THE DROP CONUNDRUM

On Friday, November 20, 2004, the SDCERS Board of Trustees took under consideration a proposal to change the annual interest rate for retired members DROP accounts to the yield on the 5 year U.S. Treasury as published on the first day of each new fiscal year. Currently that yield is 3.45%. The matter first came before the Business & Procedures Committee where several retired members voiced their concerns about any change to the DROP interest rate. After considering the information available to them, the Committee asked that further study be done before any action is taken on the proposal. This request was later agreed to by the full Board at their afternoon meeting. The Board agreed to continue paying the 8% interest rate to retired members through March 31, 2005

Coincidently, on Thursday November 19^th, 2004 the SDCERS Audit Committee had reviewed an audit report discussing the recent performance of SDCERS in several areas. One of the areas reviewed was the DROP program. The audit report showed that overall benefits for SDCERS retirees are on a par or better that those of other plans studied. It also found that the 8% interest rate for DROP is higher than that of the other plans studied. The other plans all had different ways of crediting DROP interest with some paying as little as 3% or paying the yield on the 10 year U. S. Treasury.

In looking at the option of changing the DROP interest rate for retired members, the Board considered previous legal opinions on the topic including whether DROP is a “vested benefit” and whether retired members rights were subject to the rule of “detrimental reliance”

As many of you know, there has been a lot of publicity about the DROP program with the Pension Reform Committee and local politicians describing DROP as a “Cadillac plan” and a “giveaway”. Public perception is that DROP is a “gift” of City money to retired members. They do not understand that almost all of the money in a DROP account is money earned by the member. Hopefully, we will be able to change that perception, but, as you know, perception is often “reality “ to some.

Something that must be considered by all with DROP accounts who are concerned about losing the current 8% interest rate is the following. Effective April 1, 2005, a new Board of Trustees will be sworn in due to the passage of proposition H on November 2^nd, 2004. Of the 13 members on the Board of Trustees, as many as eight (8) members may be new members. If the current BOARD does not resolve this issue, the new Board will have the final say on it.

For those of you retired members with a DROP account, I recommend that you take the time to consult with a financial advisor to determine what options you might have if there is a vote to change the interest rate. At this, no one knows whether or not there will be a change, but it would be a smart move to look into your options and protect your investment to the best of your ability