Philadelphia Mayor Calls for End to DROP Program

Last week, Philadelphia's Mayor Michael Nutter announced his intention to send legislation to City Council to end the controversial Deferred Retirement Option Plan (DROP), stating that the City could no longer afford it. A study by Boston College economist Anthony Webb maintained that DROP has cost Philadelphia an extra $258 million over the past 10 years. Under DROP, city workers set a retirement date up to four years in advance, their pension benefit is then frozen and starts accruing pension payments at 4.5% interest.

According to Webb's study, workers delay retirements in order to pump up their benefits, putting more financial pressure on the city, costing an extra $22 million a year, and noted "...in no plausible scenario did the DROP program result in a reduction in pension costs." Union officials attacked the report, calling it flawed and claiming that the pension fund's problems are because of bad investments. The unions intend to commission their own study.

The initial intention of DROP when introduced in 1999 was to save money by lowering pension payments and enabling the city to plan for the replacement of retired workers in advance and to keep experienced workers on the job longer. The lower pension payments were supposed to save the city money. However, the 4.5% interest payment is well above what private sector pensions accrue, and many workers took advantage of a loophole enabling them to retire for a day and return to work at full salary and benefits, while still collecting their pension. The city claimed they could not always find someone competent enough to replace a long-term employee, and that it was more cost efficient to retain proven talent.

In 2003, former Mayor John Street tried to end DROP when the pilot program expired, claiming then that it was too expensive. The Pension Board voted him down, and Street himself went on to enter DROP, leaving office with a $450,000 lump sum DROP payment.

The program came under fire in recent years when re-elected officials and high-level administrators collected their DROP payments, retired for a day, and returned to work at full salary. Last year, a state law disqualified future elected officials from DROP, but not before six City Council members had registered for the program, who can still take advantage of the "retire for a day" loophole.

Not only did Mayor Nutter's recent announcement generate ire from the city's unions, but it prodded city employees to make a mad dash to apply for DROP. Since Nutter's August 3rd announcement, 542 of the 3,132 city employees eligible to enroll in DROP have applied.

According to Nutter, the pension fund has only 45 percent of the money needed to meet present pension obligations. Finance Director Rob Dubow he was not surprised by the report's findings, but added that DROP is not solely to blame for Philadelphia's budget problem, saying that the pension fund "would still be severely under funded even without DROP."

Theoretically, the program was supposed to save money since workers lock into lower benefits earlier. But the study claims that has not been the case. DROP supporters disagree with those that say working while accumulating pension payments is double dipping, claiming the city would have paid the pension if they retired anyway, would hire and pay someone else to replace them, and that they are taking a 10 percent cut in pension payments. However, technically, they are still collecting four extra years of pension payments, the employee hired to replace them would likely be hired at a lower salary and with less benefits, and the 10 percent cut is offset by the 4.5% interest collected. When a person enters the program, he and the city stop contributing to the pension fund. However, while the retiree and the city save money, the pension fund can no longer invest monies paid into DROP accounts.

My feeling is that, while city firefighters and police who have DROP written into their contracts, deserve decent pension plans more than other city workers, the DROP plan has not worked as planned from the beginning. And in today's economy, while the city residents who pay city workers' salaries are struggling with higher property taxes, unemployment, foreclosure and a lowered standard of living, city employees must also share the burden. Philadelphia can no longer afford to have a municipal workforce that enjoys bloated benefits on the backs of those it professes to serve. And no one has even questioned the outrageous 4.5% interest rate the DROP plans accrue.

Firefighter and president of the firefighters Local 22 Bill Gault, 52, who refers to his job as a calling, says, "Basically, what I have to figure out is, will DROP be enough to eliminate my mortgage and live on my $2,500 to $3,000 a month and pay my medical?" Firefighters and police get five years of medical coverage at retirement, becoming responsible for their own health insurance after that until Medicare kicks in.

With all due respect, very few private sector jobs allow retirement in your late 40s and early 50s. As half of a couple in their late 50s forced into early retirement and reduced social security payments, paying off your mortgage at age 52, and collecting $2,500 to $3,000 a month with full medical for five years is way above what any private sector retiree gets in a pension or social security, and certainly not at that age.

Also, firefighters and police are far more employable after retirement than most people, as security guards, bank guards, consultants and small town police and firefighters. Nevertheless, I would be more inclined to retain DROP for them if the interest was lowered, simply because these people put their lives on the line for us.

I have far less compassion for the legions of city officials, administrators and office workers, who recent events and scandals have outed as just plain taking advantage of the system. The City of Philadelphia needs to take the reins and do what it must to stop the hemorrhage of funds that is bankrupting this city.

Related articles: Philadelphia's Clerk of Quarter Sessions Vivian T. Miller Resigns; Philadelphia City Council Approves Changes to "DROP" Program; Sources: Philadelphia Daily News, 8/4/10; Philadelphia Inquirer, 8/12/10; WHYY.org, 8/10/10