We Still Need to Reform Deferred Retirement Plans

pension-2In these waning days of the 2018 legislative session, pension reform once again was shoved into the future. That can’t last forever.

One bill I hope to bring back in an upcoming legislative session is Senate Bill 1433, concerning a clever retirement postponement gimmick called a Deferred Retirement Option Plan, or DROP, for police and firefighters. But it’s a DROP kick for taxpayers, and an expensive one.

Let me explain this scheme. In an employee’s last five years with the municipality, they receive their salary and their pension. The pension benefits are deposited into a trust where it earns an attractive rate of interest. At the conclusion of the five years, the trust distributes the final balance along with the compounded interest income.

As the Los Angeles Times reported, new Los Angeles Police Department Chief Michel Moore was given a lump sum of $1.27 million from his DROP plan by first retiring, then being rehired in his new position. “Moore said in an interview that the plan to have him retire and then return almost immediately to work was proposed by former Chief Charlie Beck and approved by Mayor Eric Garcetti.”

I fully understand the motivation and the implementation of this plan. I can see why it is used and how politically difficult it is to discontinue allowing DROP plans as a management alternative.

And I am in no way inferring that Chief Moore and others who take advantage of DROPs are abusing the system. As someone who has earned a Certified Financial Planner designation earlier in my career, I certainly would advise anyone who qualifies for a DROP to take it.

It is the system that is wrong. It needs to be fixed.

Unfortunately, SB 1433 would not affect charter cities such as Los Angeles, which have a great deal of autonomy on such matters. But it would affect what are called ’37 Act counties, short for the County Employees Retirement Law of 1937. SB 1433 would prohibit altogether such a county or district from starting a new Deferred Retirement Option Program, or a public employee in a DROP jurisdiction from now participating in one.

Let’s stop the perception of abuse. Let’s eliminate a temptation that should never have been there in the first place. The experience of DROP participants in Los Angeles between July 2008 and July 2017 is not pretty.

Five points on that from an earlier Los Angeles Times story from April 15:

  1. Police and firefighters in the DROP program were nearly twice as likely to miss work for injuries, illness or paid leave.
  2. Those taking disability leave while in DROP missed a combined 2.4 million hours of work for leaves and sick time, and were paid more than $220 million for the time off.
  3. More than a third of police officers who entered the program, 36 percent, went out on an injury leave. At the fire department, it was 70 percent.
  4. The average time off for those who took injury leaves was nearly 10 months. At least 370 missed more than a year. This comes at a very steep cost.
  5. In addition to the salary and pension payments, leaves taken by DROP participants create a third cost for taxpayers. The fire department pays overtime to fill their vacant shifts. The Police Department requires other officers to cover their work.

Los Angeles is realizing that DROP plans are a mistake after costing the city an estimated $1.6 billion since 2001. Our state legislature should too. It should take a leadership role and totally discontinue allowing this unique strategy.

Sacramento needs to help local governments help themselves in addressing the pension crisis. This year would have been good. Next year, with a new governor and many new legislators, it is critical.

California State Senate, 37th District.

This article was originally published by Fox and Hounds Daily

The California Legislature passes the pension buck – again

PensionsIn truth, Sacramento politicians are very dependable. You can depend on them to raise your taxes, pass meaningless resolutions attacking President Trump and hurt the private sector by eliminating workplace arbitration and enacting even more burdensome regulations. And finally, they are very dependable in avoiding the most important threats to California’s financial solvency, especially dealing with unfunded pension liabilities.

Much has been written about California’s unfunded pension crisis. By 2024, normal contribution payments by cities and counties to CalPERS are estimated to total nearly $3 billion, and the unfunded contribution payments are estimated to total $5.5 billion. That shortfall of nearly $3 billion a year will continue to increase unless reforms are enacted – soon.

California’s pension crisis exists in large part due to the very nature of defined-benefit plans. Unlike defined-contribution plans, where the taxpayers’ obligation to each public employee ends with every pay period, defined-benefit plans depend on a projection of future investment returns. And therein lies the problem. California has been horribly wrong in its application of assumed rates of return, leading to hundreds of billions in unfunded liabilities.

And this shortfall is occurring in good economic times when the state of California is relatively flush. A recession will quickly expose this short-sighted thinking, yet the Legislature continues to believe that local municipalities will continue to pass regressive sales tax increases to bail themselves out. Already, 24 cities have sales tax rates at or over 9.5 percent, and more cities are destined to join them.

To read the entire column, please click here.

California Teacher Pension Debt Swamps School Budgets

School educationCalifornia’s public schools have enjoyed a remarkable restoration of funding since the bone-deep cuts they endured during the recession, but many are now facing a grave financial threat as they struggle to protect pensions crucial for teachers’ retirement.

Over the next three years, schools may need to use well over half of all the new money they’re projected to receive to cover their growing pension obligations, leaving little extra for classrooms, state Department of Finance and Legislative Analyst’s Office estimates show. This is true even though the California State Teachers’ Retirement System just beat its investment goals for the second straight year.

Some districts are predicting deficits and many districts are bracing for what’s to come by cutting programs, reducing staff or drawing down their reserves—even though per-pupil funding is at its highest level in three decades and voters recently extended a tax hike on the rich to help pay for schools.

At the same time, some districts are grappling with how to simultaneously afford raises for teachers who have threatened to strike.

The situation could become even more bleak if California’s economy doesn’t keep growing.

If there’s another recession – which economists say is increasingly likely given the record length of the expansion underway now – the higher pension payments scheduled could push some districts deeper into the red, Legislative Analyst’s Office data indicates.

“Many districts’ budgets would be upside down with expenses growing faster than revenues,” said Michael Fine, CEO of the Fiscal Crisis and Management Assistance Team, the state agency responsible for overseeing schools with financial problems.

School systems that saved money over the last few years will be able to use it to buy time, Fine said, but those reserves “won’t eliminate the impact or make that problem go away.” Tackling it will likely require new sources of revenue or an array of cuts.

“Building maintenance could suffer, grounds care could suffer, class size could suffer, instructional coaches could suffer, athletic programs could suffer, technology could suffer, intervention programs could suffer” Fine said.

The problems stem from the state Legislature’s reticence to mandate steeper payments into the California State Teachers’ Retirement System. The system was badly underfunded and careening toward collapse four years ago when school districts, teachers and the state all agreed to pay more to reduce its unfunded liability, which now stands at $107 billion.

Districts took on the greatest share of those new costs, agreeing to increase payments from 8 percent of their payroll in 2013 to 19 percent by 2020.

No matter how burdensome the larger and larger pension payments may be, actuaries say they’re necessary to protect teachers’ hard-earned retirement and prevent the system from running out of money. Teachers don’t get social security, and unlike firefighters or police officers, most retirees earn modest pensions of about $55,000 a year.

The Brown administration has directed an additional $20 billion to the state’s public schools since 2013 and says districts have had plenty of time to plan for the pension payments ahead. But many school leaders and advocates want the state to invest even more, especially since California still ranks near the bottom in per-pupil spending compared to other states.

“Knowing that these liabilities were growing, we provided districts with the resources they needed to plan accordingly,” said H.D. Palmer, a spokesman for the state Department of Finance.

Meanwhile, the state’s largest teachers union is downplaying the problem and encouraging its members to bargain for raises. California’s teachers may be among the nation’s most generously paid, but they say the money doesn’t go very far because the state’s cost of living is so high.

School officials are left with a Gordian knot of politically charged problems, forced to make escalating payments into the pension fund while trying to elevate disadvantaged students’ sagging classroom performance, which remains among the country’s worst despite the state’s big investment in their learning through a policy championed by Brown.

“We need to graduate more kids and close academic achievement gaps, but we can’t move the needle when costs are rising like this,” said Dennis Meyers, executive director of the California School Boards Association, who stressed that his group is not seeking to reduce teachers’ retirement benefits.

“We simply need more revenue, and we’re out here waving the white flag, looking for relief.”

Each of California’s school districts is bound to tackle these challenges differently, so CALmatters visited three of them whose circumstances are emblematic of what others across the state are experiencing. During those visits, we spoke with the people working to solve the problem.

Fremont Unified devotes a greater share of its budget to salary than any other district in the state (discover the percentage devoted to salaries at each of California’s school districts here). So when the largest pension payments are phased in, Fremont will be hit especially hard. That means the district’s budget could face cuts even as enrollment in the Bay Area school system grows.

Sacramento City Unified knew that larger pension payments were coming and saved money to prepare for them. Then the local teachers union criticized the district for hoarding cash and threatened to strike. Now, the contested funds are being used to finance a raise that teachers say is long overdue and that the county superintendent believes the district can’t afford.

And in Los Angeles, growing demand for charter schools and a dwindling birth rate has led to declining enrollment in the district’s own schools, which means pension payments will rise even as the district’s state funding shrinks. School officials recently predicted that a quarter billion dollar budget deficit was just two years away.

♦♦♦

Raul Parungao’s distinctive grin and his cheery demeanor belie his concern about Fremont Unified’s finances.

Situated between Oakland and San Jose in the pricey Bay Area, the school system pays its employees more than most. That makes it a desirable place to work but also means it will be hit especially hard when the largest payments required under Brown’s pension plan are phased in.

“There’s this sense in the community that we’re flush with cash, but I try to remind people about the other half of the story,” said Parungao, the district’s chief business officer.

Even though revenue is rising because enrollment is growing, the district must hire and pay more employees to serve them. And over the next three years, while Fremont predicts its revenue will grow by $26 million, a 7 percent bump, it also expects its employee pension and health care costs to climb by $14 million, a 23 percent surge.

“Here’s the bottom line: the extra revenue we expect to get from the state won’t be enough to keep pace with our pension contributions,” Parungao said. “The problem hasn’t exploded big yet, but it will. It’s only a matter of time. I haven’t met another chief business official who isn’t concerned about this.”

Meanwhile, Fremont’s teachers just won a small raise after months of protracted negotiations.

The current pay scale is competitive, with veterans making $114,000 a year, but leaders of the local union say about half of teachers still don’t make enough to live in the district and must commute from up to an hour away.

But no matter how tough it may be for the district to afford this 1 percent pay hike, teachers deserve one, said Victoria Birbeck, the union’s president.

“The series of small raises we’ve received haven’t covered cost of living,” she said. “Besides, the district has known about the governor’s plan for a few years now. There should have been better planning.”

Parungao said planning isn’t the problem.

The district stretched to offer teachers a raise last year and even had to shift its budget by millions of dollars to accommodate that 2 percent increase, which came after a 13 percent bump over the prior three years. Plans to upgrade students’ textbooks and computers were postponed and class size for kindergarten, first and second grade students increased slightly.

Given the district’s rising pension and other fixed costs, the new agreement’s $7 million price tag will be tough to accommodate. Still, Michele Burke, one of the district’s board members, acknowledged that for many teachers, $1 spent on pensions isn’t as good as $1 spent on salary.

“As we negotiate with the union, STRS is the elephant in the room,” she said in an interview before the deal was finalized, referring to the acronym for the California State Teachers’ Retirement System. “We’re paying toward your future, but those payments don’t help put food on the dinner table.”

Sacramento Mayor Darrell Steinberg only worked with a few key players one weekend last fall when he helped broker a deal to avert a citywide teacher strike, and former school board president Jay Hansen was one of them.

Hansen had tried for months to negotiate the terms of a pay increase for the city’s 3,000 teachers, but the district and leaders of the local teachers union were far apart and neither side would budge. An acrimonious relationship between the two camps was partly to blame for the impasse.

“It’s like the Hatfields and the McCoys,” Hansen said. “No one remembers why they can’t get along.”

At issue during the talks was the $81 million sitting in Sacramento City Unified’s savings account, a sum the district had built up over several years with spoils from California’s booming economy.

The union said the money should go toward class size reduction and raises for teachers that would make the district a more attractive place to work. Sacramento educators are paid less than their peers in nearby districts, but they also receive more generous lifetime health benefits, records show. The district said that it had saved the money to help cover rising pension and employee health care costs in the lean budget years ahead.

In the end, Steinberg helped craft an agreement that gives Sacramento teachers an 11 percent raise over three years. But just a few weeks after Steinberg announced the deal during a celebratory news conference on the steps of City Hall, Sacramento County Superintendent Dave Gordon delivered some bad news: the district can’t afford it.

“Based on the review of the public disclosure and the multi-year projections provided by the district, our office has concerns over the district’s ability to afford this compensation package and maintain ongoing fiscal solvency,” Gordon wrote in a December letter to the district.

The district’s own budget offers proof of Gordon’s concerns.

Over the next three years, the school system anticipates its revenue will grow by $6 million, a 1 percent increase, while its pension and health care costs grow by more than $18 million, an 11 percent increase. A popular summer program for struggling students has already been eliminated to save money.

A second letter Gordon sent in January further underscores his concerns. He called the district’s plan to use one-time money to help cover the cost of the new contract a “poor business practice” that “only perpetuates the district’s ongoing structural deficit.”

“The pension contributions are putting a strain on everyone’s budgets,” Gordon said in an interview.

Even though Hansen had been the union’s adversary during months of stalled contract talks, he defended the district’s decision to offer teachers a raise, calling it “the right thing to do” despite the school system’s escalating pension and health care costs. “We did it anyway,” he added.

Steinberg echoed Hansen’s perspective.

“A strike would have been calamitous for everybody,” he said. And Sacramento isn’t the only place in California where teachers are thinking about a show of force. At least half a dozen other local unions fighting for higher wages have held labor actions in recent months.

In an interview with CALmatters that union leaders cut short after refusing to answer some questions, Executive Director John Borsos rejected any suggestion that the district won’t be able to afford the contract it recently signed or that it ever claimed to have needed the money stockpiled in its savings account to cover rising pension costs.

“They have more than enough to cover the pension increases,” Borsos said. “And they didn’t make that argument at the bargaining table.”

♦♦♦

Gov. Jerry Brown promised his 2014 funding plan would shore-up California’s teacher pension system, but at least one young Los Angeles teacher, Josh Brown, says he’s not counting on it. The Oliver Wendell Holmes Middle School special educator is so worried about the system’s solvency that he has an alternative retirement plan: using a portion of his salary to invest in the stock market.

“I’m a fifth-year teacher, I’m 30 years old, and I’m paying into a pension system that may or may not be around when I retire,” he said. “If I were 65-years-old and retiring soon, I would feel differently. Right now, I feel frustrated and worried.”

The largest payments required under the plan will be tough for many districts to manage, but they’re going to be especially vexing for large urban districts like Los Angeles Unified, which lost 100,000 students in the last decade and expects to shed more (here’s the toll of that under-enrollment, school by school). That’s a problem because California’s schools are funded on a per-pupil basis and fewer students means less money.

In Los Angeles, the swift enrollment decline is due to a dwindling birthrate and growing demand for charter schools, which are publicly funded but independently run, meaning their budgets are separate from the district’s.

Over the next three years, the district anticipates its employee pension and health care costs will climb $90 million, a 5 percent increase, while its revenue dips about $270 million, a 4 percent decline. The result is a $258 million budget deficit in 2020 that the district can no longer paper over, push off or ignore.

“We’re going to have to tighten our belts to save our schools,” said Nick Melvoin, a board member whose stark views on district finances have been criticized by skeptical local union leaders and fellow board members. “We’re in a death spiral.”

The district plans to tackle the deficit with a one-time $105 million bailout from the state and central office staff reductions. But observers says officials will soon need to consider some painful measures it has so far been able to avoid, like boosting high school class sizes or closing schools with dwindling numbers of students.

At least 55 schools across the district are under-enrolled by a quarter, and ten of those are half empty, a CALmatters analysis of building capacity and enrollment data shows.

“Our costs are rising, and as a result, there are hard choices and trade-offs to make each time we look at the budget,” said Scott Price, the district’s chief financial officer.

Parent Paul Robak fears that if the district doesn’t tackle its budget problems soon, it could be taken over by the state. At a recent board meeting, he urged the members to reject a healthcare spending plan that would further squeeze the budget. The members listened and thanked him for testifying before approving the agreement.

“It’s as if the board members are prancing down the lane and covering their ears, pretending nothing’s wrong,” said Robak, who has been active on the district’s parent councils for a decade. “Everyone will lose if we fail to act.”

Board member Kelly Gonez also acknowledged the district’s budget woes and the pressure of rising pension and health care costs but said officials should be trying to ease the pain by finding new sources of revenue, not by making cuts. All but one other board member declined to comment.

Even as a fiscal crisis looms, Los Angeles teachers are negotiating for a raise.

“Everyone who works in the district comes to work with an expectation they’re going to be treated fairly. They need to be treated fairly,” Austin Beutner, a former investment banker and the district’s new superintendent, told the Los Angeles Times. “How we strike that balance remains to be seen.”

United Teachers Los Angeles President Alex Caputo-Pearl declined CALmatters’ request for an interview. However, at a Pepperdine University event held before the state bailout was announced, he pledged to keep pushing for more money and predicted that the state would come through.

“If we take it off the table,” Caputo-Pearl said, “then we are acknowledging that the public district system is going to go off a fiscal cliff, which (is something) I’m not willing to acknowledge.”

♦♦♦

Flooded with calls from anxious school officials, Sen. Anthony Portantino of La Canada Flintridge and several other Democrats pushed earlier this year for a fix that would boost districts’ funding by $1 billion a year. In the end, Portantino convinced Brown to include about half as much in the state budget he signed a few weeks ago.

He insisted that the money be “flexible,” meaning districts may use it to cover rising pension costs or for anything else. But California’s schools are still underfunded compared to other states, and to better fulfill their responsibility to students and taxpayers, that must change, he said.

“In a few months, we’ll have a new governor with a new set of priorities,” Portantino said. “Is there more to do? Absolutely.”

CalSTRS’ first official report on the impact of districts’ growing pension obligations is due to the Legislature mid next year, when school budgets will likely be squeezed the most.

In the meantime, Fine hopes a recession doesn’t strike soon and that districts can manage their budgets without needing to make cuts or send out pink slips. He was a deputy superintendent in Riverside during the Great Recession and remembers how painful it was to carry out round after round of layoffs.

“We lost one of the best counselors and some very bright teachers. I had to layoff someone who years earlier had taught my young children how to swim,” Fine said. “I remember their faces.”

This article was originally published by CalMatters.org

Local Officials Avoid Pension Discussion as They Push New Taxes

TaxesWhile public and media attention to this week’s primary election focused – understandably so – on contests for governor, U.S. senator and a handful of congressional seats, there were other important issues on Californians’ ballots.

One, which received scant attention at best, was another flurry of local government and school tax and bond proposals.

The California Taxpayers Association counted 98 proposals to raise local taxes directly, or indirectly through issuance of bonds that would require higher property taxes to repay.

The proposed taxes on legal marijuana sales and other retail sales and “parcel taxes” on pieces of real estate were particularly noteworthy for how they were presented to voters.

Most followed the playbook that highly paid strategists peddle to local officials, advising them to promise improvements in popular services, such as police and fire protection and parks, and avoid any mention of the most important factor in deteriorating fiscal circumstances – the soaring cost of public employee pensions.

City, county and school district officials howl constantly, albeit mostly in private, that ever-increasing, mandatory payments to the California Public Employees Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS) are driving some entities to the brink of insolvency.

However, those officials are just as consistently unwilling to tell their voters that pension costs are the basic underlying factor in their requests for tax increases.

Why?

Tying tax increases to pensions, rather than popular services, not only would make voters less likely to vote for them but make public employee unions less willing to pony up campaign funds to sell the tax increases to voters. It is, in effect, a conspiracy of silence.

This week’s local tax and bond measures are just a tuneup for what will likely be a much larger batch on the November ballot.

It’s a well-established axiom of California politics that low-turnout elections, such as a non-presidential primary in June, are not as friendly to tax proposals as higher-turnout general elections, such as the one in November. Primaries tend to draw more older white voters who often shun taxes, while general elections have younger and more ethnically diverse electorates more attuned to taxes.

As local officials make plans to place those proposals on the November ballot, a bill making its way through the Legislature could skew local tax politics even more.

Senate Bill 958 would allow one school district, Davis Unified, to exempt its own employees from paying the $620 per year parcel tax that its voters approved two years ago.

The Senate approved SB 958 on a 24-19 vote last month, sending it to the Assembly. It’s being carried by Sen. Bill Dodd, a Napa Democrat whose district includes Davis.

The bill’s rationale is that housing is so expensive in Davis that teachers and other school employees cannot afford to live there, and that exempting them from the parcel tax would, at least in theory, make housing more affordable.

However, if SB 958 becomes law, it would set a dangerous precedent. It doesn’t take much imagination to see local government and school unions throughout the state demanding similar exemptions from new taxes with the threat, explicit or implicit, that they would refuse to finance tax measure campaigns.

The very people who benefit most from additional taxes by receiving higher salaries and/or better fringe benefits thus would be able to avoid paying those taxes themselves.

Where would it end?

olumnist for CALmatters

California Can’t Afford to Play Politics with Pensions

SACRAMENTO, CA - JULY 21: A sign stands in front of California Public Employees' Retirement System building July 21, 2009 in Sacramento, California. CalPERS, the state's public employees retirement fund, reported a loss of 23.4%, its largest annual loss. (Photo by Max Whittaker/Getty Images)

As a former mayor of the city of Newport Beach, I took very seriously the financial obligations related to our pension liabilities, the impact of pension costs on city services and the ability to keep our commitments to our employees, which is why recent developments in California concern me.

For years, a small group of voices nationwide has called for universities, pension funds, and other groups who hold investments in fossil fuels to abandon those investments. This movement, known as divestment, believes that abstaining from investment in fossil fuels is key to combating climate change. However, the divestment movement has found it difficult to gain traction, in large part because making political statements through public or institutional investments runs counter to the fiduciary responsibility of pension fund managers. Those who depend on pensions expect their fund managers to make decisions based off sound and profitable investment strategy, not political agendas. There is also no real evidence that walking away from fossil fuel stocks does anything to actually help the environment.

Frustrated by their failure to gain ground, divestment advocates have turned to new methods of create momentum. For example, state lawmakers in California have been asked to consider a rash of bills related to pension funds. In 2017, the legislature considered two bills related to this topic. Senate Bill 560, which ultimately died, would have required CalPERS and CalSTRS, pension funds that serve California’s teachers and public employees, to consider climate risk when managing their funds. Assembly Bill 20 forced these pension funds to examine their financial holdings related to the controversial Dakota Access Pipeline. This year, a third bill, Senate Bill 964, would require CalPERS and CalSTRS to report every three years on any investments related to climate change.  If these well-intentioned but misguided policies are enacted, the impacts will be felt by cities through rising pension liabilities and a reduction in funds available for basic city services like public safety and parks.

Rebranding their efforts to focus on climate risks, as opposed to directly calling for the abandonment of fossil fuel holdings, divestment advocates are taking new approaches toward the same goal. But while some might view these bills as well-intentioned measures to help the environment, the reality is quite different.

For starters, there is no evidence that these measures do anything to help the environment or combat climate change. Even Assembly Bill 20, with its targeted focus on a single pipeline, has had no impacts on the Dakota Access Pipeline’s investments or implementation. Rather, the value of passing such a measure lies mostly in its symbolism, a fact acknowledged by Bill McKibben, an environmental activist helping to drive the divestment agenda.

In practice, “climate risk” measures open the door for playing politics with retirement funds. This is especially dangerous for large funds tasked with protecting the future of Californians. Consider, for example, that the state’s public employees fund, CalPERS, manages the largest public pension fund in the United States, serving nearly 2 million people and holding around $300 billion in assets. CalSTRS, which serves education employees, is the world’s largest educator-only pension fund and the second largest pension fund in the U.S., managing a portfolio of more than $200 billion. Recent figures show that more than 200,000 retirees currently depend on CalSTRS for their pensions. Divestment from tobacco related stocks has already cost the CalPERS system more than $3 billion according to recent studies. We simply cannot afford more of this waste.

There is clearly an incredible amount at stake when it comes to managing these funds and others like them in California, with job number one being safeguarding the money that these employees worked so hard to earn. Both CalPERS and CalSTRS, California’s two largest pension funds, explicitly require fund managers to adhere to their fiduciary responsibilities. Misguided legislation requiring pension managers to follow political agendas when managing money only distracts from that duty, putting public funds and retirement nest eggs at great risk. Now more than ever, pension managers must focus on achieving returns that address the looming unfunded pension crisis, not on playing politics.

The truth is that divestment and related ideas like climate risk have always lived on shaky ground. Instead of walking away from investments in fossil fuels and losing a seat at the table, isn’t the better approach to affect change through active engagement? Instead of requiring pension fund managers to mitigate climate risks, shouldn’t we allow them to fulfill their fiduciary duty and leave climate discussions to policymakers? Hopefully retirees and their elected officials are paying attention to this dangerous rebrand of the divestment movement.  The consequences are higher unfunded pension liabilities and the crowding out of municipal services.  With today’s turbulent financial markets, it is more important than ever that we protect the hard-earned money of Californians.

Keith Curry is a former Mayor of Newport Beach and former financial advisor to state and local governments.

Who will end up paying CalPERS’ $168 billion in unfunded liabilities?

pension-2California’s public employee pension systems have immense gaps – called “unfunded liabilities” – between what they have in assets and what they will need to meet their obligations to retirees.

The California Public Employees Retirement System (CalPERS), the nation’s largest pension trust fund, and other state and local systems are desperately trying to close those shortfalls, or at least reduce them, mostly by ramping up mandatory “contributions” from public agencies.

Everyone is getting hit by those rapidly escalating demands and it’s no secret that they are pushing some school districts and cities to the brink of insolvency, forcing them to slash other spending, even vital police and fire services, and/or seek higher taxes from their voters to keep their heads above water.

Moreover, the squeeze is destined to get even tighter. For instance, cities that are now paying 50 cents into CalPERS for every dollar of police officers’ salaries are projecting that it could go to 75 or 80 cents within a few years.

School districts are feeling a double whammy – a more than doubling of their mandatory payments to the California State Teachers Retirement System (CalSTRS) for their professional staffs, plus increasing demands from CalPERS for their support staffs.

The state government itself is not immune. Last week, CalPERS told Gov. Jerry Brown and legislators that they must include $6.3 billion in the 2018-19 state budget to cover state employee pensions, making it one of the budget’s largest single items.

CalPERS officials send mixed messages to the public about the gap, on one hand saying that they must jack up contributions to avoid having it grow so large that the trust fund can never catch up, but on the other crowing about recent investment earnings and insisting that retirees and employees should feel confident that their money will be there when it’s needed.

This month, the Pew Charitable Trusts, which has followed the nationwide public pension issue closely, issued a report that examines the systems’ unfunded liabilities, and explains why some states have big gaps while others are fully funded, or nearly so.

Nationwide, Pew calculated, the total gap for all states grew by $215 billion between 2015 and 2016 to $1.4 trillion – and that assumes that the systems will meet their investment earnings assumptions of 7-plus percent a year.

Actual 2016 earnings, including those in California, fell extremely short of those assumptions, but even if they had been met, Pew says, unfunded liabilities would still have grown because most states, including California, also fell short on employer payments needed to cover ever-growing pension obligations.

That’s an important point. Even though CalPERS and other systems have sharply accelerated payments from employers, they still fell short in 2016 of what was needed to keep the gap from growing. California’s contribution shortfall, in fact, was the nation’s sixth highest in relative terms.

Pew agrees with the official CalPERS calculation that it was 69 percent funded in 2016, which is slightly higher than the 66 percent level for state pension systems nationwide. That’s a $168 billion unfunded liability – again assuming that it will meet its earnings goals, which is dropping slowly to 7 percent.

In contrast, New York’s system is 91 percent funded because it steadily dealt with earnings downturns and funded benefit increases, rather than allow shortfalls to accumulate, as California and many other states did, until they reached the crisis point.

CalPERS says that an uptick in 2017 earnings, to more than 11 percent, has raised its funding level to 71 percent. That’s obviously good news, but CalPERS’ own staff estimates that earnings over the next decade should barely average 6 percent a year, which, if true, would mean the system would either have to allow its funding level to decline or hit state and local government employers – and, of course, their taxpayers – even harder.

It’s a balancing act. CalPERS and the other systems are trying to avoid insolvency without driving their members over the fiscal cliff. Rising pension costs are driving many cities to ask voters for sales tax increases this year, but they won’t be telling those voters the truth about why new revenue is needed, fearing candor would spark a backlash.

This article was originally published by CalMatters.org

Will the California Supreme Court Reform the “California Rule?”

California Supreme CourtMost pension experts believe that without additional reform, pension payments are destined to put an unsustainable burden on California’s state and local governments. Even if pension fund investments meet their performance objectives over the next several years, California’s major pension funds have already announced that payments required from participating agencies are going to roughly double in the next six years. This is a best-case scenario, and it is already more than many cities and counties are going to be able to afford.

California’s first major statewide attempt to reform pensions was the PEPRA (Public Employee Pension Reform Act) legislation, which took effect on January 1st, 2013. This legislation reduced pension benefit formulas and increased required employee contributions, but for the most part only affected employees hired after January 1st, 2013.

The reason PEPRA didn’t significantly affect current employees was due to the so-called “California Rule,” a legal argument that interprets state and federal constitutional law to, in effect, prohibit changes to pension benefits for employees already working. The legal precedent for what is now called the California Rule was set in 1955, when the California Supreme Court ruled on a challenge to a 1951 city charter amendment in Allen v. City of of Long Beach. The operative language in that ruling was the following: “changes in a pension plan which result in disadvantage to employees should be accompanied by comparable new advantages.

To learn more about the origin of the California Rule, how it has set a legal precedent not only in California but in dozens of other states, two authoritative sources are “Overprotecting Public Employee Pensions: The Contract Clause and the California Rule,” written by Alexander Volokh in 2014 for the Reason Foundation, and “Statutes as Contracts? The ‘California Rule’ and Its Impact on Public Pension Reform,” written by Amy B. Monahan, a professor at the University of Minnesota Law School, published in the Iowa Law Review in 2012.

Pension benefits, most simply stated, are based on a formula: Years worked times a “multiplier,” times final salary. Thus for each year a public employee works, the eventual pension they will earn upon retirement gets bigger. Starting back in 1999, California’s public sector employee unions successfully negotiated to increase their multiplier, which greatly increased the value of their pensions. In the case of the California Highway Patrol, for example, the multiplier went from 2% to 3%. But in nearly all cases, these increases to the multiplier didn’t simply apply to years of employment going forward. Instead, they were applied retroactively. For example, in a typical hypothetical case, an employee who had been employed for 29 years and was to retire one year hence would not get a pension equivalent to [ 29 x 2% + 1 x 3% ] x final salary. Instead, now they would get a pension equivalent to 30 x 3% x final salary.

Needless to say this significantly changed the size of the future pension liability. For years the impact of this change was smoothed over using creative accounting. But now it has come back to haunt California’s cities and counties.

Amazingly, the California rule doesn’t just prevent retroactive reductions to the pension multiplier. Reducing the multiplier retroactively might seem to be reasonable, since the multiplier was increased retroactively. But the California rule, as it is interpreted by public employee unions, also prevents reductions to the multiplier from now on. And on that question the California Supreme Court has an opportunity, this year, to make history.

Ironically, the active cases currently pending at the California Supreme Court were initiated by the unions themselves. In particular, they have challenged the PEPRA reform that prohibits what is known as “pension spiking,” where at the end of a public employee’s career they take steps to increase their pension. Spiking can take the form of increasing final pension eligible salary – which can be accomplished in various ways including a final year promotion or transfer that results in a much higher final salary. Another form of spiking is to increase the total number of pension eligible years worked, and the most common way to accomplish this is through the purchase of what is called “air time.”

Based on fuzzy math, the pension systems have offered retiring employees the opportunity to pay a lump sum into the pension system in exchange for more “service credits.” Someone with, say, ten years of service, upon retirement could pay (often the payment that would be financed, requiring no actual payment) to acquire five additional years of service credits. This would increase the amount of their pension by 50%, since their pension would now be based on fifteen years x 3% x final salary, instead of 10 years x 3% x final salary. To say this is a prized perk would be an understatement. How it became standard operating procedure, much less how the payments made were calculated to somehow justify such a major increase to pension benefits, is inexplicable. But when PEPRA included in its reform package an end to spiking, even for veteran employees, the unions went to court.

The spiking case that has wound its way to the California Supreme Court with the most disruptive potential started in Alameda County, then was appealed to California’s First Appellate Court District Three. The original parties to the lawsuit were the plaintiffs, Cal Fire Local 2881, vs CalPERS (Appellate Court case). On December 30, 2016, the appellate court ruled that PEPRA’s ban on pension spiking via purchases of airtime would stand. The union then appealed to the California Supreme Court.

An excellent compilation of the ongoing chronology of the California Supreme Court case Cal Fire Local 2881 v. CalPERS (CA Supreme Court case) can be found on the website of the law firm Messing, Adam and Jasmine. It will show that by February 2017 the unions filed a petition for review by the California Supreme Court, and that the court granted review in April 2017. In November 2017, Governor Brown got involved in the case, citing a compelling state interest in the outcome. Apparently not trusting his attorney general nor CalPERS to adequately defend PEPRA, the Governor’s office joined the case as an “intervener” in opposition to Cal Fire Local 2881. For nearly a year, both petitioners and respondents to the case have been filing briefs.

This case, which informed observers believe could be ruled on by the end of 2018, is not just about airtime. Because whether or not purchasing airtime is protected by the California Rule requires clarification of the California Rule. The ruling could be narrow, simply affirming or rejecting the ability of public employees to purchase airtime. Or the ruling could be quite broad, asserting that the California Rule does not entitle public employees to irreducible pension benefits, of any kind, to apply for work not yet performed.

One of many reviews of the legal issues confronting the California Supreme Court in this case is found in the amicus brief prepared by the California Business Roundtable in support of the respondents. A summary of the points raised in the California Business Roundtable’s amicus brief is available on the website of the Retirement Security Initiative, an advocacy organization focused on protecting and ensuring the fairness and sustainability of public sector retirement plans. An excerpt from that summary:

“The Roundtable brief asserts the California Rule has numerous legal flaws:

(1) It violates the bedrock principle that statutes create contractual rights only when the Legislature clearly intended to do so.

(2) It violates black-letter contract law by creating contractual rights that violate the reasonable expectations of the parties.

(3) It violates longstanding constitutional law by assuming that every contractual impairment automatically violates the California and Federal Contract Clauses.

(4) It lacks persuasive or precedential value. The Rule was initially adopted without anything resembling a full consideration of the relevant issues.

(5) It has been almost uniformly rejected by federal and state courts—including by several courts that previously accepted it.

(6) It has had—and will continue to have—devastating economic consequences on California’s public employers.”

Pension reform, and pension reformers, have often been characterized as “right-wing puppets of billionaires” by the people and organizations that disagree. The fact that one of the most liberal governors in the nation, Jerry Brown, actively intervened in this case in support of the respondent and in opposition to the unions, should put that characterization to rest.

If the California Supreme Court does dramatically clarify the California Rule, enabling pension benefit formulas to be altered for future work, it will only adjust the legal parameters in the fight over pensions in favor of reformers. After such a ruling there would still be a need for follow on legislation or ballot initiatives to actually make those changes.

What California’s elected officials and union leadership, for the most part, are belatedly realizing, is that without more pension reform, the entire institution of defined benefit pensions is imperiled. Hopefully California’s Supreme Court will soon make it easier for them all to make hard choices, to prevent such a dire outcome.

Edward Ring co-founded the California Policy Center in 2010 and served as its president through 2016. He is a prolific writer on the topics of political reform and sustainable economic development.

REFERENCES

California Government Pension Contributions Required to Double by 2024 – Best Case
– California Policy Center

California Public Employees’ Pension Reform Act (PEPRA): Summary And Comment
– Employee Benefits Law Group

Allen v. City of of Long Beach
– Stanford University Law Library

Overprotecting Public Employee Pensions: The Contract Clause and the California Rule
– Alexander Volokh, Reason Foundation

Statutes as Contracts? The ‘California Rule’ and Its Impact on Public Pension Reform
– Amy Monahan, Iowa Law Review

Did CalPERS Use Accounting “Gimmicks” to Enable Financially Unsustainable Pensions?
– California Policy Center

Cal Fire Local 2881, vs CalPERS (Appellate Court case)
– JUSTIA US Law Archive

Cal Fire Local 2881 v. CalPERS, California Supreme Court, Case No. S239958 – Case Review
– Messing, Adams and Jasmine

Intervener and Respondent State of California’s Answer Brief on the Merits
– Amicus Brief, Governor’s Office, State of California

Amicus Brief of the California Business Roundtable in Support of Respondents
– Amicus Brief, California Business Roundtable (CBR)

RSI Supports California Business Roundtable Amicus Brief
– Summary of CBR Amicus Brief by Retirement Security Initiative

Resources for California’s Pension Reformers
– California Policy Center

Oakland Unified Besieged by Skyrocketing Pension Costs, Declining Enrollment

OaklandIt’s been a tumultuous era in Oakland. The Police Department has been enmeshed in an ugly scandal surrounding officers’ involvement with an underage sex worker that led to an officer’s suicide, firings and turnover in the chief’s office. City Hall was unable to prevent the Oakland Raiders from agreeing to move to Las Vegas. And in the past month, Mayor Libby Schaaf has engaged in a high-profile war of words with President Donald Trump and Attorney General Jeff Sessions over her opposition to federal immigration control efforts in her city.

But now Oakland is also wrestling with a painfully familiar story: financial turmoil in local schools. The state took some of Oakland Unified’s autonomy in 2003 after the Legislature approved an emergency $100 million loan to the then-reeling district. With $40 million of the loan still unpaid, the state continues to oversee district spending, though with a smaller role. Now there are new indications that even Oakland Unified’s limited autonomy could disappear for another long stretch as school officials struggle to make ends meet yet again.

In recent months, district officials had to approve what were described as “emergency” $9 million cuts in the district’s $521 million general fund 2017-18 budget and to authorize potentially greater reductions in 2018-19 as well. The cuts were widely denounced in public meetings as unnecessary and indicative of poor management.

This criticism has been buttressed by the Fiscal Crisis Management Action Team (FCMAT), the state agency that works with struggling school districts. In an August report, FCMAT warned that a “fiscal emergency” loomed if Oakland Unified officials didn’t quit spending reserve funds to cover budget shortfalls. FCMAT depicted the Oakland school board as irresponsible for approving cumulative raises for teachers of 14.5 percent in the 2014-15, 2015-16 and 2016-17 school years in a three-year span in which the cost of living went up by less than 2 percent. These pay hikes were the biggest drain on district reserves.

Oakland board members brought more criticism on themselves in January when they approved 5 percent pay raises for themselves. While the total amounts were small – $39 per board member per month – San Francisco Chronicle columnist Otis Taylor Jr. wrote that district students and parents were appropriately “livid” about the salary boost at a time when schools often lacked funds for basics like toilet paper.

A recent East Bay Times analysis suggested there was plenty of blame to go around for Oakland Unified’s fiscal headaches. It largely absolved district Superintendent Kyla Johnson-Trammel, who took over in January 2017, noting her predecessor had failed to follow through on plans to lay off 42 employees because declining enrollment had left the district with less than 37,000 students. Since enrollment directly determines how much state aid comes to districts, well-run districts usually reduce employees when enrollment drops. With enrollment down 33 percent from its 1999 peak of 55,000, Oakland Unified has thus faced constant pressure to downsize.

Pension costs grow 132% per teacher by 2020

But information distributed by the district before Oakland Unified trustees approved the recent $9 million in cuts pointed to another budget culprit – one that is hammering districts statewide. That is the bailout of the California State Teachers’ Retirement System approved by the Legislature and Gov. Jerry Brown in 2014. It phases in an 80 percent increase in annual contributions to CalSTRS from fiscal 2014-15 to fiscal 2020-21 – going from $5.9 billion a year to $10.9 billion.

More than two-thirds of this additional cost must be borne by local school districts. In 2014-15, they were required to pay 8.25 percent of teacher payroll to CalSTRS. Beginning in fall 2020, that amount will be 19.1 percent – a 132 percent increase in per-teacher pension funding obligations. Even in districts with high numbers of English-language learners – which receive additional funding under the Local Control Funding Formula, a 2013 state law – pension obligations have created major headaches.

School Services of California – a consultant which advises a large majority of the state’s 1,000 school districts – estimated last July that at least 280 districts would struggle to pay bills in the 2017-18 school year. A San Jose Mercury-Newsanalysis at the time suggested that the just-ended 2016-17 school year might be looked back on in 10 years “as the last good year in recent times for public education.”

The August 2017 FCMAT report on Oakland Unified raised additional concerns about why the district would struggle with its finances in coming years beyond inadequate funding. FCMAT faulted the district for inadequate internal budget controls, for allowing significant expenditures without board approval and for inadequate training of officials with budget responsibilities.

This article was originally published by CalWatchdog.com

The Underrecognized, Undervalued, Underpaid, Unfunded Pension Liabilities

SACRAMENTO, CA - JULY 21: A sign stands in front of California Public Employees' Retirement System building July 21, 2009 in Sacramento, California. CalPERS, the state's public employees retirement fund, reported a loss of 23.4%, its largest annual loss. (Photo by Max Whittaker/Getty Images)

“It’s the economy, stupid.”
–  Campaign slogan, Clinton campaign, 1992

To paraphrase America’s 42nd president, when it comes to public sector pensions – their financial health and the policies that govern them – it’s the unfunded liability, stupid.

The misunderstood, obfuscated, unaccountable, underrecognized, undervalued, underpaid, unfunded pension liabilities.

According to CalPERS own data, California’s cities that are part of the CalPERS system will make “normal” contributions this year totaling $1.3 billion. Their “unfunded” contributions will be 41% greater, $1.8 billion. As for counties that participate in CalPERS, this year their “normal” contributions will total $586 million, and their “unfunded” contributions will be 36% greater at $607 million.

That’s nothing, however. Again using CalPERS own estimates, in just six years the unfunded contribution for cities will more than double, from $1.8 billion today, to $3.9 billion in 2024. The unfunded contribution for counties will nearly triple, from $607 million today to $1.5 billion in 2024 (download spreadsheet summary for all CalPERS cities and counties).

Put another way, by 2024, “normal contribution” payments by cities and counties to CalPERS are estimated to total $2.8 billion, and the “unfunded contribution” payments are estimated to total almost exactly twice as much, $5.5 billion.

So what?

For starters, every pension reform that has ever made it through the state legislature, including the Public Employee Pension Reform Act of 2013(PEPRA), does NOT require public employees to share in the cost to pay the unfunded liability. The implications are profound. As public agency press releases crow over the phasing in of a “50% employee share” of the costs of pensions, not mentioned is the fact that this 50% only applies to 1/3 of what’s being paid. Public employees are only required to share, via payroll withholding, in the “normal cost” of the pension.

Now if the “normal cost” were ever estimated at anywhere near the actual cost to fund a pension, this wouldn’t matter. But CalPERS, according to their own most recent financial report, is only 68% funded. That is, they have investments totaling $326 billion, and liabilities totaling $477 billion. This gap, $151 billion, is how much more CalPERS needs to have invested in order for their pension system to be fully funded.

A pension system’s “liability” refers to the present value of every future pension payment that every current participant – active or retired – has earned so far. In a 100% funded system, if every active employee retired tomorrowand no more payments ever went into the system, if the invested assets were equal to that liability, those assets plus the estimated future earnings on those invested assets would be enough to pay 100% of the estimated pension payments in the future, until every individual beneficiary died.

A pension system’s “normal payment” refers to the amount of money that has to be paid into a fully funded system each year to fund the present value of additional pension benefits earned by active employees in that year. When the normal payment isn’t enough, the unfunded liability grows.

And wow, has it grown.

CalPERS is $151 billion in the hole. All of California’s state and local pension systems combined, CalPERS, CalSTRS, and the many city and county independent systems, are estimated to be $326 billion in the hole. And that’s extrapolated from estimates recognized by the pension funds themselves. Scenarios that employ more conservative earnings assumptions calculate total unfunded liabilities that are easily double that amount.

With respect to CalPERS, how did this unfunded liability get so big?

An earlier CPC analysis released earlier this year attempts to answer this. Theories include the following: (1) Letting the agencies decide which type of asset smoothing they’d like to employ, (2) permitting the agencies to make minimal payments on the unfunded liability so the liability would actually increase despite the payments, (3) making overly optimistic actuarial assumptions, (4) not taking action sooner so the unfunded payment wouldn’t end up being more than twice as much as the normal payment.

One final alarming point.

CalPERS recently announced that for any future increases to the unfunded liability, the unfunded payment will have to be calculated based on a 20 year, straight-line amortization. This is a positive development, since the more aggressively participants pay down the unfunded liability, the less likely it is that these pension systems will experience a financial collapse if there is a sustained downturn in investment performance. But it begs the question – why, if only increases to the unfunded liability have to be paid down more aggressively, is the unfunded payment nonetheless predicted to double within the next six years?

CalPERS information officer Tara Gallegos, when presented with this question, offered the following answers:

(1) The discount rate (equal to the projected rate-of-return on invested assets) is being lowered from 7.5% to 7.0% per year. But this lowering is being phased in over five years, so it will not impact the 2018 unfunded contribution. Whenever the return-on-investment assumption is lowered, the amount of the unfunded liability goes up. By 2024, the full impact of the lowered discount rate will have been applied, significantly increasing the required unfunded contribution.

(2) Investment returns were lower than the projected rate of return for the years ending 6/30/2015 (2.4%) and 6/30/2016 (0.6%). Lower than projected actual returns also increases the unfunded liability, and hence the amount of the unfunded payment, but this too is being phased-in over five years. Therefore it will not impact the unfunded payment in 2018, but will be fully impacting the unfunded payment by 2024.

(3) The unfunded payment automatically increases by 3% per year to reflect the payroll growth assumption of 3% per year. This alone accounts, over six years, for 20% of the increase to the unfunded payment. The reason for this is because most current unfunded payments are calculated by cities and counties using the so-called “percent of payroll” method, where payments are structured to increase each year. CalPERS is going to require new unfunded payments to not only be on a 20 year payback schedule, but to use a “level payment” structure which prevents negative amortization in the early years of the term. Unfortunately, up to now, cities and counties were permitted to backload their payments on the unfunded liability, and hence each year have built in increases to their unfunded payments.

The real reason the unfunded liability has gotten so big is because nobody wanted to make conservative estimates. Everybody wanted the normal payments to be as small as possible. The public sector unions wanted to minimize how much their members would have to contribute via withholding. CalPERS and the politicians – both heavily influenced by the public sector unions – wanted to sell generous new pension enhancements to voters, and to do that they needed to make the costs appear minimal.

As a result, taxpayers are now paying 100% of an “unfunded contribution” that is already a bigger payment than the normal contribution, and within a few years is destined, best case, to be twice as much as the normal contribution.

Camouflaged by its conceptual intricacy, the cleverly obfuscated, deliberately underrecognized, creatively undervalued, chronically underpaid, belatedly rising unfunded pension liabilities payments are poised to gobble up every extra dime of California’s tax revenue. And that’s not all…

Sitting on the blistering thin skin of a debt bubble, a housing bubble, and a stock market bubble, amid rising global economic uncertainty, just one bursting jiggle will cause pension fund assets to plummet as unfunded liabilities soar.

And when that happens, cities and counties have to pay these new unfunded balances down on honest, 20 year straight-line terms. They’ll be selling the parks and libraries, starving the seniors, releasing the criminals, firing cops and firefighters, and enacting emergency, confiscatory new taxes.

Whatever it takes to feed additional billions into the maw of the pension systems.

Budget surplus? Dream on.

*   *   *

Edward Ring co-founded the California Policy Center in 2010 and served as its president through 2016. He is a prolific writer on the topics of political reform and sustainable economic development.

RELATED ARTICLES

How to Restore Financial Sustainability to Public Pensions, February 14, 2018

How to Assess Impact of a Market Correction on Pension Payments, February 7, 2018

California Government Pension Contributions Required to Double by 2024 – Best Case, January 31, 2018

Did CalPERS Use Accounting “Gimmicks” to Enable Financially Unsustainable Pensions?, January 24, 2018

How Much More Will Cities and Counties Pay CalPERS?, January 10, 2018

If You Think the Bull Market Rescued Pensions, Think Again, December 7, 2017

Did CalPERS Fail to Disclose Costs of Historic Bump in Pension Benefits?, October 26, 2017

Coping With the Pension Albatross, October 13, 2017

How Fraudulently Low “Normal Contributions” Wreak Havoc on Civic Finances, September 29, 2017

Pension Reform – The San Jose Model, September 6, 2017

Pension Reform – The San Diego Model, August 23, 2017

These L.A. Police and Firefighters Figured Out How to Double Pay for Not Working

Police carTake a program that lets a public employee earn both a pension and a salary at the same time. Add an extremely generous disability leave and workers’ compensation program that allows public employees to be paid while not working for months or even years on end. What do you get? Massive corruption, obviously.

new report from the Los Angeles Times attempts to quantify the costs and consequences of a program allowing L.A. police and firefighters to collect both salaries and pension returns in the years running up to retirement. But these same employees often spend massive chunks of their final years on the payroll out on medical leave — so they’re costing the city even more money without actually working.

The program is called the Deferred Retirement Option Plan (DROP), and it allows public safety employees who have reached the age of 50 to bring home a salary while also earning pension returns during that time. The pension funds (with a guaranteed five percent return rate) are then given to the officer or firefighter as a single payment upon retirement within five years. When you hear stories about police chiefs or fire captains taking home a massive lump sum of money when they retire, this is typically why.

The Times calculated that employees who participated in DROP took more than twice as much sick leave and disability time off than other employees in 2016: 296 hours compared to 123 hours. Over the course of nine years, the city has paid more than $220 million for police and fire personnel who had taken a combined 2.4 million hours off for leaves and sick time.

None of the injuries claimed by cops and firefighters in this program happened as the result of intense field activity. According to the Times, they tended to be the medical consequences of growing old: bad backs, high blood pressure, cancer, and a lot of carpal tunnel syndrome. Thanks to state law (and the influence of public employee unions on lawmaking), these ailments are all presumed to be job-related. Apparently one of the most terrifying, dangerous beats for Los Angeles Police Department officers is its own offices. One guy’s injuries stemmed from him falling off a chair.

The corruption that follows is fairly predictable. The Times includes several stories of public safety employees who spend months or years of their final period on the job out on medical leaves. But they’re hardly bedridden or fighting their way through physical therapy. One couple, a captain and a detective in the LAPD, spent around two years each on medical disability, spending some of their time at their condo in Cabo San Lucas starting a family theater production company. A firefighter who injured his knee just weeks after entering the DROP program shares the same name and hometown as a man who ran a half-marathon two months later, but he and his lawyers would not confirm or deny to the Times whether they were the same person.

Unsurprisingly, this easily abusable program was sold by claiming it would accomplish the opposite of what it actually does. City leaders said the program would keep older police and firefighters on the job to serve and mentor new recruits. And they promoted it to voters by saying it would create no additional costs for the city. This is obviously an absurd claim—the city paid out more than $400,000 in extra pension payments in average in 2016 per DROP employee, and the fire department has to pay overtime to fill the shifts of those who take medical leave.

It’s not a new thing for cities to not consider — or to deliberately ignore — the long-term unintended costs and consequences of pension-related commitments. It’s the very reason why cities (and now even states) face bankruptcy over them. The costs of pension-related commitments are often concealed from residents. The Times notes that Los Angeles city officials haven’t even bothered to analyze the amount of medical leave taken by DROP participants.

Public warnings about problems with the DROP program aren’t even new. Check out this piece from 2011 that warns that the program wasn’t even being audited.

Former L.A. Mayor Richard Riordan, who was in charge when the program was introduced, has acknowledged that DROP was “a mistake” and a “total fraud.” But it persists in Los Angeles as other cities and states across the country have dropped it. Even San Francisco dumped the program because it was too costly, and this was after they implemented rules to try to cut back on abuse.

Los Angeles has a big problem with underfunding its pensions to the tune of billions and expecting much higher returns than is reasonable. This DROP program helps make a bad problem even worse.

This article was originally published by Reason.com

Bonus link: Steven Greenhut goes over the ways public sector unions in California push for costly benefit packages that leave taxpayers overcommitted.