. No more PoSC, no more under the table hanky panky.


JustWondering Feb. 21, 2009 @ 12:43 p.m.


So glad you're keeping up-date. The DROP program was stopped in 2005 or 2007 for new employees. The date issue depends on who's interpretation of the rule of law you want to subscribe to. That controversy was caused by the previous City Attorney.

The SDCERS board changed the rules regarding the PoSC on January 23, 2009, making it "cost neutral", whatever that means. But I do agree with you it should be done away with except for the one exception.


JohnnyVegas Feb. 21, 2009 @ 12:57 p.m.

I never said DROP was not stopped in 2005, now did I?


Don Bauder Feb. 21, 2009 @ 9:51 p.m.

Response to posts #19, 20 and 21: Eliminating DROP for new hires, lowering its interest rates and changing PsSC rules are drops in the bucket. Only massive reforms will make the system -- and the City -- solvent. Best, Don Bauder


JohnnyVegas Feb. 22, 2009 @ 9:30 a.m.


But we needed the reform 4 years ago, we have already gone over the cliff, the public just doesn't know it yet.


Don Bauder Feb. 22, 2009 @ 7:24 p.m.

Response to post #23: The public may figure it out sooner than you think. Remember, I said MAY. Best, Don Bauder


JustWondering Feb. 27, 2009 @ 6:32 a.m.

Well Johnny, it's now final at the trial level....

A Los Angeles Superior Court judge has thrown out Orange County's lawsuit seeking to roll back pension increases handed out to deputy sheriffs in 2001. The decision in the year-long lawsuit that pitted Orange County against the deputies union and the local retirement system means that county supervisors will have to decide on Tuesday whether to appeal. While several supervisors said they were disappointed and still believe in the merits of their case, it's unclear how they will move forward.

More here: http://www.ocregister.com/articles/county-pension-lawsuit-2319865-deputies-case


Don Bauder Feb. 27, 2009 @ 7:20 a.m.

Response to post #25: As I responded in another post, even if the Orange County case is knocked down, we haven't seen the end of these cases. Economics dictates their frequent return, in whatever form. Best, Don Bauder


paul Feb. 27, 2009 @ 10:17 a.m.

DROP was an additional perk for safety employees that really didn't cost too much, but also really shouldn't have been granted.

JF's claim of a 15% savings is dubious, when a typical employee can enter the workforce in their early twenties, max out their pension at 90% in their early fifties and then enter drop and retire in their late fifties.

JF is correct that there are some savings involved since the city does not pay into the pension for the DROP years and the pension will not include any raises over the last five years of employment.

The problem I see is that the multiplier was raised for safety personal AND the retirement age is awfully low. You can't do both.

To me the fix is simple, either:

1) Go back to a 2.5% multiplier so that it takes six additional years to reach 90% pension, or

2) Disallow anybody from entering drop if they are at 90%, and raise the retirement age from 50 to 55. (e.g. If you are at 75% pension, you could enter DROP for the full 5 years, but if you were at 84% you could only enter DROP for 2 years).

What do you think, JF? The city has to do something with the retirement burden, or the whole thing will be restructured in bankruptcy.


JF Feb. 27, 2009 @ 10:58 a.m.

Paul, You say the "typical" employee. How are you defining "typical". Here's how I define it. According to SDCERS, the "typical" safety member joins the city at age 27, enters DROP at age 52 and leaves service at age 57. Note, that's 25 years or 75% of salary. Also according to SDCERS almost all safety members who enter DROP stay for the full five years. Let's see, five years x three percent... yep, 15%.

Go look my numbers on the SDCERS website. You'll see that I'm correct.


paul Feb. 27, 2009 @ 11:52 a.m.


I'm not sure which numbers you are referring to, so feel free to link to them. I'm curious how you define a "typical" employee, and how it factors in ex-military (who already have a first pension) and transfers from other public agencies (who either are vested there, or can transfer vesting).

Just taking your numbers at face value and assuming a first job with no additional vesting, that would mean that half of the safety employees have a career with the city of 25 years or more. That is a very high number compared to the private sector. It is high even before you consider that a substantial percentage of the 50% who don't make it 25 years either a) didn't make it because of disability (which costs even more), or B) started later due to the reasons cited above. What you are saying is that half of safety personnel currently retire earlier and/or for a higher multiple than your "typical" employee, which is already nearing the maximum retirement benefit.

In my scenario, your "typical" employee could either 1) Still retire at age 52, but with a pension of 62.5%, or 2) Enter DROP at 55 at the earliest. Based on your "typical" employee that would be a small enough sacrifice to avoid bankruptcy.

I'll also give you a third option: The pension should be dissolved completely, and your SS benefits should be calculated backwards in the same manner as us poor schmucks in the private sector who aren't allowed to opt out. Its funny how the government allows the government to opt out of its own programs because it knows they stink. On top of that, the SPSP match is also better than most private 401Ks (it is 6%for MEA, I don't know if it is the same for fire and POA), which is the only employer supported retirement program left in the real (non-public) world.


SurfPuppy619 Feb. 27, 2009 @ 1:33 p.m.

JF will never compare his pension and benefits to the private sector (only to other gov agencies) because you have pointed out the obvious-public employees, and public safety employees in particular, are reaping multi million dollar benefit packages in addition to their 6 figure (including O/T) cash compensation.

That does not go on in the real world so he can't compare against the real world.

JF will point out how "other cities and counties" pay so much better in pay and benefits and to "stay competitive" San Diego must do the same.

I'm calling his ^^^^response^^^ right now.


SurfPuppy619 Feb. 27, 2009 @ 1:35 p.m.

Well Johnny, it's now final at the trial level....

By JustWondering

JW, I'll tell you what I have told everyone else. This ruling means nothing. This is the first round of a three round fight.

And the ONLY round that counts is round 3-the last one.


JustWondering Feb. 27, 2009 @ 2:19 p.m.

Yes Johnny. But it's only a three-rounder if the losing party appeals the decision. Mr. Moorlach, may convince his colleagues on the Board to pursue it. But with statements like this:

Tom Umberg, one of the lead attorneys on the case for the deputies union and a former state legislator, said Bendix's decision is very well reasoned and not likely to be overturned. He also said, "it's unusual that a court would find there's so little merit that they would dismiss the matter on the pleadings."

Mr. Moorlach, may be sealing his own fate as as county supervisor.


SurfPuppy619 Feb. 27, 2009 @ 3:43 p.m.

Please, Tom Umberg is the lawyer for the opposition-did you expect anything else?? He is a paid mouthpiece.

Moorlach has broad support, he's not going anywhere.

You do know he was the one who (ran for treasurer-lost and was then appointed treasurer) blew the whistle on the derivative investment scam BEFORE it blew up and forced OC into BK don't you?????


Don Bauder Feb. 27, 2009 @ 11:11 p.m.

Response to post #27: These are thoughtful suggestions but not nearly enough. Best, Don Bauder


Don Bauder Feb. 27, 2009 @ 11:15 p.m.

Response to posts #28 and 29: Public sector employees are thinking of concessions for those who retire between 50 and 59. What about private sector employees who are now working into their 70s? Best, Don Bauder


Don Bauder Feb. 27, 2009 @ 11:18 p.m.

Response to posts #30-33: Once again, all eyes are on Orange County. Best, Don Bauder


paul Feb. 28, 2009 @ 6:09 p.m.

Response to Don's post #34:

I was curious to see what JF thought of it, since if the union won't even go that far, there is no point even having a discussion. They have killed the golden goose, and it is time to go to bankruptcy.

I think those moves may have been enough if implemented 4 years ago when Sanders first took office, but I agree with you that they are much too little in the face of the current economy and are years too late.

The fact that it seems perfectly reasonable to JF for a typical safety employee to retire at 52 with a 75% pension (on a very good salary) is indicative of how out of touch the safety unions are. Their argument that they had to raise their pension multiplier and reduce their retirement age to compete for because the state and other cities were raising theirs, reminds me of the joke a few years back about how all the top NFL teams were signing their star running backs to contracts that guaranteed (for the sake of their egos) that they would be the highest paid running back in the league by one dollar. The joke is what happens when about ten of those contracts took effect in the same off-season!

Of course the real answer for the city is to immediately switch to a system based on contributions and investment results, and drop the ridiculous system of defined benefits.


Don Bauder Feb. 28, 2009 @ 10:35 p.m.

Response to post #37: You make excellent points. I believe the municipal unions are living in a dream world and don't realize the level of hostility among San Diegans. Their pay and benefits are excessive. They must realize this. Their argument that their remuneration is justified so that the city can compete with other municipalities doesn't wash, particularly in this economy. Nor does their assertion that a deal is a deal: the city must accept what it bargained for. The city doesn't have to accept its past errors in bankruptcy. And bankruptcy is not only a possibility, it is a probability. Best, Don Bauder


SurfPuppy619 March 3, 2009 @ 11:43 a.m.

And bankruptcy is not only a possibility, it is a probability. Best, Don Bauder

By dbauder

Actually, at this late stage of the game BK is not a possibility or probability- it is a certainty.

Ditto for the national debt of $13 trillion, it will never be paid back. And anyone that says it can be is in denial.


paul March 3, 2009 @ 9:27 p.m.

Response to #39:

The $13 trillion will be paid back, that is not in question.

The real question is, after the treasury prints enough money to pay it off, whether we will be able to hold enough money in a wheelbarrow to buy a loaf of bread.


Don Bauder March 3, 2009 @ 10:56 p.m.

Response to post #39: Well, two people in denial are Bernanke and Geithner. They keep testifying before Congress about how all those loan guarantees will be paid back. Yeah. Best, Don Bauder


Don Bauder March 3, 2009 @ 10:58 p.m.

Response to post #40: You've got it. It's called monetizing the debt -- by the wheelbarrow. Best, Don Bauder


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