Pension perk DROP still costing tens of millions to taxpayers

Pennsylvania Daily Life
DROP has not been revenue-neutral for City Hall, a new study by the Pennsylvania Intergovernmental Cooperation Authority has concluded.

The Philadelphia pension perk known as DROP cost the city at least $237 million over a 16-year period ending in 2015, a new study commissioned by the Pennsylvania Intergovernmental Cooperation Authority (PICA) has concluded.

PICA, a state-created authority with oversight of city finances, on Tuesday released the 34-page study that said the Deferred Retirement Option Plan (DROP) is continuing to drain the city’s pension fund of much-needed dollars. The pension fund has less than 45 percent of the $11 billion needed to cover its obligations to current and future retirees.

According to the new report, the DROP program has caused the pension fund to lose out on between $41 million and $62 million between 2010 and 2015. DROP has cost the city between $237 million and $277 million from its inception in 1999 through 2015, according to the study’s authors.

DROP allows employees to pick a retirement date up to four years in the future, then immediately start accumulating pension payments in an interest-bearing account while still earning a salary. They then collect a lump sum upon retirement. Their pensions are frozen at the level earned at the time they signed up for the program.

DROP was meant to be cost-neutral, but PICA’s study concluded that it has not been, at least while the city was offering 4.5 percent interest on the pension funds it was holding for eventual lump-sum payments.

In 2011, City Council passed legislation that lowered the rate to that of one-year Treasury bonds, which have hovered near or below 1 percent in recent years.

Jean-Pierre Aubry, director of state and local research at Boston College’s Center for Retirement Research, which conducted the study, said not enough new data are available to determine whether the 2011 DROP reform legislation has made the program cost-neutral.

“They grandfathered everybody in that currently had it,” Aubry said, referring to the more generous benefits. “What you do know is that the lower interest rate is going to make the system cheaper. We just don’t know how much going forward.”

Future costs could be affected by how many workers enroll in DROP under the new rules and how long they remain in the program, given the lower interest rate on their accumulating funds.

PICA executive director Harvey Rice said the lower interest rate would lower the cost of DROP but would not be cost-neutral.

“It will still have a cost, but we won’t know what that will be,” until further research is done in a few years, Rice said.

PICA paid $55,000 to the Boston College center to conduct the research for the report.

DROP historically has been unpopular with Philadelphia voters, particularly following news reports that elected officials and city workers had taken advantage of a loophole that allowed them to retire for a day, collect the lump-sum DROP payment, and then return to work.

Most city employees take advantage of DROP when retiring, according to the PICA study. In 2015,  for instance, 72 percent of the city’s 578 new retirees took a DROP payment. That’s a decrease from 2013, when 85 percent of new retirees cashed out on DROP.

To date, the highest DROP payments have gone to former Council President Anna Verna ($566,039 when she retired in 2011); former Fire Commissioner Lloyd Ayers ($551,269 when he retired in 2014); and former Philadelphia Parking Authority First Deputy Carl Ciglar ($539,342 when he retired in 2013).

The Inquirer and Daily News reported Monday that Richard Dickson, a deputy executive director at the Philadelphia Parking Authority, is eligible to collect a $655,053 estimated DROP payment if he continues working until 2021.

Dickson also will be owed a $149,760 yearly pension upon retirement.

Mayor Kenney spokesman Mike Dunn said Tuesday that the administration was reviewing the PICA study. As a councilman, Kenney had sought unsuccessfully to end DROP.

“However, we recognize that eliminating DROP would require an act of City Council, and could be subject to mandatory bargaining with unionized workers, and cannot be done unilaterally by the mayor,” Dunn said.

Dunn said the administration is focused on other pension reform, specifically its plan to have the pension fund 80 percent funded by 2030.