Public employers are growing increasingly skeptical of Deferred Retirement Option Plans. So-called DROP plans allow employees who would otherwise retire in a defined benefit plan to continue working. However, rather than continuing to accrue credit for their extra years of service, their pension is paid out alongside their usual salary but is credited to a separate account with a city-guaranteed interest rate. The employee typically receives the money in the account, including an agreed-upon interest amount, in a lump sum when he or she retires. DROP plans were initially promoted as cost-neutral programs that would keep experienced employees around longer. That optimistic outlook, however, is shifting.
Last Wednesday, the California Supreme Court held oral arguments for Cal Fire Local 2881 v. CALPERS. This case, along with three others, addresses the “California Rule,” which provides that employees are forever entitled to the pension benefits that were promised to them on the first day they began their service. The California Rule has been known to pose problems for fiscally limited agencies because the rule essentially prohibits decreases of an employee’s pension benefit. This case, however, might show that the California Rule is not so inflexible.
As reported in the Sacramento Bee, last week the CalPERS Board unanimously voted to shorten the amortization period of future gains and losses from 30 years to 20 years. The new policy will become effective as of the June 30, 2019 actuarial valuations, with the first payments due in 2021.
Other AALRR Blogs
- CalPERS Health Plan Premiums Announced for 2021
- CalPERS Misses Annual Investment Target with a 4.7 Percent Net Return
- “California Rule” Survives (For Now) — But “Airtime” Does Not
- Be Cautious About “DROP” Programs
- California Supreme Court Hears Cal Fire Oral Argument
- Amortization Period for New Debt Shortened to 20 Years
- New CalPERS Compensation Limits, Effective Immediately
- CalPERS Responds to Its Critics
- Senate Bill 525 Amends California Public Pension Laws
- New Stanford University Study Predicts Public Pensions Costs in California to Consume 14-17.5% of Operating Expenses by the Year 2030