Mayor Nutter tells Philadelphia City Council to drop DROP

Mayor Nutter called on City Council Tuesday to kill Philadelphia's DROP retirement benefit, citing a new report that said the program increased pension costs by $258 million in 10 years.

"We cannot afford this program any longer, and it must go," Nutter said at a City Hall news conference. "It has not achieved the anticipated managerial goals. In short, it has not worked."

Council Majority Leader Marian B. Tasco - one of six Council members enrolled in DROP - promised to introduce a bill on Nutter's behalf and schedule a hearing when she and her colleagues return next month.

The program works like this:

A city employee who enrolls in the deferred retirement option plan picks a retirement date four years ahead of time. The decision freezes the employee's pension benefits, and the city immediately starts putting his or her pension payment into an interest-bearing account. When employees leave, they take the money in the account and start collecting their pensions.

The case for abolishing DROP is simple, Nutter said. When the Rendell administration introduced DROP in 1999, it was not supposed to increase the city's costs. But it did, adding $22.3 million in expense yearly to an already overburdened pension fund.

"Under no plausible assumption is DROP cost-neutral," said Anthony Webb, the Boston College researcher who is the report's lead author.

DROP also failed to achieve its primary goal of helping the city better plan for employee departures, Webb said.

The report, however, did not recommend what the city should do about DROP.

Earlier studies tried to estimate DROP's effect on the pension fund, but Webb's was the first to answer a crucial question: How does the program affect employees' retirement decisions over a long period?

Webb, an economist, based his estimates on data from 63,558 employees.

In theory, the advance notice that DROP provides gives the city time to replace key workers, and the promise of a large one-time payment encourages employees to participate. Pension experts at the time DROP was implemented said it would increase costs only marginally.

But Webb found that DROP boosted pension costs significantly because it caused employees to start collecting pension payments earlier than they would have otherwise.

If DROP is repealed, employees who already have enrolled would stay in the program, but it would not accept new applicants.

DROP has paid nearly $673 million to 6,921 retirees since its inception, according to the Board of Pensions and Retirement. That's an average of $97,221 per worker upon retirement, and an additional 2,129 are enrolled in DROP.

But the $673 million cannot be regarded as the cost of DROP, because much of that money may have been spent on workers who would have retired earlier because DROP was not in place.

Despite its extra costs, killing DROP may not be easy.

A spokesperson for Council President Anna C. Verna, who is enrolled in DROP and, as the longest-serving city employee, stands to collect a lump sum of $571,000, said she had not reviewed the report and would not take a stance until after hearings.

On Tuesday, she wrote City Solicitor Shelley Smith a letter raising several questions based on the Boston College report, such as whether the city was powerless to repeal DROP for union workers without bargaining for the change in contracts. Calls to eight other Council members were not returned, including two in DROP, Minority Whip Frank Rizzo and Jack Kelly. Another DROP participant, Councilwoman Donna Reed Miller, was on vacation.

"I've not seen the report, but based on my conversation with [Nutter] and the numbers he was providing me with, I see no other option but to abolish it," said Councilman Frank DiCicco, the only DROP participant so far to call for the program's end.

Council members Jim Kenney, Bill Green and W. Wilson Goode Jr. said they would also likely support the mayor. "I'm tired of having to take heat for it when I have nothing to do with it," Kenney said. "It has taken on a life of its own, and it's just radioactive."

At his news conference Tuesday, Nutter expressed respect for the city's unions and their leaders, who said they would fight to keep DROP in place.

"It's nonsense, it's absolute nonsense," John McNesby, president of Lodge 5 of the Fraternal Order of Police, said of the Boston College report. He sat in the second row at Nutter's news conference along with Bill Gault, president of Local 22 of the International Association of Fire Fighters.

Both said they were surprised that Nutter would go so far as to call for the program's end, and they accused the report's authors of writing the study to justify the mayor's goals.

Pete Matthews, who leads District Council 33, the city's largest union, said in an interview that he had not yet read the report but would press for a hearing on it. Cathy Scott, president of District Council 47, did not return a telephone call.

Given his $198,658-a-year salary and his approximately 18 years to date on the city payroll, Nutter could be among the biggest DROP beneficiaries. But in his 2009 budget address, Nutter pledged not to enter the program. And in 2004, he backed a measure - enacted into law just last year - prohibiting future elected officials from joining the program.

"Having something like [the report] five years ago certainly would have been helpful," Nutter said Tuesday.

DROP has come at a high cost to the city's image. Critics assailed the program as expensive. They said it created the appearance that employees were "double-dipping," collecting both salaries and pensions.

When elected officials and highly paid city employees enrolled in DROP, quit briefly to collect six-figure lump sums, and then returned to their jobs, it fueled taxpayer rage even more.

"After the financial crisis when people have really lost so much in 401(k) plans and in their homes, and even their jobs, there is a lot of pension envy," said Olivia Mitchell, a professor at the University of Pennsylvania's Wharton School and an expert on retirement benefits. "Very few workers outside the public sector have a guaranteed anything."

But until Tuesday's Boston College report, which Nutter commissioned for $80,000, no one knew whether DROP was a boon to the city or a boondoggle.

Mitchell, who read the Boston College report and called it "thorough" and "carefully done," said the answer was clear.

"The bottom line is, this looks like an expensive program," she said. On average, it cost the city about two years of a worker's salary for each DROP participant.

Some of the extra cost resulted from the city's decision to pay 4.5 percent yearly interest - significantly higher than available elsewhere - on amounts paid into DROP accounts.

Decades of underfunding and, more recently, weakness in the stock market have left Philadelphia's $4 billion pension fund with only 45 percent of the amount it needs to meet future liabilities.

Philadelphia's finance director, Rob Dubow, said that while DROP had "accelerated the problems that the pension fund already has," it was not the main cause of the shortfall. If DROP had not existed, the city's pension fund would still have less than 50 percent of the amount it needs, Dubow said.

In the 2009 fiscal year, the city's pension fund paid $656 million to retirees.

City Controller Alan Butkovitz, a pension board trustee, said in a statement that he supported Nutter's decision. "The pension fund currently stands at a 45 percent funding level and cannot continue to sustain these yearly DROP payments of $22.3 million," he said. "Ultimately, Philadelphia taxpayers will be forced to foot the bill if this annual drain on the pension fund is allowed to continue."