Editorial: DROP flunks the math test
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Editorial: DROP flunks the math test
AFTER YEARS of rancorous debate and much citizen outrage, the Deferred Retirement Option Plan - which began in 1999 and became a political hand grenade in 2008 after Councilwoman Joan Krajewski retired for a day, collected nearly $300,000, and then went back to work - looks as if it has finally confronted a poison pill it can't dismiss. That pill comes in the form of a string of numbers and letters, and looks like this:
PtDB = E1[E1/1(+R)s|tp(q,t)]
This is one of the key equations used by researchers at the Center for Retirement Research at Boston College in a report, released yesterday, that accomplished the long-overdue task of measuring just how much DROP has cost us.
DROP fans - namely, those who have entered the program, including six Council members - have maintained that DROP, designed to help the city plan for staffing transitions by pinpointing retirement dates of senior staff in exchange for a special one-time pension benefit, was budget-neutral. Council President Anna Verna, who signed up for the program, responded to criticism by maintaining that it was her money and that it wasn't costing the city anything.
In fact, the program has cost the city $258 million since it began a little over a decade ago, about $22 million a year. The report concludes that "the program imposes a significant cost to the pension plan and the city . . . at no plausible combination is it cost-neutral."
The Nutter administration gets credit for wrestling the DROP question to the ground. But why did it take 10 years to figure this out? A 2003 report on the program had a similar outcome, but was dismissed by detractors. This latest report should end the DROP debate once and for all. The program should be killed.
But it shouldn't stop there. The city should be reviewing departments and programs and subjecting them to the same level of scrutiny, and performing similar and regular cost-benefit analyses on anything that involves public money. Some programs may have high costs, but bigger social benefits; others may turn out to be not worth the money. Without the facts, though, too many public investments are done in the dark. *
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I'll bet $258 million that Waxman doesn't understand the formula, the article or the program. Yet he takes the findings as gospel. Why don't we have actual pension actuaries look at the article before we pontificate to the masses about its costs?— RGP- Questions, questions. If the DROP is dropped, when will the changes take effect and when or will that show up as a positive impact on the city's budget? Also, in addition to citing specific dollar amounts, can the papers describe the pension payouts (both the one-time payouts and the basic pensions) in percentages of final salaries? For example, in the same sentence describing Anna Verna's package mention the percentages: lump sum payout is $571,000 (X% of her annual salary) and her regular pension is $XXX,000 (X% of her salary). Percentages put the amounts into perspective, make it easier for the ordinary public to comprehend the situation. The standard default for American retirement is to replace final salaries with 1/3 from Social Security, 1/3 from pensions, 1/3 from savings. So pension benefits greater than 30% or 70% of salary indicate ok-ish to strong retirement funding; greater than 100% is an amazing number that really matters. For example, employees in the private sector mostly have no guarantees about retirement benefits--no certainties that the funds will be there when the time comes, and 401k plans particularly make no promises and even add disclaimers on their statements about how the balance can go up...or can go down. Also, funds indexed to inflation are particularly desirable and rare. So the biggest issue here is how ordinary taxpayers face declines in services with simultaneous increases in taxes in order to pay out the guaranteed retirements for government employees who have structured far better deals than public policy will allow for private employees. (And some govt employees are actually in a position to improve the rules governing private retirement but they have let the private sector flounder while they flourish.) It's confusing which is one reason why the DROP lasted so long--not enough people understand their own retirement plans (if they even have one) much less the plans of others.— MB6
- RGP - first of all, the equation is not from the pre-released article but from the actual commissioned report (the SECOND to say the same thing). And frankly, if two separate teams of economics academics with no ties to the system BOTH condemn the program, Waxman doesn't need to be a pension actuary to understand that DROP needs to be ended. If it is not providing financial benefit to the City (and not exclusively to City employees) then it needs to go; we now have two independent confirmations of what everyone thought already - DROP is fleecing the City rather than helping it.— citylumberjack
- What EVERYONE fails to understand is that the DROP money already belongs to the employees as they earned it. It is their own pension money that was put in the bank instead of being given to them immediately.— 40013
- What it all comes down to for me is this: The guaranteed 4.5% interest is costing the taxpayers $258 million.— Lancer248
- Thank Goodness some people in Beantown still know how to do some complex Algebra. Or is this Calculus that's needed to grasp these finances??
