Some L.A. pensions are so huge they exceed IRS limits, costing taxpayers millions extra

By Jack DolanStaff Writer

Dec. 16, 2018 4 AM PT

Dozens of retired Los Angeles employees are collecting such generous retirement pay that they exceed pension fund limits set by the Internal Revenue Service, saddling taxpayers with additional costs, a Times data analysis has found.

Their lavish pensions forced the city to establish an “Excess Benefit Plan” to pay what the pension system cannot legally cover, using money that could otherwise be tapped to fix sidewalks, fight homelessness or hire more cops.

In all, the little-known fund has paid $14.6 million to 110 retired employees since 2010, The Times’ analysis showed.

The list of recipients is dominated by former cops and firefighters whose million-dollar payouts from a separate retirement program drove their incomes well over the $220,000 annual limit the IRS allows pension funds to pay.

The top recipient of excess benefits last year was former LAPD Assistant Chief Earl Paysinger, whose $251,000 pension alone would have put him over the limit.

But an additional $1.3-million lump sum payment Paysinger got through the Deferred Retirement Option Plan when he retired in 2016 catapulted him way over the top, requiring the city to pay more than half of his pension from the Excess Benefit Plan.

Next was former Assistant Fire Chief Emile Mack, who also received a $1.3-million DROP payment in addition to his $247,000 pension, according to city data from 2017, the last year for which complete records are available.

Joining them soon at the top of the list will be current LAPD Chief Michel Moore, who got a $1.27-million DROP payment and started collecting his $240,000 pension when he retired, briefly, earlier this year. He’s now collecting an additional $350,000 per year in salary from city taxpayers.

The DROP program came under scrutiny this year after a Times investigation found that nearly half of the cops and firefighters who have entered the program — which pays their salary and pension simultaneously for up to the last five years of their careers — subsequently took injury leaves, typically for bad backs, sore knees, carpal tunnel syndrome and other conditions that afflict aging bodies regardless of profession.

The average absence was about 10 months, but hundreds took more than a year off, at essentially double their usual pay.

In response to The Times’ investigation, Mayor Eric Garcetti and leaders of the unions representing police and firefighters called for reform, requiring that people in DROP show up for about half of their scheduled hours in any given month in order to get the extra pension check. The proposal passed its first reading in the city council 12 to 0; a second vote is expected in January.

Supporters of the program suffered another blow last month when a city report showed DROP has never been “cost-neutral” as was promised to voters in 2001.

This week, Garcetti spokesman Alex Comisar refused to say whether the mayor thinks it’s appropriate for the city to pay excess pension benefits from money that could otherwise be used for essential city services. But he noted that pension reforms instituted earlier this decade should prevent people hired after 2011 from being able to exceed the IRS limit when they eventually retire.

“Our police officers and firefighters spend their careers putting their lives on the line to protect our safety, and we have a responsibility to provide them the benefits they’ve earned,” Comisar added.

Los Angeles is far from alone in setting up such a plan to get around the IRS limit. Both of the state’s largest public employee pension funds, CALPERS and CALSTRS, have them, as does the University of California, said Robert Fellner, executive director of Transparent California, which tracks pay to public officials

“It’s just another perk government workers get, paid for by taxpayers, who will never see similar perks themselves,” Fellner said.

Pensions are typically paid from money set aside by employers and employees over the course of a career. Because those funds get significant tax breaks — contributions aren’t taxed and neither are the earnings on investments — the IRS placed a limit on how much money they can pay any retiree in a given year.

That limit rises with inflation and is generous — someone without a pension would have to save about $5 million in their retirement account to have a similar guaranteed income.

City leaders began funding the Excess Benefit Plan in 2002, said Ray Ciranna, general manager of the Los Angeles Fire and Police Pensions. That was around the time they initiated a pair of key policy changes that made it clear they were creating a class of retirees whose pension benefits would soon far exceed the IRS limit.

First, following a precedent set by the California Highway Patrol a few years earlier, the city raised the maximum pension for police and firefighters from 70% of salary to 90%.

“Before that, when it was capped at 70%, it was almost impossible to exceed the [IRS] limit,” Ciranna said.

Next, voters approved a ballot measure creating the DROP program, which has distributed more than $1.7 billion in early, extra pension checks, city records show.

Nobody in Los Angeles has received a bigger DROP payout than Paysinger.

Like everyone else in the program, the former assistant LAPD chief’s early pension checks were deposited in a special savings account, with city-guaranteed 5% interest, while he worked his last five years and collected his $280,000 salary, city records show.

When he retired in 2016 to become vice president for civic engagement at USC, he walked away with an impressive $1.34-million lump sum from DROP.

Since that put Paysinger well over the annual IRS limit, and would put the city’s general fund on the hook for a huge one time charge, the DROP payment is plugged into a formula that, for accounting purposes, spreads the lump sum over the retiree’s expected life span and determines how much of his monthly check should come from the pension plan and how much must be paid from the general fund.

The result, in Paysinger’s case, was that the Excess Benefit Plan paid $144,000 of his $251,000 pension in 2017. Paysinger did not respond to messages requesting comment.

In Mack’s case, $136,000 of his $247,000 pension came from the Excess Benefit Plan last year. Mack could not be reached for comment.

A similar calculation will soon be done for Moore, said Ciranna, the pension fund manager. The former LAPD chief of operations retired for about a month at the beginning of this year, which allowed him to collect his $1.27-million DROP payment and then come back to work at his old job and salary.

The highly unusual move was approved in advance by Garcetti, who appointed Moore to the department’s top job a few months after his return. Because police and fire chiefs are excluded from the DROP program, others who have promoted from within the departments have had to forfeit their DROP accounts in order to accept the prestigious postings.

When The Times reported on the chain of events in August, Moore conceded the timing looked “suspicious” but insisted he did not know he would soon be offered the chief’s job when he retired and collected his DROP payment.

Moore’s spokesman, Josh Rubenstein, did not respond to multiple requests for comment on this story.

Eight of the top 10 recipients of the Excess Benefits Plan in 2017 were former cops and firefighters, most of whom received substantial DROP payments, The Times found.

The only civilians among the top 10 recipients, according to city records, were John Driscoll, former head of Los Angeles International Airport’s governing body, and Robert Aguallo Jr., former head of the city’s largest employee pension fund. Aguallo sparked a city ethics probe when he started lobbying his former employer to pay higher fees to his new employer, an investment firm, just days after he retired in 2008, but the ethics commission took no enforcement action.

Jack Humphreville, a blogger and frequent critic of city spending, said he didn’t know the city was paying its most highly compensated retirees from the general fund — essentially the city’s checkbook — instead of from money specifically set aside and invested to cover pensions.

“This is just another reason you don’t trust city hall,” Humphreville said.

Jon Coupal, president of the anti-tax Howard Jarvis Taxpayers Assn., also said he had never heard of an Excess Benefit Plan.

“I’m surprised they didn’t come up with a more innocuous name, like ‘fair compensation plan,’ ” Coupal said.

Though the city has moved to combat chronic, long-term absenteeism in DROP — a serious problem for a program that was pitched to voters as a no-cost way to keep veteran cops and firefighters on the job a few years longer — the broader question of whether the program makes financial sense remains open.

Former Mayor Richard Riordan, who championed the creation of the program in the early 2000s at the request of the police union, has since said it was a mistake. Other cities that experimented with their own versions of DROP, including San Diego and San Francisco, quickly abandoned them, citing the expense. Los Angeles County officials considered creating a DROP a few years ago but decided the idea was flawed for several reasons, including the likely expense.

For years, actuaries hired by the city of Los Angeles said they did not have enough data to determine if the DROP program was really “cost-neutral” as voters had been promised.

But the last two studies, one completed in 2014 and the other last month, determined the DROP is not, and has never been, cost-neutral.

Even so, there has been little appetite among city leaders — including Garcetti and key city council members who get financial support from the politically powerful police and firefighter unions — to eliminate the program.

In an email to The Times after publication of the most recent study, Garcetti’s spokesman focused on a sentence that said DROP could become cost-neutral in the future if certain conditions are met. Comisar wrote that the mayor is “encouraged” by the report and looked forward to discussing it with other city leaders.

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