Pension Crisis

In Los Angeles, Massive Payments to Retirees Don't Even Count as 'Pensions' Anymore

A heavily abused program breaks the limits of what the IRS allows, leaving taxpayers even further on the hook.


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In Los Angeles, retirement payments for some top police and fire officials don't really count as pensions anymore. The city is essentially handing over wads of taxpayer cash directly to retired leaders.

The Los Angeles Times reports that retirement pay for dozens of retired public officials has grown so large that they're slamming into the ceiling of what the IRS allows to fall under the tax breaks of a pension fund. So as public employee pension funds skyrocket on the top end, the city had to make a special "Excess Benefit Plan" fund that has paid off $14.6 million to 110 employees over the past eight years.

The IRS limit for pension fund payments is $220,000 a year. Mind you, California has more than 60,000 retired public workers who earn six-figure annual pensions. There are retirees who are already hitting that ceiling. But in Los Angeles, thanks to a particularly corrupt special retirement program, the problem has escalated dramatically.

Los Angeles has a Deferred Retirement Option Plan (DROP), a special program that allows public safety employees to earn what they'd get paid as pensions for the last five years on the job while still earning their salary. Those pension payments are set aside in a fund and the employees get it all as a massive lump sum when they retire.

The stated justification for the program was to give older public safety employees (police and fire captains, etc.) a financial reward for staying around and "mentoring" younger leaders. This was somehow supposed to be budget-neutral. Instead, the program has been a predictably costly disaster. The Los Angeles Times has thoroughly investigated how public safety employees abuse the program by joining it and then claiming injuries and taking extensive medical leaves. This means they're not working at all, but they're earning both their salaries and their pension pay at the same time. They're not just getting paid for doing nothing—they're getting paid even more.

As Jack Dolan notes at the Times, these lump sum payments from the DROP program are pushing additional employees past the IRS limits for pension payments, and that's also prompting the need for this new fund. That money comes out of the city's pool of revenue, yanking away funding from infrastructure.

One beneficiary of this program is the Los Angeles Police Department's new chief, Michael Moore, who "retired" briefly while a participant in DROP before being offered the top job. He got a $1.27 million payout from DROP and is now also making $350,000 a year on top of his pension. They're now discussing how to reform the system to make it less prone to abuse, but Dolan notes that there's little "appetite among city leaders" to eliminate the program because of the power public safety unions hold in Los Angeles.

Unbelievably, this same weak-willed, spendthrift city government asked voters in November to give them permission to open up and operate a bank, its supporters attempting to lay the blame on Wall Street for the city's financial problems. Voters wisely said no.