Pending report on DROP will put Nutter in a pinch

It may pit him against Council, unions - or voters.

Posted: August 01, 2010

The release this week of a study of the city's DROP program will force Mayor Nutter to balance the competing interests of the city's pension problems and the public demand for a leaner government against the mayor's relationships with City Council and the municipal unions.

The Boston College economists hired to evaluate the deferred retirement option plan wrote in a preliminary summary in January that DROP was siphoning money from the already ailing pension fund. The city has not released a figure connected to those findings, and city officials won't even say whether the study will provide a price tag for DROP.

If that finding holds in the final report, the avowed financial-reform mayor will be expected to eliminate or alter the program, and quickly, said Phil Goldsmith, managing director under former Mayor John F. Street.

"If it is a significant cost, I don't see how in God's name you support this, given the current financial climate in the city budget," Goldsmith said.

The Street administration tried to eliminate DROP in 2003 after the program's first four years. The Street administration argued that the program cost $7 million a year, but unions joined with then-Controller Jonathan Saidel in a Board of Pensions and Retirement vote to keep it. Street then joined the program and walked out of office in 2008 with $450,000 in DROP money to go with his $115,700-a-year pension.

The Rendell administration introduced DROP in 1999 as an incentive that allows retirement-eligible employees to amass pension payments at 4.5 percent interest, in addition to their salary, over their final four years.

The program's stated intent was to retain long-term, valuable employees who would otherwise retire, or encourage less productive employees to leave, while providing the city a valuable planning tool.

In theory, the plan should add little or no cost to the pension fund because the additional years of pension payments would be offset by lower payments because workers lock into benefits four years early. Over time, the city would save on lower annual payouts.

The four municipal unions continue to stand strongly behind DROP, which Fire Fighters' Union president Bill Gault on Friday called "the only way in the world a blue-collar guy can save any money."

But the $4 billion pension fund has been hit by the recession. As of July 2009, in the last official actuary's report, it had only 45 percent of the funding required to meet its obligations.

And the unions, Nutter, and Council have to deal with a public resentful of politicians and highly paid officials who have collected or are due to collect lump sums as high as $500,000 under DROP.

Some have returned to work after collecting DROP, elected officials doing so by exploiting a loophole allowing them to retire for a day after being reelected and returning to office. The state legislature in 2009 banned future elected officials from joining DROP.

Of the six Council members enrolled in DROP - President Anna C. Verna, Majority Leader Marian B. Tasco, Minority Whip Frank Rizzo, Frank DiCicco, Jack Kelly, and Donna Reed Miller - none has ruled out running in May.

"There's a pretty strong momentum going against DROP," City Controller Alan Butkovitz said. "It just rubs people the wrong way. It looks like there's a kind of bonus system that's not available to people generally."

That sentiment will be a powerful force in the May primary, political consultant Maurice Floyd said. Nutter appears secure, but as many as 16 of the 17 Council members may run.

"I think this is going to be a hammer out there. I don't see how you can overlook it," Floyd said. "DROP's a big issue all the way around. . . . When you're out there campaigning, that's one of the first things they ask you."

Floyd and others say the sentiment is not necessarily fair - that DROP may be a legitimate tool for city workers, but that its image has been tainted by elected officials' joining in.

That tide appears stronger than any political advantage Nutter could gain by appeasing the unions, as Mayor Frank Rizzo famously did before the 1975 primary by awarding a 12.8 percent raise to 20,000 non-uniformed employees with $26 million the city didn't have.

Instead, DROP may be thrown unofficially into negotiations with District Councils 33 and 47 of the American Federation of State, County, and Municipal Employees, representing the city's more than 13,000 non-uniformed employees. Both unions have been without a contract since July 2009, and the city is awaiting an arbitration award for firefighters this month.

Committee of Seventy president Zack Stalberg said Nutter's supporters in the business community would expect him to get rid of DROP if the report "suggests there can be big savings." Absent the study, he said, he thought Council might be immune to pressure over DROP, but an incendiary report could alter the field.

"Now the game changes, because now DROP is center stage," Stalberg said. "They'll be watching the behavior of the mayor and City Council on this, and it will reflect itself in the primary next year."

Unlike most pension benefits, which can't be taken away without negotiations, DROP could be abolished by Council through legislation. If asked to do so, however, Council members who have cashed in on DROP or are scheduled to would be in a no-win situation: Kill DROP and they're hypocrites; defend it and they're antireform, said Randall Miller, a history professor at St. Joseph's University.

"In that regard, no matter what City Council does, you can read their actions negatively," Miller said.

Still, any action involving DROP puts Nutter's goodwill in Council at risk, Councilman Bill Green said.

"What I learned in introducing a bill to eliminate DROP for elected officials in my first Council session is that DROP for many people is not a policy decision. It's a personal issue," Green said. "So you wade into this debate knowing that you will either make people very happy or very angry at you on a very personal level."

Nutter declined to comment for this article. Verna, who as the longest-serving city employee will collect a lump sum of $571,000 though DROP in January 2012, did not return a request for comment.

Nutter entered office promising to get answers to DROP, which 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 can't 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.

Nutter worked with Council to produce an actuary's report in 2008 that gave a maddeningly wide range to DROP's impact - from $141 million in the red to $125 million in the black.

The city's actuary said the missing component was human behavior - how DROP affected people's retirement decisions. If it meant that people began collecting their pensions earlier, it would probably involve a cost. If workers stayed four more years because of DROP, the pension fund was likely to save money.

The latest study, done by the Center for Retirement Research at Boston College, is supposed to determine how DROP affected people's retirement choices and estimate the cost.

"DROP has been an issue that has gotten a lot of focus, and that's one of the reasons we did this report," city Finance Director Rob Dubow said.

The report may ascribe a negligible financial impact to DROP, which supporters will argue should put the issue to rest. But with an early draft predicting significant costs, anything different may put Nutter on the defensive.

"The public is extremely suspicious of the DROP program and is going to be looking for a quick and substantive response," Stalberg said.

That's what worries Bill Rubin, vice chairman of the pension board and the elected representative of District Council 33, who fears a real debate on the merits of the program will be lost.

"I fully believe in a fair, balanced, and open dialogue on pensions, and the cost, and the net effect on the taxpayers, as well as on the hardworking individuals and the pensions they receive," Rubin said.

Goldsmith said the climate had changed since 2003, when DROP survived.

"Politically, it's going to be a harder sell to retain" DROP, Goldsmith said, "but let's see what the report says."


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

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