Pension week: Philly pension benefits made simple | Philly

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Tuesday, April 14, 2009

Pension week: Philly pension benefits made simple

It's pension week at “It's Our Money”! Wednesday, the pension board appears before City Council for their annual budget hearing, so we're covering all things pension on the blog. Yesterday, we brought you a detailed look at the national pension crisis. Today, we're looking at pension benefits for city workers.

This analysis was prompted by City Councilwoman Marian Tasco’s statements - -- both to the Daily News and the Philadelphia Tribune -- that DROP payments were “our own money,” and don’t cost the city anything. We wanted to test that statement and see what, if anything, pensions cost taxpayers. Below is a basic explanation of how pension benefits work.

First, a quick disclaimer: The example below is for a non-uniformed worker who was hired before July 1^st, 1992. There are two different tiers for pension plans. Uniformed workers hired after 1988 pay a higher percentage of their salaries (6%) than their counterpart hired after 1988. Non-uniformed workers hired after 1992 are required to also pay a higher percentage of their salaries (2.2%) than their later-hired counterparts (2%). Retirement ages also differ. The formula used for City Council members is roughly the same as for non-uniformed employees like John Smith.

John Smith is hired by the city on December 1^st, 1989. His starting pay is $35,000.
Every pay period, 3.75% of Smith's salary is automatically deducted and paid to the pension fund.
After ten years of service, provided he is 55 years old, Smith is eligible to retire and receive a pension from the city.
In 2009, he decides to retire. Smith has moved from entry level employee to management, so his salary is now $60,000. What will his pension be?
To determine what percentage of his salary will be awarded as a pension, his years of service (20) are multiplied by 2.5%. That means he'll receive 50% of the average of his three highest paid years. To keep things simple, let's assume his highest salary was $60,000 for the past three years.
Smith, now retired, receives an annual pension of $30,000 or $2,500 per month. Benefit payments continue for the remainder of his lifetime.

So what happens if Smith decides to enter the DROP program instead of just retiring?

In 2009, Smith decides to enter the DROP program. His salary is frozen at $60,000.
The city still pays his pension of $30,000 per year, but it goes into an account that earns 4.5% interest. Smith also receives his salary of $60,000 during these four years,
After four years, the pension and interest payments total $125,400. That's his lump sum DROP payment.
Smith also receives his annual pension of $30,000. ( It does not include any raises awarded to other employees of the same rank over those last final years.)

So, here is the big question: What has the employee above cost the city? It's not a simple answer, but at minimum, the city must guarantee the 4.5% interest of the DROP account. That's easy to do when the stock market is riding high, but costly when Wall Street is tanking. Also, the number of retirees receiving benefits now outnumbers of the employees paying into the pension fund. Since previous administrations did not adequately fund the system, the city is required to make payments to the pension fund to cover the difference. Last year, that amount was $352 million. With the dramatic decline in the stock market, that amount is likely to increase significantly. Bottom line: Councilwoman Tasco’s claim that the DROP and her pension is her own money is not true. In fact, some of it is our money.

Posted by Ben Waxman @ 5:10 PM Permalink | 4 comments

Comments

Comment removed.

Posted 11:31 AM, 04/15/2009

DennisR

This is a good analysis but is he also eligible for Social Security ? If so maybe we could reduce the payments from 50percent to 40percent. Better yet convert the program to 401k type program with no guarantee on payout like the private sector.

Posted 07:48 PM, 04/15/2009

Ben Waxman

I just want to acknowledge that deaddog was right about the benefit if the person getting the pension passes away. Post has been updated to reflect that.

Posted 07:29 AM, 04/17/2009

DennisR

ok , now that i look at the above its not so clear. City council had retire for one day is what i am reading but their employee who is in drop program has to retire permantly and not one day and no exception. Also the four years they are in program they are getting a salary and a pension payment to the drop fund as well as an unrealistic interst rate. how is this not politicians taking real good care of themselves at taxpayers expense.

4 comments

About It's Our Money

Every year, city government spends slightly more than $4 billion. Where does all that money come from? More importantly, where does it go? Are we getting the most bang for our tax buck? “It's Our Money” is a joint project between Philadelphia Daily News and WHYY, funded by the William Penn Foundation, designed to answer these questions.

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Ben Waxman reports and blogs for “It's Our Money.” Before joining “It's Our Money,” he was a regular contributor to the Philadelphia Daily News op-ed page and former contributor to the blog Young Philly Politics. He studied political science at Juniata College in Huntingdon, PA.

Doron Taussig is the Project Manager for “It's Our Money.” He is also a graduate student in communications at Temple University. Previously he worked as a Staff Writer and News Editor for the Philadelphia City Paper.

Dave Merrell is the Web Editor for "It's Our Money." He comes to the project from Philly.com, where he is a web producer. Originally from upstate New York, he moved to Philadelphia after graduating from Haverford College with a degree in math and economics.

Anthony Campisi reports and blogs for "It's Our Money." Originally hailing from Central Jersey, he came to Philadelphia while a student at the University of Pennsylvania, where he studied intellectual history. He also writes about transportation for PlanPhilly, an innovative urban planning website started by PennPraxis, the consulting arm of the Penn School of Design.