Proposition B - Police Deferred Retirement Option

What it does

Proposition B is an amendment to the San Francisco City Charter that would allow San Francisco police officers who have served at least 25 years and who are at least 50 years of age to participate in a deferred-retirement option program, called a DROP. A DROP is a program that allows an employee who is eligible to retire to continue working while simultaneously drawing a pension. In the proposed DROP program, participating police officers would continue working at their prior salary and benefits while the City places their monthly pension into an interest bearing account (at 4% annual interest) that the employee accesses at the end of the DROP.. During the DROP, the employee would not be eligible for promotion nor would those years count towards added pension benefits.

Members of the department who have the title of police officer would be eligible to participate for up to three years, sergeants and inspectors for up to two years, and lieutenants and captains for a maximum of one year. A member of the police force need not have maxed out his or her pension eligibility prior to entering DROP. The only officers not eligible for the DROP are those who are disabled, or who cannot work the streets or the investigation desk. Further, if an officer became disabled while participating in the DROP, he or she would have to leave it. Employee participation in the DROP is entirely voluntary. They can elect to join, and then subsequently leave the DROP at any point.

Upon entry into the DROP, the member’s normal monthly retirement benefits and pension would be frozen and not increased for any reason other than for cost-of-living adjustments. These frozen benefits would be credited to a DROP account for each month of participation in the program. All assets in the DROP account would receive an annual effective interest rate of 4 percent.

During the DROP, the employee would not be eligible for promotion, but would receive normal pay and regular benefits such as health care. The participant would also be required to contribute a portion of his or her pay — about 4 percent of salary — into the retirement system. But those payments would not be added to the participant’s DROP account. The City and County of San Francisco would not be required to make contributions to the retirement system for the DROP participant.

At the end of participation in the DROP, the member would be considered a normal retiree of the San Francisco Police Department. The new retiree would then receive the assets accrued in the tax-deferred DROP account. For example, if a 55-year-old regular police officer entered the DROP after 25 years of service while earning $100,000 annually, at the end of three years in the DROP that officer would receive a lump sum of $225,000,plus interest and minus taxes. The amount of lump-sum payment would be based on the participant’s salary, the years of service, the participant’s age and the number of years of participation in the DROP.^[1] At the termination of the DROP, the participant would have the option to have the assets from the DROP account rolled over into a government-approved retirement account or to receive it as a normal payout.

Leaving the DROP would constitute retirement from the Police Department. After the employee officially retires, he or she would then receive all normal expected pension payouts for the remainder of his or her life. The measure does not prevent an employee from being reinstated as a police officer again at the end of the DROP period. This means that an employee could continue to work and enter the DROP, during which time his retirement benefits would go into a separate account. Then the employee could return to full service again as a police officer with full pay and benefits and continue to receive pay raises until such time as he or she retires again or chooses to reenter the DROP. There is nothing that would prevent an employee from entering the DROP more than once.

Employees still pay their contribution to the pension during the years they are in the DROP. There is the option for the City to not make the payment into the pension account.

In a change to the governance of pensions, the measure reduces the threshold of the number of votes on the Board of Supervisors required to make a change to this pension ordinance, from nine (a supermajority) to six (a simple majority). While this change does not directly affect other pensions, it sets a precedent that would likely be followed by other groups.

Why it is on the ballot

The Police Officers Association paid signature-gatherers to gather sufficient signatures to place this charter amendment onto the ballot. They submitted 65,000 signatures and incurred costs of approximately $200,000 to gather the signatures.

As a charter amendment, six members of the Board of Supervisors could have placed the measure onto the ballot. According to the POA, they did not pursue that route to place onto the ballot because they wanted more control of the final language of the measure. If it had gone through the Board of Supervisors elements of the legislation as written may have been modified or eliminated.

The problem the measure is seeking to solve is the high percentage of San Francisco police officers who are nearing retirement age, and the lack of sufficient additional experienced officers. According to the SFPD, more than 550 police officers are expected to reach retirement age in the next five years and there are 300 vacant police officer positions.

The department also claims that it is below the staffing level — 1,971 sworn officers — mandated in the city charter, and that it has 250 positions it could fill. Yet the department is having difficulty recruiting new officers and retaining older veterans. Recruitment of new officers is more difficult in part because of the strict eligibility criteria that reduces the supply of otherwise strong candidates. Retention of veterans is a perennial problem, as many officers max out their pensions at 30 years and then retire from San Francisco, only to begin working again as police officers for another city, while collecting their San Francisco retirement pension. With nearly 25 percent of the police officer workforce facing retirement in next four years, the idea of the DROP is to provide enough incentive for veterans to stay.

Pros

Arguments in favor of the measure:

• This measure will create an additional incentive for experienced police officers to remain working in San Francisco for additional years beyond when they ordinarily would have worked. Today, many police officers retire from San Francisco, earn their pension, and then begin working for another police force.
• It provides the opportunity for a police officer to continue working for a few years while also earning a pension at the same time. Under current rules, an employee cannot work for the City and earn a pension at the same time. This measure changes that rule, but only for employees of the Police Department.
• The measure provides a financial windfall to participants, as they receive the full accrued pension for their period in the DROP program as a lump sum when they finish their time in the DROP.
• Relative to other similar DROP measures throughout the United States, this one is “pro-employer” in that it limits the number of years an employee may continue both earning a salary and receiving a pension. For example, Fresno allows a police officer to be in a DROP program for up to 10 years, as opposed to the three proposed for San Francisco.
• Retaining experienced high-salaried police officers is no more costly than hiring and training new officers. Further, because the employee in the DROP still contributed to their retirement, the costs to the City are primarily administrative.

Cons

Arguments against the measure:

• The DROP program is a form of “double-dipping,” as the officer effectively earns both a salary and a retirement pension from the same employer. This option is not given to any other employees in City government.
• Prop. B is a temporary and incomplete fix that does not address a deeper underlying problem: that we do not have enough people who are interested in becoming police officers in San Francisco. Unless we change the charter to no longer require a minimum number of police officers or revisit the eligibility criteria to widen the pool of potential recruits, we will continue to face the same problems with total numbers and recruitment.
• The measure may not achieve its policy goal because it does not require an officer to have maxed out his or her retirement before he or she enters the DROP. In total, there are 580 people who meet or are projected to meet the criteria of the DROP within the first three years. Of these, fewer than 20 percent have maxed out their retirement, or would have over the three years of the DROP. If the DROP is meant to be an incentive for these people to stay on the force, isn’t the opportunity to maximize their pension incentive enough?
• The DROP may create a perverse incentive for some officers to enter the DROP for a few years, retire, and then hope to get reinstated while having cashed in a sizable nest egg — up to several hundred thousand dollars — for the years that they were in the DROP.
• This measure makes a change to the governance of pensions by changing the number of votes on the 11-member Board of Supervisors required to change pensions, dropping the threshold from a supermajority, or nine, to a simple majority, or six. This may result in other groups of employees seeking the same change in the governance of their own pensions. Allowing a simple majority of the supervisors to govern pensions makes it more likely that the board will grant increasingly generous pension benefits.
• The measure will be costly to administer. The head of the City’s retirement system argues that first-year costs will be approximately $800,000 and the following year will cost $500,000. In part, the high cost is related to the complexity of implementation and the large number of potential recipients. Currently, the City’s retirement system handles 1,200 retirees per year. The DROP program alone creates eligibility for up to an additional 600 officers, nearly 50 percent of the existing caseload of the retirement office.
• The greatest benefit of this proposal goes to the upper end of the police spectrum because it also applies to captains and lieutenants, who are unlikely to be out on the streets where they are most needed.
• Keeping the high-ranking officers in service longer could actually reduce promotional opportunities for regular officers.

SPUR’s analysis

The DROP program is an attempt to slow down the rate of retirement for those at or near retirement age, by providing an additional financial incentive to those who stay on for a year or more. Whether the DROP is necessary to actually retain officers is unclear.

Most officers reach their maximum pension benefits — 90 percent of wages — before they turn 55 years old. This is because most police officers begin work before they are 25. That means they already have an incentive to keep working for longer than 30 years, in order to max out their pension. What the DROP does is give the individual officer a potential financial windfall that he or she can collect, on top of his or her salary, simply for choosing to enter the DROP for one or more years. As the proponents argue, it gives the employee a chunk of cash that they otherwise would not have been able to save.

The problem is that there are other incentives in place that have yet to be tested. Recently, the City began offering police officers a separate incentive of 4 percent of their wages for those who work 30 years or more, as an inducement to stay on. However, no officer has yet used this incentive. The POA argues that the City’s incentive is “too little too late.” The DROP, in a sense, is the POA response to the 4 percent incentive-pay proposal, and they claim it is the level of financial “carrot” required to keep officers on the job past their retirement age.

Even if this were true, the arguments of the proposal’s merit would be more convincing if it came from through the regular charter-amendment process instead of as a financed campaign of paid signature-gathering, where there is no need for compromise or public review.

Our concerns with the DROP are three-fold. First, it sets a precedent for changes to pension governance that may make it easier to modify other pensions in the future. Second, the DROP does not address the larger structural problem of recruitment. Even the proponents understand that the DROP is a stopgap measure that does not solve the long-term issue of recruitment into the police force in San Francisco. The existing set of officers cannot be a substitute for effective recruitment.

Third, it is a misuse of the pension system. Some officers may choose to enter the DROP, then retire and receive their cash payment, and then become reinstated to continue working until they max out their pensions. The DROP program as written has no restriction on making use of the DROP multiple times. This reinforces the concern that the DROP is a form of “double-dipping.” This was not the intended use of the pension system, which was meant to be retirement security. In fact, all the officers hired after 1976 — all but 50 — could all “unretire” once they have retired. Given the scarcity of officers, it is possible that people would come back into the force until they maximize their pensions.

While recruiting a sufficient number of police officers to meet the required minimum remains a real problem in San Francisco, the DROP program is not the solution.

SPUR recommends a “No” vote on Prop. B.

[1] Note: Retirement pension is based on 2 percent of salary per year of service at age 50 or 3 percent at age 55. The maximum pension accrual is at 30 years. An employee who reaches 55 with 30 years of service could earn 90 percent of their salary as a pension.