Category: Newsroom

DROP UPDATE – January 13, 2014

Due to the pending actuarial study of the DROP Program, many members are concerned… Is DROP going to change? Should I enter now? Is DROP costing the City money? Are there plans to freeze DROP? Will DROP be around when I get ready to retire?

A lot of questions remain unanswered. However, here is what we do know:

• DROP is currently open to eligible members.
• At the time the DROP Ordinance was last amended on November 7, 2008, the “Sunset Clause” for termination of the Program was removed. Therefore, the DROP Program will continue indefinitely unless and until the ordinance is amended in the future.
• DROP will not be discontinued without warning.

The Administrative Code, Section 4.2100(c), specifically states the criteria by which DROP can either be amended or suspended. These criteria include maintaining cost neutrality to the City and/or meeting the City’s DROP goals of retaining and lengthening the careers of sworn personnel with LAFD, LAPD and the Harbor Department.

We will have lead time to notify you of any Program changes.

If and when DROP is amended, there will be sufficient lead time for us (and the unions) to notify members that the Program will be amended. This notification will allow eligible members to enter DROP before the changes take effect. Before DROP can be amended, a study must be conducted, followed by a meet-and-confer with the unions.

The Administrative Code Section 4.2100 requires the City to conduct an actuarial study of the DROP Program no less than once every five years. The last study was completed in 2008 and the current study, initiated in late 2013, is expected to be completed in early 2014.

To make changes to the DROP Program, the City would need to do the following:

1. Have an actuarial study performed to evaluate whether the Program continues to be cost neutral and is meeting the goal of extending the careers of sworn personnel;
2.  Meet and confer with the unions to negotiate changes to the Program if the actuarial study determined that changes were warranted. (The City would have up to 180 days to negotiate the changes with the unions, with the possibility of an additional 180 days if both sides agree to an extension);
3. Any amendments to the enabling ordinance would affect only future entrants to the DROP Program – those who enter the Program after the effective date of the ordinance that amends DROP.

At this time, we are not aware of any effort to amend or suspend the DROP Program.

For questions, please contact your union. For information on entering or exiting the DROP Program, please contact the Retirement Services Section at (213) 978-4495, or (800) 787-2489, ext. 84495.

If you made after-tax pension contributions, your DROP funds may include after-tax “basis”. “Basis recovery” is the process by which your after-tax employee pension contributions are returned to you, free of taxes, as part of your pension benefits. You may have made after-tax contributions for any of the following reasons:
From 7/1/82 -12/20/96, mandatory pension contributions were collected after-tax.
Elective purchases of service credit made by contract or lump sum payments were collected after-tax. (Trustee-to-trustee transfers from Deferred Compensation are pre-tax.)

The voluntary 2% “opt-in” pension contribution by certain members in order to vest future retiree medical subsidy increases are collected after-tax. (Note: This does not apply to Tier 6 members.)
The Internal Revenue Code includes a provision that allows DROP members to recover a portion of their eligible after-tax contributions using an accelerated method. This method allows you to take a lump sum distribution of any eligible after-tax DROP funds, rather than recovering it in payments over your lifetime through the Simplified Method. Members exiting DROP on or after January 1, 2014 will be subject to this basis recovery method and may:
Recover pre-1987 after-tax contributions entirely from the lump sum DROP distribution.
Have any post-1986 after-tax contributions allocated pro-rata between the lump sum DROP distribution and the member’s ongoing monthly pension annuity. Any after-tax funds included in the monthly pension annuity will be subject to the Simplified Method. The Simplified Method, developed by the IRS, is the formula that determines the amount of your pension that will not be taxed for a fixed number of months in retirement based on your age and the age of your qualified spouse/domestic partner, if applicable.

Distribution Options – Effective January 1, 2014

Review the options below to select a distribution election for both your taxable and non-taxable DROP funds. Please note, if you rollover any non-taxable portion, you must also rollover your entire taxable portion.

OPTION
NON-TAXABLE DROP FUNDS
TAXABLE DROP FUNDS
1
Lump sum cash payment of eligible non-taxable funds
Direct rollover of all taxable funds
2
Direct rollover of all non-taxable funds
Direct rollover of all taxable funds
3
Partial lump sum cash payment and partial direct rollover of non-taxable funds
Direct rollover of all taxable funds
4
Lump sum cash payment of eligible non-taxable funds
Partial lump sum cash payment and partial direct rollover of taxable funds (partial lump sum cash payment subject to mandatory 20% Federal tax withholding)
5
Lump sum cash payment of eligible non-taxable funds
Lump sum cash payment of all taxable funds (subject to mandatory 20% Federal tax withholding)

All rollovers must be made to one financial institution of your choice for either the non-taxable or taxable portions of your DROP account. It is important to note that not all plans can accept a rollover of non-taxable funds, so please confirm with the plan of your choice before making any elections for a direct rollover. For example, the City’s Deferred Compensation Plan does not accept rollovers of non-taxable funds. Therefore, if you select Options 2 or 3, you must roll your non-taxable funds to an institution other than Deferred Compensation.
You must complete a DROP Distribution Form within 90 days of your DROP exit date to determine how you wish to recover your after-tax contributions. After 90 days, the distribution of your DROP account will be limited to a lump sum cash payment only, subject to mandatory 20% Federal tax withholding for the entire account balance. The Board Operating Policies and Procedures (Pension Processing, Section 3.2.3) have been amended to reflect the basis recovery method.
For more information review the DROP Basis Recovery FAQs. For any questions, please contact DROP/Service Pensions at (213) 978-4575.

FAQS – HOW AFTER–TAX CONTRIBUTIONS AFFECT YOUR DROP FUNDS

DROP BASIS RECOVERY

FREQUENTLY ASKED QUESTIONS

If you made after-tax pension contributions, your DROP funds may include after-tax “basis”. “Basis recovery” is the process by which your after-tax employee pension contributions are returned to you, free of taxes, as part of your pension benefits.

I’ve heard that if I’m exiting DROP after January 1, 2014, that I will get a refund or rebate. Is this true?

The amount due to you from DROP has not changed. However, the taxability of your DROP account will be determined differently, depending upon whether or not you’ve made after-tax employee pension contributions. You may be able to receive part of your DROP distribution tax-free.

How do I know if I’ve made after-tax employee pension contributions?

You may have made after-tax contributions for any of the following reasons:

From 7/1/82 – 12/20/96, mandatory pension contributions were collected after-tax.

• Elective purchases of service credit made by contract or lump sum payments are collected after-tax. (Trustee-to-trustee transfers from Deferred Compensation are pre-tax.)
• The voluntary 2% “opt-in” pension contributions certain members elected in order to vest future retiree medical subsidy increases are collected after-tax. (Note: This does not apply to Tier 6 members.)

How is the non-taxable portion of my DROP account determined?

If you made after-tax pension contributions, your DROP funds may include after-tax “basis”. “Basis recovery” is the process by which your after-tax employee pension contributions are returned to you, free of taxes, as part of your pension benefits.

If you are exiting DROP, the Internal Revenue Code includes a provision that allows you to recover a portion of your eligible after-tax contributions using an accelerated basis recovery method. This method allows you to take a lump sum distribution of any eligible after-tax DROP funds, rather than recovering it in payments over your lifetime through the Simplified Method. If you exit DROP on or after January 1, 2014, you will be subject to the following basis recovery method:

• Recover pre-1987 after-tax contributions entirely from the lump sum DROP distribution.
• Have any post-1986 after-tax contributions allocated pro-rata between the lump sum DROP distribution and your ongoing monthly pension annuity. Any after-tax funds not recovered from the DROP lump sum, will be recovered through the Simplified Method from the monthly pension annuity.

What is the Simplified Method?

It is the formula that the Internal Revenue Code requires us to use to determine the amount of your ongoing monthly pension benefit that is taxable vs. the amount that is tax-free. You can read about this formula in IRS Publication 575. The tax-free portion is based on the amount of your unrecovered after-tax contributions at retirement and your age (plus your spouse’s/domestic partner’s age, if applicable), when you exit DROP and begin to receive pension benefits.

The formula determines the amount of your pension that will not be taxed and the length of the time for that exclusion. By subtracting the tax-free amount from your gross pension for a fixed number of months, your already taxed contributions will be recovered. Cost-of-living pension increases will not change or have any effect on the tax-free amount since the calculation is based upon your remaining after-tax contributions at retirement.

How will I know how much of my DROP distribution will be non-taxable?

When you receive your DROP distribution election forms, you will be provided with your distribution options, the breakdown of your after-tax contributions, the amount that may be recovered tax-free from your DROP distribution and how much you will recover on an ongoing basis from your monthly pension benefit tax-free.

What if I exited DROP prior to January 1, 2014?

This change was implemented January 1 to coincide with the beginning of the tax reporting year. If you exited DROP prior to January 1, 2014, no after-tax basis was allocated to your DROP account. You are recovering all of your after-tax contributions from your ongoing monthly pension annuity, using the Simplified Method.

LAFPP’s tax counsel is working with the IRS to confirm the proper tax treatment of all benefits.

For any questions, please contact the DROP/Service Pensions Section at (213) 978-4575.

Pension Perspectives Newsletter for Retirees and DROP Members

Retired Members — February 2014 Newsletter

Currently Available to Members in Tiers 2 – 5!

Active members in Tiers 2 – 5 can now log in to MyLAFPP to view and/or print their 2013 Annual Active Member Statement.* Once logged in, simply click on the link in the Online Paper Statement box and then select the year of your choice.
*Please note that Tier 6 members will be notified once their statements become available.
This statement summarizes a member’s individual pension-related information by providing employee information, pension estimates (if eligible to retire), contributions and interest, domestic partner information and beneficiary designation as of December 31, 2013.
For questions concerning your statement, contact the Active Member Services Section at (213) 978-4522.

Annual Board Retreat: March 6, 2014

On Thursday, March 6, 2014, the Department held its Sixth Annual Board of Fire and Police Pension Commissioners Offsite Educational Meeting at the California Endowment Center. This Educational Meeting for the Board and our stakeholders was designed to educate Board members and all of our stakeholders on various issues and topics that are relevant to the administration of pension benefits and investments. Educational sessions included an Overview on Private Equity, Healthcare Reform, Healthcare Reform Panel discussion, GASB 67 and 68 Implementation, Asset Allocation Primer and Experience Studies 101.
The Educational Meeting was attended by several representatives from our member associations, including the Los Angeles Retired Fire and Police Association, Los Angeles Firemen’s Relief Association, Los Angeles Police Relief Association, Los Angeles Police Protective League, United Firefighters of Los Angeles City, Los Angeles Police Command Officers Association and the Los Angeles Port Police Command Officers Association. The Board and staff thank you for your interest and support!
Click here for the presentation material.

On March 12, 2014 the City Controller released audit reports for both Los Angeles Fire and Police Pensions (LAFPP) and the Los Angeles City Employees’ Retirement System. This is consistent with Section 1112 of the Los Angeles City Charter which requires the City Controller, the Office of the Mayor and the Los Angeles City Council to request a management audit of the pension systems be conducted by an independent, qualified management auditing firm once every five years. The first such audit was released in 2007.
We are pleased to report that the current audit found that:
LAFPP is generally operating in an effective manner.
Investment management fees were reasonable compared to our peers.
On a cost per assets basis, LAFPP’s administrative expenses are lower than average.

We look forward to reviewing and addressing each recommendation.

On March 3, 2014, MSN Money released an article by Traders Reserve titled, “3 Huge Cities Flirting with Bankruptcy”. Los Angeles was named as one of the three. Since the economic downturn in 2008, the City has taken the necessary steps – negotiated pension and healthcare costs, reduced its civilian workforce, increased revenues – to improve its financial position. According to a January 2013 study completed by the Pew Research Center, LAFPP is amongst the highest funded public pension systems in the country. For additional information please see our article on Detroit’s Bankruptcy Filing.

THE PENSION REFORM ACT OF 2014 Update as of 3/18/14 On March 14, 2014, San Jose Mayor Chuck Reed announced that he and fellow supporters decided to suspend efforts to qualify their initiative, “The Pension Reform Act of 2014″ (AG# 13-0043) for the upcoming November 2014 General Election. The decision came after Sacramento Superior Court Judge Allen Sumner rejected Reed’s lawsuit against Attorney General Kamala Harris, citing inaccurate ballot language. The judge stated that Reed failed to prove that the ballot summary was false, misleading or biased. As a result of this legal challenge, the proponents concluded that there would not be sufficient time to obtain the 807,615 valid signatures to qualify the initiative for this year’s November election. Instead, they will resume their efforts later for the November 2016 election. Background The Pension Reform Act of 2014, officially titled, “Public Employees. Pension and Retiree Healthcare Benefits. Initiative Constitutional Amendment,” would have amended the California Constitution to allow all public employers, including the City of Los Angeles, if they so choose, the option to modify future pension and retiree health benefits of current employees. The initiative would have provided the following: The constitutional protections would be eliminated for current public employee pension and retiree healthcare benefits for service not yet performed. Government employers would have the flexibility to reduce employee pension benefits for future service if their pension plans are substantially underfunded or if they declare a fiscal emergency.   Benefits earned for service already performed would remain protected by law and may not be modified.  As such, current retirees or an employee who retires prior to any benefit changes would not be impacted. Government employers would be required to publish a non-binding “stabilization report” for every year that the actuarial funding status of their pension plans is below 80 percent. Please be assured… The Board of Fire and Police Pension Commissioners, management and staff will continue to monitor this and other pension reform efforts and provide member updates as they become available.

2014 ANNUAL REPORT

The 2014 Annual Report for Los Angeles Fire and Police Pensions is now available online!

As of June 30, 2014, the System’s assets grew from $15.75 billion to over $18.27 billion on a market basis, while serving over 25,600 members including 13,097 active and DROP members and 12,502 retired members and beneficiaries. The System’s pension benefits are actuarially funded at 86.6 percent and the health subsidy benefits are funded at 43.2 percent.  Combined, the funded status of these benefits is 80.8 percent.  It is important to note that LAFPP has been pre-funding health subsidy benefits since 1989, and is one of the few public pension systems to do so.
Our market rate of return of 17.86 percent marks the second year in a row that the System experienced double-digit returns. This increase from the previous year’s 13.01 percent return was primarily due to strong performance in the domestic fixed income and international equity markets.  As a result, LAFPP continues to remain amongst the highest funded public pension systems in the country.
 
This past fiscal year was also a year of great accomplishments at LAFPP. Our successes include the completion of security and network infrastructure upgrades to help ensure the protection of our membership information. In addition, the project to replace our pension administration system, one of the most significant projects undertaken by staff, is well underway.  A major goal of the new system is to provide additional functionality to members and staff.  We continue to refine and update our Strategic and Business Plan goals to build upon our prior achievements and meet new challenges. All achievements ultimately support our mission – to advance the health and retirement security of those who dedicate their careers and risk their lives to protect the people of Los Angeles.
 
In addition to this report, our historical annual reports, actuarial valuations and financial statements are available in the Financial Reports section.