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The Secrets of Plan E

By: Kathleen Sharp

CounterPunch, July 15, 2002

Editors’ note: Nothing more vividly evokes the corruption and cruelty of our present social arrangements than the sight of some scoundrel atop a $100 million option buyout whooping it up in his palace after looting his company’s pension fund and leaving thousands of employees on the trash heap.

            The fight over social control of the trillions in pension funds, public and private, will be with us through the century. It confronts the biggest issues, starting with basic conditions of life for the growing slice of those turning the bend into the home stretch.

            This isn’t a story about Enron’s 401(k). It’s about a huge public employee pension fund. Yet here are familiar scenes: top dogs in plush kennels, underdogs with barely a crust and junkyard dogs, lawyers, and fixers, fighting over the perks. Something like it is probably going on in your neighborhood. – AC/JSC

            With its chipped paint and moldy carpet, the rented bungalow at Vernon and 2^nd Avenue doesn’t look like the home of a top fund investor. Yet, here lives a member of a huge, $30 billion pension fund – one of the largest and most envied public portfolios in the country.

            “Come on in,” says renter Ernestine Pruett, smiling. The pensioner invites me enter her well-kept home, which is so small there’s no room for a coffee table.

            Pruett is the daughter of a janitor and a maid, the first in her family to attend college. With a bachelor’s degree in biology, she landed a job at the country-operated Martin Luther King Hospital where she worked steadily for 26 years. She analyzed blood so anemic newborns and bullet-riddled teens could receive transfusions. Sometimes, people bled to death. Sometimes, they exposed her to diseases. But Pruett loved her job. “We saved a lot of people’s lives,” she said proudly.

            By late 1997, Ernestine needed to retire from her Los Angeles County job to care for her dying mother. She attended two meetings that explained her retirement plan, and was told she’d receive half of her $4,500 monthly salary—or $2,250—as her pension. IN January 1998, she visited the fund’s offices and inquired further. This time, the experts told her she was in a different plan than she had thought and that her monthly check would be “a little less” than the $2,250 she expected. So, on March 17, 1998, she retired.

            A month later, she received her first check. It was $800—or 18 percent of her salary and a third of what she had been told to expect. She nearly fainted. The check didn’t cover her rent, utilities and groceries, let alone her mother’s expenses. Pruett started using credit cards to buy necessities and amassed a $9,000 debt. Finally, she gave up and last year, filed for bankruptcy.

            What galls Pruett is not simply that the county didn’t disclose the details of her low-paying retirement plan—as the law requires. It’s that she never signed up for the lower-paying plan. She claims that the county and the Los Angeles County Employees Retirement Association (LACERA)—the trustee of her money—betrayed her. For one thing, they didn’t inform her that the county had dropped out of Social Security two decades ago, thus depriving her of about $700 a month in her old age. “Had I known, I could have paid my own Social Security (contributions) for all those years,” she says. Nor did they tell her they’d deduct $700 from her small check, based on the maximum Social Security Benefits she would have received if the county had remained in the federal plan. Nor did the trustees tell Pruett they’d subtract another $550 from her check if she retired before age 65, which she did.

            Pruett is not alone. Approximately, 35,000 retirees and workers are covered under the same plan. After belatedly discovering the pernicious details of Plan E, Pruett and 1,200 other fund participants sued LACERA. As the County Employees for Fair Retirement Plans (CEFRP), they claimed that LACERA administrators tricked them in a 20-year-long “colossal shell game.” LACERA and county officials say they’ve done no wrong. Besides, they’ve argued, the statute of limitations on such claims expired long ago and CEFRP has no standing, as a group.

            Meanwhile, Pruett and her co-workers are footing the legal bills on both sides of the aisle—those incurred by CEFRP’s plaintiffs and the defendants, the employees’ retirement fund.

            The shenanigans within America’s trillion-dollar retirement system shock most average workers. By law, all pension plans must contain full disclosers about every term and contingency. Increasingly, however, corporate funds treat “full disclosures” like a contracting rubber band. Once Enron’s shady deals began to emerge, its stock fell to 36 cents and wiped out $1 billion in workers’ retirement funds.

            Over the years, California has tried to protect public pensions from such dastardly schemes. LACERA is governed by California’s 1937 Public Employee’s Retirement Act, which was passed during the Depression to give public workers a decent income in old age. It’s the largest county pension fund in the state and holds about $30 billion in assets. It administers “defined” benefits for 137,000 county workers and retirees, which means that these workers know exactly how much money they’ll collect when they retire. Unlike corporate plans that rise and fall with the stock market, public pensions are reliable –so much so that they help lure new employees. As Simon Russin, a director of LACERA’s two boards, puts it: “You take a lower salary for better benefits.” By state law, LACERA’s administrators are fiduciaries who “must be vigilant in protecting the employees and their money”, says CEFRP’s co-counsel Jim Christiansen. And the state Supreme Court has consistently ruled that trustees must not use “the slightest misrepresentations, concealment, threat or adverse pressure of any kind”.

            But that’s what happened in this case, according to my ten-month review of the seven-volume court cases and dozens of interviews.

            Our tale Begins in 1981, the dawn of the Reagan era, when the country decided it needed to cut costs. It eyed its four employee retirement plans, from Plan A – the Cadillac of the lot—to Plan D—the two door. Workers kicked in between 4 and 10 percent of their salaries to their plans while the county contributed anywhere from 6 percent to 15 percent.

            But the county wanted a cheaper pension plan—Plan E. The county would contribute only 2 percent of a worker’s salary, rather than 4 or 5 percent. And the worker would pay nothing. Employees would have to cash out of their existing LACERA plans and sign up for the lower-paying one. But first, the county and LACERA had to sell their idea to the labor unions.

            At the time, the county was negotiating new contracts, and it made Plan E part of a new package. So union members didn’t like Plan E because it paid so little upon retirement. “I thought it was horrible,” recalls Charles Hanson of Service Employees International Union (SEIU) Local 660. But other liked the idea of not paying into a fund and taking home more money in their paychecks. According to CEFRP’s Walt Miller, who worked for Local 660 at the time, the county made Plane E a take-it-or-leave-it offer. “If the unions didn’t accept Plane E, its members were looking at lay-offs.”

            In July 1981, seven unions and the county signed a 76-page memo detailing workers’ fringe benefits. The long memo included a few paragraphs about Plane E. Here was the first opportunity to fully disclose Plan E. But as LACERA board member Russin says: “No one in the unions knew how bad it was going to be because no one told them.” But the county pledged to disclose Plane E details to employees later.

            At the time, the county and LACERA were located in the same building. LACERA was run by the County Treasurer and managed by two county employees. Russin maintains that “the county had absolute control over LACER and how much money it could spend on informing employees.”.

            Before the county could implement Plan E, it needed the state legislature’s approval to amend the 1937 pension act. So, the county and LACERA drafted Senate Bill 485. The proposal detailed a pension program so Draconian that the powerful sheriffs and firefighters unions objected. To appease the safety workers, the county agreed to exempt them from Plan E. Then, to make sure no other group would oppose its bill, LACERA and the county quietly swapped the language from the original SB 123. Then they deceived lawmakers further. According to court documents, a staff bill analysis said that the county planned to replace income for retirees by combining “a county retirement allowance and Social Security.” But the county was already in the process of withdrawing from Social Security to save even more money—about 7.5 percent. Neither LACERA nor the county revealed this to the California Legislature. Told of the county’s urgency, lawmakers quickly passed the 36-page law in September 1981.

            Next came the broiler-room sales tactics. In November 1981, the county newsletter said: “New employees who transfer to this new plan…will (see) an average in-crease in take-home of some 7.5%.” Sounding like a used car salesman, the county advertised its “ONE-TME-ONLY” offer, stating that “employees would be able to greatly enhance their retirement situation by participating in Plan E.” Yet, the newsletter provided no financial details to support the claim.

            Many did receive a brochure—a copy of which I acquired. Ben Carlson, a Ph.D. who at the time managed a health division, spent hours reading the county’s Plan E material. He noticed that the county didn’t give a complete formula for Plan E – as it did for other plans – but he finally broke its code. Plan E equaled 2 percent of your salary, times the number of years you’ve worked, minus a Social Security deduction and an “early retirement adjustment”.

            Unfortunately, two parts of Plan E’s formula were absent from the county’s “full disclosure” brochure. Under other county plans, a Social Security deduction totaled $50 . But there wasn’t a comparable figure under Plan E. When Brian Brooks (a director of LACERA’s investment board and a CEFRP plaintiff). Carlson and Smith inquired, they were told to subtract “about the same $50 figure” from Plan E pensions.

            Also missing was the financial penalty for early retirement. Since the average county worker retires at age 55, this information was crucial. The county listed comparable numbers under plans A,B,C, and D, but not for E. All it said was that such benefits would be “actuarially reduced.”

            Inside the brochure was also a small print disclosure. It said that the county was “scheduled to terminate” Social Security in 1982 unless the supervisors or the courts intervened. If the county withdrew from Social Security, “the impact on retirement benefits…(would be) indeterminate.” But Carlson wondered: “How could they not know the impact of withdrawing from Social Security when they use those numbers to disclose our benefits?” Indeed, the county calculated Social Security payments to the penny—along with each plan’s monthly pension amount (based on one’s age and years of service). By adding the federal and county pensions together, one could compare all five of the total retirement packages.

            Even so, based on plan E’s disclosure materials, Carlson figured he’d receive half his salary as a pensioner. “Not bad,” he thought.

            LACERA said it also held information seminars for Plan E. But neither Carlson, Pruett, Brooks nor Smith ever heard about them. Even so, those who read about the county’s new plan liked it. “It seemed like you’d be stupid not to go into Plan E,” says Leonard Smith, a computer programmer. He and 17,00 others either cashed out—or were moved out—of their existing plans and into Plan E. Half of the were non-union members. Most worked in low-paying jobs as janitors, nurses, clerks, sewer workers, park employees, trash collectors, hospital personnel, social workers, court reporters, and librarians. They were Hispanics, African-Americans and Asians who earned between $20,000 - $50,000 a year.

            A few, better-paid managers cashed out, receiving 2 percent interest on their county funds at a time of 18 percent interest.

            “Plan E might make sense for those who can work until they’re 65,” Carlson explains. “But few people can work that long—and certainly not laborers.” By the time people would learn all the facts about Plan E, it would be years later. Even sophisticated managers like Carlson, property appraisers such as Brooks and high-tech chiefs like Don Dunagan couldn’t see through the half-truths invisible disclosures.

            In the late 1980s, LACERA stopped using county staff and hired its own administrators. In 1991, it moved out of the county’s Hall of Administration and into its own offices in Pasadena. Its new high-rise, called “The Pink Palace”, had been build with $66 million from the workers’ retirement fund. It featured a walk-in center with a full-time staff that was supposed to give employees clear, complete information about their retirement plans. Eventually, this counter would be setting for dozens of dramatic scenes surrounding Plan E.

            By 1992, California’s public pensions had become so wealthy, they became political fodder. Faced with a tight budged that year, Governor Pete Wilson tried to withhold the state’s contribution--$ 2 billion—from the giant California Public Employee Retirement System (CALPERS). But voters slapped him down by passing Proposition 162. It said politicians could not use pensions funds for their own ends—not even to avert a financial crisis, as Los Angeles County had done in 1981. It affirmed “that a retirement board’s duty to its participants and their beneficiaries takes precedence over any other duty,” and that duty was to provide civil servants wit “a basic level of dignity and security in their retirement years”.

            By 1995, a few Plan E members had retired from their jobs. “We started hearing horror stories about folks who had retired into poverty,” Smith recalls. Some co-workers had been forced to sell their homes and cars. Some had moved in with their children—or worse. One day, a mechanic with 25 years of service had to crawl overran open elevator shaft on a 2x6 wood plank. The 45-year-old, Adam Ronquillo, fell several floors and broke numerous bones. “That’s when he learned about Plan E’s true disability benefits,” workers compensation attorney Dan Trammel told me. Under Ronquillo’s original pension plan, he would have collected half of his salary for life—about $2,000 a month. But under Plan E, he got only $250—not enough to support his wife and two kids.

            Soon, Plan e members started to line up LACERA’S service counter with questions. Brooks wanted to retire at age 60 and asked LACERA’s experts to calculate his monthly retirement income. “I asked three different times and got three different answers.” LACERA published tables with compensation figures for plans A,B,C, and D, but not for E.

            Such mysteries prompted Carlson, Smith and Dunagan to dig deeper. Carlson read the Plan E law, which included the same vague formula. If he retired at age 60, he’d receive about 66 percent of his salary—or 2 percent of his salary times his 33 years of service, according to the statute. But when he returned to LACERA’S counter, he was told he’d get less than 20 percent. “Why the huge discrepancy?” he kept asking. “Finally, I got it. It was the actuaries!” LACERA “had actuarially reduced Plan E pensions without disclosing the damage. The fund administrators had chosen o interpret the law in the most punitive, damaging way possible.”

            LACERA’s actuaries were subtracting the maximum amount of Social Security payments that a 65-year-old could conceivably receive—even though the worker would never receive that money. The county may have dropped out of that federal fund 15 years ago, but LACERA hypothesized E pensioners were still receiving Social Security checks. (LACERA’s documents verify this.) Furthermore, this deduction was at least 10 times more than what LACERA subtracted under its other plans. LACERA penalized Plan E folks a third time by subtracting 10 percent of their salary for every year they retired before age 6. No other plan had such an onerous “early retirement adjustment”. After enduring these three hits, some E pensioners were left wt nothing to live on. Christiansens says that if this had occurred in a corporate plan, federal regulators would have indicted the company.

            Word spread throughout the Pink Palace. Dunagan learned that a few people had taken their case to arbitration and gotten reinstated to their original plans. Jose Martinez, for example, argued that his supervisor had signed him up for Plan E. LACERA denied that, but didn’t produce a Plan E sign-up sheet with his signature. As a result, the arbitrator told LACERA “to take whatever steps” necessary to reinstate Martinez into Plan A.

            “That set a precedent”, according to Dunagan. He too asked for a hearing. He’d been deceived by the fund and given wrong information. He wanted to buy back into his original Plan A, but was denied. “By then, LACERA had closed the gates.”

            Carlson went before LACERA’s board, using his own situation to illustrate that parsimonious plan. The directors were stunned, he recalls. “It was scary that the directors didn’t know about this earlier.” The board told LACERA’s chief, Marsh Richter, to present it with real E numbers. In January 1997—about 16 years after Plan E’s rollout-LACERA administrators presented a clear and simple worksheet showing how Plan E pensions were being reduced to stipends.

            Yet, the board didn’t share this document with the workforce, board member Russin Remembers. Nor did it reinstate Carlson. “It became clear to us” Dunagan says, “that we weren’t going to get a fair hearing.”

            “LACERA wasn’t acting like our fiduciary,” Brooks explains. “It behaved more like our adversary.”

            Indeed, critics claim that LACERA and the county are still intertwined. One of LACERA’s actuaries, Towers Perrin, has called LACERA the county’s “alter ego”. LACERA’s influential attorney—David Muir—spent seven years working as a lawyer part-time for both the fund and the county. (Muir didn’t return telephone calls.) The county occupies most of the seats on LACERA’s nine-member board and on its nine-member investment board.

            Dunagan, Smith and a dozen others decided to sue LACERA for the right to buy back into their original plans. “We didn’t have any other choice. They formed CEFRP and didn’t seek punitive damages “because we knew that would eat into the fund,” n Dunagan’s words. They didn’t file a class action, because attorneys would get most of the money. Instead, they filed a representative class suit and hired Miller to help gather plaintiffs. To date, CEFRP has 1,100 people who’ve paid $1,000 each in legal costs.

            The employees’ suit quickly gained ground. Then, in 2000, LACERA brought in the county as a co-defendant. County counsel Lloyd Pellman in turn hired two big-gun law firms, Brown, Winfield & Canzoneri and Parker, Milliken, Clark, O’Hara & Samuelian and the legal battalion asked for another judge. These attorneys, some of whom charged $400 an hour, overwhelmed the already strapped-pensioners by filing costly motions.

            Last year, CEFRP lost its case in lower court, Los Angeles Superior Judge John Shook ruled that CERFP could not legally represent the plaintiffs because their situations were too different to form a class. He added this didn’t reflect on their cases—plaintiffs still had grounds to sue LACERA—but they had to do so individually. “That was a thinly-veiled attempt to toss out the case,” Ed Faunce, CEFRP’s attorney told me. “You don’t find a lot of poor people showing up in attorney’s offices.”

            The employees have appealed. They believe they stand a better chance in the state’s appellate courts, which historically rule in favor of pensioners.

            Meanwhile, LACERA continues to tap retirees’ money to fight retirees. And LACERA’s chief, Richter, said administrators haven’t even considered settling the case.

            This is especially odd given that LACERA and the county have all but admitted they have a Plan E problem. Last year, each introduced Plan E-Related bills. The county’s AB 399, sponsored by Sally Havice (D-Bellflower), will allow E people to transfer into Plan D. LACERA’s bill, AB 1214, will accurately reflect Plan E member’s “actual Social Security benefit—if any”. Both measures passed and must now be defined by county supervisors. But it’s not going to help those who are already living under Plan E.

            Their only recourse is court. “We’re not asking for a free ride,” Dunagan says. “We just want to buy back into our original plans Last year, Richter secured pay hikes for her staff that ranged as high as 23 percent—far more than other top county administrator. These raises were awarded during last fall’s recession and a month before Richter reported a drop in LACERA’s assets. She now earns $162,700 and Muir $170,696 a year. “The raises seemed excessive, given the salaries in other similar jobs at the county level,” said Mark Saladino, the county treasurer who sits on LACERA’s boards. The hefty raises will boost the executives’ pensions when they retire a few years from now, Saladino confirms.

            LACERA’s managers already receive car allowances, unlimited vacation time, nice pensions, 401 K funds, 457 funds, and management savings plans. And this year, Richter and Muir hope to make their nests plusher still. Richter, Muir and ten other members of the State Association of County Retirement Systems spent hours last year drafting a bill to allow workers to buy extra years of benefits. Currently, the only way to “buy” more benefits is to transfer years of service you’ve actually worked from another public system. But Richter and her committee want to use “air-time” to buy unworked extra years. They want to roll money from their riskier retirement funds—like their 401K funds—into their “defined” county pensions.  “That way, they’d be able to buy five more years of safe benefits,” Bob Palmer of the San Joaquin County Retirement Association and a committee member says. The group drafted AB 2004, which is sponsored by Assemblyman Lou Correa and may well become law next year.

            All of which begs the question: Since Richter and Muir have spent so much time crafting a way to buy “free” time for themselves, why not create a buy-back solution for Plan E retirees, who’ve spent their lives working “real” time?

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