Friday, February 12, 2016

Drop the DROP

It is bad enough that a handful of elected city officials have abused the pension perk known as DROP. But now there is more compelling evidence of an even bigger drain the plan is having on Philadelphia’s already wobbly pension system.

Drop the DROP

Mayor Nutter should move to end DROP. STEVEN M. FALK / Staff Photographer

It is bad enough that a handful of elected city officials have abused the pension perk known as DROP. But now there is more compelling evidence of an even bigger drain the plan is having on Philadelphia’s already wobbly pension system.

A lengthy story in the City Paper last week detailed a number of red flags regarding DROP, short for Deferred Retirement Option Plan.

The plan has cost taxpayers hundreds of millions of dollars and provided little to nothing in return. The firm that helped the city establish DROP has run into legal trouble in other cities. Before trying to raise taxes, Mayor Nutter and City Council should end DROP for all employees.

Almost 9,000 city employees have either cashed out of DROP or are enrolled in it. The retirees have collected lump-sum payments averaging more than $100,000, according to the City Paper story written by former Inquirer reporter Ralph Cipriano.

Those payouts — in addition to the annual pensions the retirees receive — will cost the city more than $1 billion. This is a huge and unnecessary hit to the city’s pension fund, which is already severely underfunded.

DROP began in 1999 under then-Mayor Edward G. Rendell. The plan allows workers to select a retirement date four years in the future, freeze their pension benefit, and begin accruing payments into an account with a guaranteed 4.5 percent interest rate.

The city’s explanations for DROP have been a moving target over the years, and always sounded too good to be true. At various turns, the plan was supposed to be cost neutral; help retain good workers; act as an incentive for early retirement; and give departments advance notice for succession planning.

There’s no convincing evidence DROP does any of the above. Some speculate the plan was really a hidden way for Rendell to reward the unions. This much is clear: The plan is very costly to taxpayers. At a time when the city is essentially broke, it is hard to support paying six-figure cash bonuses to city bureaucrats over and above their annual pensions.

DROP has erupted in scandal in San Diego and Milwaukee. Mercer Inc., the same actuarial firm used in Philadelphia, has also come under a cloud for its work in those cities and elsewhere.

Three San Diego pension board members have been indicted for fraud. One member faces conflict-of-interest charges for approving DROP while benefiting from the plan. (Some Philadelphia pension board members voted for DROP and received DROP payments.) The controversy prompted San Diego to end DROP for new employees last year.

County officials in Milwaukee sued Mercer for negligence last year, alleging the firm didn’t properly advise them about the full cost of the DROP payments.

A voter petition drive forced the county executive there to resign and not collect his $2 million DROP payment. Milwaukee’s human resources director was indicted and pleaded no contest to misconduct related to his role in setting up that DROP program.

Meanwhile in Philadelphia, bureaucrats continue to line up for six-figure, lump-sum payments. DROP was a bad idea from the start, and it should end.

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