DROP, the Billion-Dollar Pension Perk, Still Getting No Political Play

Can a city that's bleeding money afford some retirees the kind of windfalls you'd expect in corporate boardrooms? Judy Muller has an astonishing story about a program that lets some L.A. police and firefighters retire as millionaires.

TRANSCRIPT:
Judy Muller: Ahh, retirement. It's the first day of the rest of your life and the first day you get to collect your pension -- assuming you're lucky enough to get one!

But what if you could collect your salary and your pension at the same time? How about a million dollar check to kickstart your retirement?

OK, that was a fake moment. But it's a reality if you're an officer or firefighter with the city of L.A. That's because of a little-known pension perk only offered to public safety personnel.

It is known as the Deferred Retirement Option Plan, or DROP.

As we first reported two years ago, DROP allows LAPD and L.A. city fire personnel who have been on the force for at least 25 years and are 50 years old to collect both a salary and their pension at the same time for the last five years on the job.

Here's how it works: Officer Jones retires January 30th, 2013. The very next day he comes back to work.

Now Jones continues to be paid his salary. But his pension goes into an account where it collects 5 percent interest. Jones and the city still contribute towards his pension. When Jones leaves his job, he gets those accumulated pension checks plus 5 percent interest.

Since its inception, 3,407 officers have entered DROP. Some are getting supersized checks as they walk out the door.

This police commander got $800,000. This deputy fire chief, $939,000. And since our first report two years ago, a few DROP members hit the million dollar mark, walking away with seven-figure checks.

Not many people in L.A. know about this so-called "retire for a day loophole."

Bernard Parks/L.A. City Council: If you get people some people to actually know what DROP is, you've done something.

Muller: Two years ago Councilmember Parks supported DROP. Now he has questions about its cost to the city's bottom line.

Parks: It's an unknown, unanswered question and generally it's one of those things that people say, "Well, we'll study it in the future." But it's now well over 10 or 12 years old.

Keith Comrie/Former L.A. City Administrative Officer: I don't think the public understands someone collecting a pension check and a salary simultaneously. I think they get very upset. It's called double dipping.

Muller: During his 19 years as L.A.'s longest serving chief administrative officer, Keith Comrie rejected proposals for DROP -- what he calls a double dip. We spoke to him two years ago about it. Since then, he's noticed the hefty payouts for police and fire.

Comrie: Some of these examples now that are given now in the list now where they are releasing -- we now have a million dollar case. And that employee looks like he might have taken a $5,000 or $6,000 reduction in his pension, which in theory offsets it, but he got a million dollars.

Muller: Believing DROP was a budget buster, Comrie rejected it. But he retired in 1999 and newly elected mayor Richard Riordan saw DROP as the solution to a big problem at that time -- retaining veteran officers.

Richard Riordan/Former L.A. Mayor: What my office, the chief's office, is doing is looking at how do we improve the recruiting, how we do improve the morale of the department?

Muller: The Rampart Police corruption scandal in 1999 and an unpopular police chief hurt morale among the rank and file. The LAPD was suffering from low recruitment numbers and high retirement rates. Riordan was under pressure to stop the hemorraging and to live up to his campaign promise of a 10,000-member police force.

[NBC News Clip] Mayor Riordan joined city council members today to push two ballot initiatives aimed at helping low police morale.

Muller: Part of Riordan's plan was the DROP plan. He campaigned heavily for it, promoting DROP as an essential recruitment tool. It easily won the support of the City Council who put it on the ballot.

Ruth Galanter/L.A. City Council: Open the roll on Item 19. Close the role. Tabulate the vote. Twelve Ayes - that is approved!

Muller: It was called Charter Amendment Two. Taxpayers were told it wouldn't cost them anything. It was required to be cost neutral only to the pension fund and not to the city's overall budget. In June of 2001, the voters gave DROP a thumbs up.

Comrie: It was never really discussed. I think a lot of people passed it without knowledge of what it really was, what the argument that it's cost neutral.

Muller: In 2007, when DROP was up for renewal, the council even removed the so called "sunset clause" -- the provision which set an expiration date. DROP can't be dropped without renegotiating it.

When we first reported on DROP, we asked the current city administrative officer, Miguel Santana, about the program's price tag.

Muller: Has it really been reviewed? Has anybody taken a look at how much this is costing the city?

Miguel Santana/L.A. City Administrative Officer: We haven't up until recently. We're going to start doing that.

Muller: So right now, you don't know how much this costs in salaries or pensions?

Santana: The last report that was done was several years ago. That is why we need to do another one to determine whether it's still cost neutral or not.

Muller: That was two years ago. Recently, we asked Santana what happened to that report.

Muller [to Santana]: When we talked to you two years ago about the DROP program, we wondered if it was cost-neutral to the city budget overall and your answer then was, "Well, we don't know but we are going to work on it." So we are back here to ask you, what's the answer?

Santana: And we're still looking at it.

Comrie: Why it hasn't been studied -- that's the CAO's responsibility, to study it and bring in a clear report and explain it in plain English, what the issues are -- what the pluses are and what the minuses are. They should do that. And I haven't seen that done.

Muller: The CAO was asked to look at DROP as part of the city's 2012 budget. Santana told us a study is about to begin.

Santana: It's required by the charter that we actually have a review every five years. We don't conduct it. The pension systems hire the pension actuary to do an analysis on the cost neutrality of it and they're in the process of doing that now.

Muller: That long-awaited study on whether DROP is "cost-neutral" will be conducted by an actuary hired by the pension board, not the city administrative officer -- a clear conflict of interest.

And that study won't look at costs to the general fund. That means there will be no independent assessment of what drop is costing the city. Councilman Parks chalks it up to pension politics--even at the CAO's office.

Parks: It's been political, probably more political than in the past. When you had Comrie here, and Piper here, they really didn't care as to what people thought of their work. They gave you what they thought was their best answer. Today it's more of what will eight votes carry as opposed to saying, you know, "Here is the best answer."

Muller: And it would seem that the original reason for the DROP program -- retaining veteran officers -- no longer exists. Recently there were 18,000 applications for 200 firefighter jobs. And the LAPD is now 10,000 strong.

Right now, the city is facing a $200-million shortfall in the budget, an amount that's expected to grow as police and fire pension obligations gobble up more and more of the city's finances. So you would think that a billion dollar perk like the DROP program would be a key issue in the race for mayor and City Council. Think again.

Angering police and fire unions while in campaign mode is the last thing most of these candidates want to do -- especially Wendy Greuel, who won endorsements by the police and fire unions.

Wendy Greuel/L.A. Mayoral Candidate: I've supported DROP. It is an effective way to keep some of our best officers and firefighters in the city of Los Angeles.

Muller [to Greuel]: You don't see DROP as a double dip?

Greuel: I don't see DROP as a double dip.

Muller: They are earning money at the same time they are collecting their pension.

Greuel: Again it has been a program that is effective to keep our officers here and keep them working in the city of Los Angeles.

Muller: Mayoral candidate Eric Garcetti also likes DROP.

Eric Garcetti/L.A. Mayoral Candidate: In study after study, it showed that is a money saver, plus it gets the most valuable people to stay on the job for a few more years.

Muller: In fact, as we've learned, there is no study showing DROP is a money saver because nobody has bothered to study it.

But that's something candidate Jan Perry promises to do, even though she didn't do it as a council member.

Jan Perry/L.A. Mayoral Candidate: As mayor, I will immediately move forward along with the CAO to do a very straightforward analysis of the DROP program.

Muller: The mayoral candidates running on their "political outsider" status also weighed in.

Emanuel Pleitez/L.A. Mayoral Candidate: I think that DROP is just one minor program. Whether it exists or not doesn't impact our pension fund liabilities that much at all.

Kevin James/L.A. Mayoral Candidate: I think that it is a program that has to be done away with currently because of the obligations that we face.

Muller: Meanwhile, cities and states across the country are modifying DROP or dumping it altogether.

Alabama's program was shut down after it was revealed that university executives, football coaches, and lobbyists walked away with big DROP checks -- some as high as $1.3 million. Comrie says that's a cautionary tale for Los Angeles.

Comrie: Don't play into the hands of the reformers that go too far. Clean up your system now before they do that.

Muller: He's talking about former mayor Richard Riordan, who tried to put a pension reform measure on this year's ballot. He pulled the plug on it last year, but...

Comrie: Dick Riordan will be back. Whether it's 6 months or a year or two years from now, he said he will come back with more time.

Muller: And, Comrie says, DROP's seven-figure payouts will be Exhibit A for doing away with pensions altogether.

Comrie: That will be the campaign, the million dollar man. Why did you give him a million dollars in the same pension? It doesn't make sense to the public. The public will just go crazy.