Ending DROP may be easier said than done

If the track record of states and cities across the country is any guide, Mayor Nutter faces significant legal hurdles in his effort to kill the city's DROP pension benefit.

In Pennsylvania and many other states, laws and court decisions have frequently upheld the right of unionized employees to bargain pensions and other workplace issues, according to experts in labor law.

Cities and states have typically only been able to tweak pensions, and then only for new hires. Even in cities that have DROP, the Deferred Retirement Option Program, changes have been limited and challenged in court.

But looming retirement liabilities have threatened so many budgets that some pension experts say workers may lose the suits, paving the way for more sweeping overhauls.

In Philadelphia, the fear of losing DROP is so great that when Nutter asked Council to eliminate it for any employees not yet enrolled, he triggered a flood of 933 new applications.

Despite those fears, DROP is not going away soon - and possibly not at all.

"You can't make a unilateral change in a term and condition of employment without incurring liability," said Robert D. Klausner, a Florida lawyer and expert on public pensions.

On Aug. 3, Nutter asked City Council to repeal DROP, meaning that it could no longer enroll city workers, citing a Boston College study that put the program's cost at $258 million over the last 10 years. The unions have attacked the report and are lobbying Council to keep the benefit.

Council plans to consider DROP sometime after it returns Sept. 16.

The program lets city employees collect a lump sum upon retirement in exchange for accepting a lower monthly lifetime benefit. Seven of the 17 Council members have enrolled.

Of the city's four unions, only the police have a contract that mentions DROP. Since its inception, DROP has paid $673 million to 6,921 retirees, and an additional 2,129 of the city's 22,500 employees are enrolled in it.

Joe Rudolf, a lawyer for Reed Smith who represents public employers, said pensions "are a bargainable item. Court decisions have repeatedly upheld a union's right to the continuation of certain benefits as a past practice even when those benefits are not spelled out in the labor contract."

The DROP ordinance, enacted in 1999, does not clearly say whether Council can revise the program. The only language that suggests that possibility refers to DROP continuing "indefinitely unless and until further amended by Council."

The same day that Nutter asked Council to abolish DROP, Council President Anna C. Verna asked City Solicitor Shelley Smith whether DROP "is an issue that must be bargained with the unions."

Smith would not comment for this story because she is completing her answer for Verna and it is subject to attorney-client privilege.

Nutter spokesman Douglas Oliver said the administration is exploring the legal questions.

"We know that [Council] legislation is needed, and if in the final analysis it is determined that union negotiations are required, we will pursue that as well, but no one should confuse the debate on the pathway to ending the program with our intent to end the program," Oliver said. "We are fully committed to ending the program."

The issue is front and center in Pennsylvania, where the Supreme Court will be taking up questions of worker benefits.

In October, the court will hear a case involving whether the City of Erie should have been able to repeal a pension program that, while different from Philadelphia's DROP benefit, also allowed firefighters to collect a lump-sump pension payment.

The court's decision may be relevant to Philadelphia.

"If I were Philadelphia, I wouldn't be making any decisions until the Supreme Court decides," said Klausner, who has represented both workers and municipalities.

Erie's City Council repealed the program, leading to a series of legal fights.

"Our contention was it wasn't a bargained-for benefit," Erie City Solicitor Greg Karle said.

An arbitrator disagreed and restored the benefit to Erie's police. The firefighters went to the Pennsylvania Labor Relations Board, which found in their favor. The City of Erie appealed that decision, and Commonwealth Court ruled for the city.

The Labor Relations Board appealed to the state Supreme Court, which will consider the case in October.

Karle said the Supreme Court's ruling should interest all Pennsylvania cities.

"The question is what has to be bargained vs. what can be unilaterally mandated," Karle said.

The state Supreme Court answered that question differently in two cases this year.

In one, the court said Philadelphia can close fire companies without union input.

In the second, the court found that the Borough of Ellwood City could not enforce a smoking ban without first bargaining with unions.

Richard Poulson, who represents both Philadelphia and Erie firefighters, said cities must bargain changes to DROP.

"The notion that just because there is a pension ordinance means council can amend it without bargaining is dead wrong," Poulson said.

But James E. Spiotto, a Chicago lawyer who has studied public pensions, disagrees.

"The municipality can change what it creates," he said. "It's a question of are you taking something away or are you ensuring the health of the retirement program."

Across the country, courts are weighing the financial-distress argument.

Pension and labor-law experts are closely watching lawsuits in Colorado, Minnesota, and South Dakota. Those states recently reduced yearly increases in pension benefits which retirees are legally fighting. They argue that pension plans are struggling only because government officials did not fund them.

The states have argued that they must cut cost-of-living adjustments, or COLAs, to preserve the pension plan.

"To leave the COLA as is, is a death sentence to the fund itself," said Republican Colorado State Sen. Josh Penry. He believes the state will win the suits.

But Stephen Pincus, who is representing workers in those three states, said laws create a high hurdle for the financial argument.

"Basically, the courts have found that pension rights are very sacred," Pincus said. "It's a contract with the state, and the state can't go around reneging on contracts they have entered into."

Public pensions are exempt from the federal Employee Retirement Income Security Act, which protects private pensions. State and local laws vary, making generalizations difficult, but some governments have altered pensions, though usually for new workers.

In New Jersey in March, Gov. Christie signed pension reform that included cutting retirement payments for future workers by 9 percent. He is expected to propose further changes this fall. Specifics are not yet available, but New Jersey unions are girding for a fight.

After the Baltimore City Council recently reined in cost-of-living benefits and made other pension changes, police and firefighters sued. They argue that the real problem is the city's failure to contribute to the pension and say their benefits are protected as contracts.

In Illinois, a fiscal crisis forced the state legislature to pass pension reform that included raising the retirement age for future employees to 67 from as young as 55 and affected workers in 13 municipalities, including Chicago.

The Illinois changes apply only to new employees, but business leaders say the state can't afford to pay benefits at current levels and are pushing for cuts.

"The reform did not fix the problem. It's very significant in the changes it makes for employees not yet hired, but the state faces an immediate crisis in figuring how it is going to fund current employees' benefits," said Laurence Msall, president of the Chicago Civic Foundation, a business watchdog group.

In Houston, Milwaukee County, and San Diego, city officials were able to get rid of DROP for new employees only.

In Milwaukee County, auditor James Heer said laws prevented further changes to the DROP plan, known as back DROP there.

"Even the union can't bargain it away for current employees," Milwaukee County Auditor Jerome Heer said.

San Diego officials were able to change that city's DROP plan but had to go to court to do it, City Attorney Jan Goldsmith said. Courts agreed that the city could lower the plan's interest rate, so San Diego changed it from 8 percent to 3.5 percent. The city also won the right to change employee salaries, giving it some power to reduce DROP payouts.

San Diego has yet to consider whether to eliminate DROP altogether because, unlike Philadelphia, it never studied the costs. City officials recently ordered an actuary's report and will base future decisions on that, Goldsmith said.