Preliminary DROP findings: 'Substantial' toll on Philadelphia's pension fund

Posted: July 30, 2010

A preliminary version of the closely guarded report on the city's controversial DROP retirement perk found that the program comes at a "substantial" cost to the city's beleaguered pension fund.

The Nutter administration's study of the deferred retirement option plan has been a well-kept secret in advance of its expected release next week, with one remarkable exception: A Boston College coauthor of the study presented his preliminary findings to an academic conference six months ago.

The paper was presented Jan. 29 by Anthony Webb, associate director of research at the Center for Retirement Research at Boston College, at a conference in the Netherlands. It was hosted by Tilburg University's Network for Studies on Pensions, Aging and Retirement.

Citing data provided by the city for 48,029 employees between 1990 and 2008, the draft says DROP both increased the retirement age and was used by employees in a way that "results in a substantial increase in pension cost," wrote Webb, Norma B. Coe, and Samson Alva, all Boston College economists.

The 22-page paper provides no supporting data for that assertion. The "conclusion" section is left blank, as are figures for specific costs of DROP. The report focuses mostly on the team's research methodology rather than the results.

The paper can be found online as part of the conference program at http://go.philly.com/dropstudy

Mayor Nutter commissioned the report last year at a cost of $79,989 to determine DROP's effect on the retirement decisions of city employees, and whether it is a drain on the $4.1 billion pension fund. The fund has just 46 percent of the money it needs to fund all its pension obligations. Whether the Boston College findings are reliable or accurately reflect what the city will issue next week is unclear. And the statements in the paper were already being assailed Thursday as unfounded by organized labor's highest-ranking member of the city's pension board, so a confrontation when the city releases the report is almost certain.

Webb would not comment on the paper.

DROP gives city employees a chance to build up pension payments while still working and has been particularly controversial in Philadelphia for its use by elected officials. About three-quarters of all employees who retire use it.

Finance Director Rob Dubow, chairman of the Board of Pensions and Retirement, was clearly perturbed when told that any version of the report was posted on the Web.

He noted that the findings - the draft paper was dated Oct. 30, before Boston College and the city had signed a contract - would have come before the researchers had all the data they needed. The city began negotiations with Boston College last summer and began providing information in the fall, though the contract was not signed until Dec. 18.

"At that point, they really didn't have all their information together yet. It's probably very preliminary," Dubow said. "That wasn't the product that we asked them for, and we still don't have a final version of that product."

Dubow has refused to release early drafts of the report and declined to comment on whether the preliminary conclusions had held up.

Bill Rubin, vice president of the Board of Pensions and Retirement, appointed by District Council 33 of the American Federation of State, County and Municipal Employees, said the report made it clear that the researchers had not talked to retirees to understand their retirement motives.

"How can you do an analysis on the program, and the effect and impact on the individuals within the program, without ever speaking to any of the individuals?" he said.

Rubin called the report "woefully inadequate" and said it failed to substantiate the conclusion that DROP substantially increased pension costs.

DROP programs throughout the country have been the center of raging debates, but no other study like the one commissioned by Nutter exists.

"It is unclear what effect programs of this type have on the average age of retirement or on the cost to the employer of providing pensions," the paper states in its third paragraph.

Thus, the Boston College researchers' work could break ground in determining how DROP affects the behavior of employees and what it costs, and Webb was clearly eager to discuss his findings in January.

Rubin, however, questioned whether the authors had the actuarial qualifications to document the costs.

Some DROP programs have helped pension systems go bankrupt, though experts say Philadelphia's is designed more reasonably than those that failed places such as Houston, San Diego, and Milwaukee.

DROP in Philadelphia allows workers to amass four years of pension payments in a fund bearing 4.5 annual interest over the final four years of their tenure.

In exchange, employees commit themselves to retire on a certain date and freeze pension benefits at the time they enter the program. That means eventual pension payments will be smaller, and the city will save money if the employee lives long enough.

The most recent actuarial study, in May 2008, gave estimates ranging from a $141 million cost to a $125 million savings, depending on DROP's effect on people's retirement decisions. Nutter promised in early 2009 that he would commission a study to provide real answers.

DROP was introduced in Philadelphia in 1999 by the Rendell administration, with seemingly contradictory intentions. Some say it was meant to retain long-term, valuable employees who would otherwise retire. Others said it offered less valuable employees who would work to the grave incentive to leave.

It was also supposed to help the city plan for turnover by making DROP participants choose an exact date for their retirement, four years ahead of time. The city has not used DROP effectively for that purpose, and the study is also supposed to investigate whether DROP encourages high-quality employees to delay retirement by looking at absenteeism and performance measures.


Contact staff writer Jeff Shields at 215-854-4565 or jshields@phillynews.com.

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