Pension Bonanza | Last of 3 parts
Retirees can make a million
BY DANIEL CHANG AND DAVID SMILEY, Miami Herald, 9/25
Charles Barbera retired in 2003 with a $124,905 annual pension after 27 years with the Hollywood Fire Department. Six years later, he retired again — this time as a millionaire.
When Barbera first “retired,” he entered the Deferred Retirement Option Program, or DROP, a public sector perk that’s unlike almost anything seen in the private workplace. It allows long-tenured employees to technically retire and start receiving a pension into a tax-deferred savings account while still working and cashing a paycheck.
Critics call it a double dip. But many local and state governments say the DROP is a money saver, or cost neutral at worst. And it is wildly popular among public employees.
Here’s why:
During the six years Barbera was in the DROP, he was able to earn an average $144,000 salary. All the while, his pension money piled up in his savings account in monthly increments. At the end of the sixyear DROP period, Barbera, by then a 51-year-old deputy chief, retired for real, surrendered his job and salary and began collecting his pension directly. And the money in his DROP account — worth $1,146,537 as of October 2010 — became his to do with
as he pleased. “Other than the Lotto, there’s no way in life that a blue-collar, middle-class person can accumulate that kind of money,” Hollywood Fire Lt. Russell Chard, who completed the DROP in March with a $600,000 account balance and now receives an annual pension of $86,700, said of the program.
Barbera and Chard do not share the concern of people with 401(k) accounts, who have gotten queasy watching their retirement nest eggs shrink with the Dow. Hollywood’s firefighter pension fund guarantees them an 8 percent return on money in their DROP accounts, regardless of market performance. Theoretically, the guarantee is not supposed to cost Hollywood taxpayers a dime — if administrators who invest pension funds can achieve at least an 8 percent return. But if they fail, the city and its taxpayers must make up the difference.
And in recent years, cities have had to pour tens of millions into their pension programs annually to shore them up. Hundreds enrolled in city programs Barbera, who could not be reached for comment, has plenty of company. Hundreds of South Florida city employees have DROP accounts of varying sizes.
In Miami, roughly one in five employees are in the DROP. Of the 144 Hollywood firefighters with accounts as of October 2010, six had amassed $1 million
in savings. Many more, like Chard, have accounts worth in excess of $500,000. Hollywood police
officers get the same arrangement as firefighters. But because their salaries and pensions tend to be lower — and they typically spend fewer years in the DROP than firefighters — very few police officers have DROP accounts greater than $400,000.
Under Hollywood’s rules, all can leave their money in the fund — taking advantage of that guaranteed growth rate, which was reduced to 6 percent for those who entered the program after 2009 — until running up against IRS limitations that kick in around age 70.
The program was not solely conceived as a nest-egg builder for late-career city and state employees. It was designed to be a retention device for governments, allowing them to hang onto valued employees like Barbera while preparing for a successor to step in.
It is often touted as financially beneficial for public pension funds. That’s because when employees shift into the DROP, their pension benefits are capped — meaning their monthly retirement benefit can grow no bigger no matter how much money they earn in subsequent years. Also, the city is finished paying into the pension fund on their behalf, a significant savings. Employees in the DROP are, likewise, done making payments toward their pensions.
“When I hear people call the DROP double-dipping, my blood boils,’’ said Stephen Cypen, a South Florida labor attorney who represents the Hollywood Firefighters Pension Fund and believes the program is a win-win proposition. Whether the DROP is truly cost neutral is a matter of some debate. There is little dispute that offering 8 percent guarantees can put a strain on cities and their pension funds during a down economy. “Why would the government, especially small government, take the liability for the stock market going up or down,” said Harris Solomon, a Fort Lauderdale attorney who has represented South Florida cities in
pension hearings before the state. “If you’re going to guarantee some of your rates of return, then you need to be a giant investment house.
And as we’ve seen, even they, our giant banks that are in theory experts in this — Morgan Stanley, Lehman Brothers — can’t do it. Why would we think that a local government can figure out how to invest at a guaranteed rate when the heads of the largest brokerage firms in the world and the banks couldn’t figure it out?’’
In Hollywood’s case, almost half of the city’s nearly $10 million contribution into its firefighter pension
fund in 2010 went to make good on the 8 percent guarantee, Finance Director Matthew Lalla said in a
June 22 email to commissioners.
“This is obviously not sustainable,’’ he wrote.
Hollywood won’t have to sustain it forever. Earlier this month, city voters passed a referendum that,
among other things, shuts the door to the DROP, effective this coming Saturday.
The differences from city to city
Though most longtime employees would be foolish not to go into the DROP if one is offered, the
program does come with disadvantages. Some cities do not allow workers to collect disability if they get
hurt while in the DROP.
There are also potential tax penalties for employees who want to cash in on their DROP accounts at a
young age.
Throughout the past 20 years, variations of the DROP have been implemented by Fort Lauderdale,
Hialeah, Miami, Miami Beach and Pembroke Pines, among many others. These DROP programs, like
pension plans, differ widely:
• Pembroke Pines guaranteed 8 percent annual growth on DROP accounts for police officers and
firefighters from 2004 until May 2010, when city officials negotiated a reduction to a guaranteed
minimum of 5 percent. Any police officers or firefighters hired after May 2010 will receive the same rate
of return as that realized by the pension fund’s investments.
Like Hollywood, Pembroke Pines allows police officers and firefighters to leave their DROP accounts in
the fund to reap the investment returns, even after they have separated from the city.
The city had a DROP for general employees but closed the door in 2010.
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Pembroke Pines adopted the DROP in the mid-2000s, a decade later than Hollywood, so the number of
people in the program is much smaller, and consequently so is the city’s liability for the guaranteed rate.
“You didn’t get a lot of big hiring in Pines until after Hurricane Andrew [in 1992, when the city saw an
influx of storm refugees],’’ said Daniel Rotstein, human resources director.
Still, Pembroke Pines will carry considerable legacy costs for those who retired before the benefit was
curbed.
“There’s a good 25 to 35 years of that,’’ Rotstein said, “because if somebody retires at 45 and their life
expectancy is 85 … it takes a while to work that liability down.’’
• In Coral Gables, firefighters can remain in the program for eight years and other employees five years.
Their accounts are guaranteed a minimum 3 percent return. They get more if the plan’s investments do
better than that.
• In Miami Beach, accounts are tied to the performance of investments and an individual’s proceeds
must be removed from the pension fund or rolled over into an independent account shortly after they
leave the city’s employ.
The firefighter and police pension fund got its deferred retirement program around 2000. Miami Beach
commissioners created a DROP for general employees in 2009 despite early warnings from the
administration that doing so could boost labor costs.
• Miami general employees can receive their salary and pension simultaneously for four years;
firefighters for five, and police for seven. Like Miami Beach retirees, they get no guaranteed return on
the money held in the accounts. Accounts increase or decrease in value in lockstep with investment
performance.
Even without a guaranteed return, recently ousted Miami Police Chief Miguel Exposito was able to leave
the DROP after six years with a $904,000 account balance to go along with an $118,000 pension. That
DROP figure doesn’t include a city-matched account created when Exposito became police chief in
2009.
A 48-year-old Miami deputy fire chief is one of many who figure to do about as well as Exposito. Since
enrolling in the DROP in April 2010, the deputy chief has benefited from a $222,000 yearly DROP
payment, to go along with his $193,000 salary.
Miami also offers something called a BACDROP, tailored for the employee who, for whatever reason,
regrets not entering the DROP a few years earlier.
Under the BACDROP, a worker can retroactively enter the program and instantly accrue a nest egg
equal to several years’ pension payments.
In January 2010, Capt. James Pace of the fire department entered the BACDROP and immediately
tallied $390,000. But there’s a tradeoff: Pace’s annual pension took a 22.5 percent hit.
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The end of a lucrative era
Lt. Robert Suarez, president of the city’s fire union, said the era of the half-million-dollar-and-more
DROP fund is fading away, at least in Miami. The city has slashed salaries in the past couple of years,
and altered its pension system, capping retirement benefits at $100,000 a year and freezing the growth
of those worth more than that.
“The benefits you’re looking at are not what the city is offering anybody now,” he said.
Those new pension reforms, however, don’t affect the large portion of Miami’s 4,000-strong workforce
already in the DROP. Their retirement benefits are set in stone.
Dan Martinez, president of the Hollywood firefighters union, said the 8 percent guarantee that seems so
generous today was actually the result of a concession made by employees in 1999.
“During the tech stock boom, we were making huge returns,” Martinez said. So much so, that the city
wanted the firefighters to settle for an 8 percent guarantee, which they did.
These periodic recalibrations of the DROP in various cities have created a multitiered system where
workers performing the same tasks receive markedly different benefits.
And then there is the case of Charlie Dodge.
In 2002, the Pembroke Pines city manager retired and entered the DROP. The following year, he
proposed that the city hire him and his assistant city manager, Martin Gayeski, as private contractors, for
a total initial cost of $669,000.
The City Commission agreed. Dodge’s firm went on contract as city manager and superintendent of the
city’s charter schools.
Employees who leave the city’s payroll don’t stay in the DROP.
But Dodge did. By 2007, Dodge was done with the DROP. In 2010, he was instrumental in closing the
general employees’ pension plan to new employees, including the DROP, as a cost-cutting move.
Dodge did not respond to repeated requests for comment.
Rotstein, who became human resources director in 2008, said Dodge’s deal would not be allowed today,
but added that the city manager gained little because general employees didn’t get a guaranteed rate on
their DROP accounts.
“Most people would rather have the money in their hot little hands,’’ he said.
That’s true of Robert Jenkins, a Miami Beach policeman who was president of the city’s Fraternal Order
of Police. He entered the DROP six years ago when he was in his 40s, achieving six-figure savings. But
there was a hitch: Jenkins left the DROP too young to avoid a 10 percent IRS penalty for withdrawing
the money before roughly age 60.
In Miami Beach, fund value is tied to investment performance, and Jenkins watched his account value
sag during the 2008 market meltdown.
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“I can’t touch that money,” said Jenkins, 50. “I wish I could. I lost money in the DROP and now I can’t
even take it out.”
But he’s not going to end up on the street. In January 2009, four months after he finished the DROP and
separated from the city, Miami Beach wanted to hire a new parking manager. The city chose Jenkins.
The pay is $45,000. He doubled that last year, tacking on more than $44,000 in overtime.
Jenkins also gets his $85,000 pension.
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