Study: DROP program cost Phila. an extra $258 million

Posted: August 03, 2010

Philadelphia's controversial DROP retirement program has cost the city $258 million in extra pension costs over the last decade, according to a much-anticipated report by Boston College researchers released today.

Given that finding, Mayor Nutter this afternoon called on City Council to eliminate the program.

The report's authors say the program boosted pension costs by about $22.3 million yearly because employees timed their departures from work to maximize their benefits, consequently increasing the cost to the pension fund.

Researchers Anthony Webb, Norma B. Coe and Samson Alva of Boston College - who were hired by the Nutter administration - cautioned that their figures are an estimate because they had to make assumptions about interest rates and changes in wage growth.

Because of those variables, the annual cost of DROP ranges from $21 million to $36 million.

But they said there was "no plausible scenario" in which DROP reduced pension costs.

Nonetheless, City Finance Director Rob Dubow said, "Picking on DROP and making it the poster child for all the city's problems is unfair."

He said the city's pension fund, currently funded at 45 percent, would still probably be under 50 percent without DROP, partly because of the national economic collapse.

In an interview this morning, Webb said the program's estimated cost to the pension fund was based on data from 63,558 employees.

But it excluded 48 elected and appointed officials - including six City Councilmembers - who have participated in DROP. "You cannot do tests of statistical importance" with so small a sample, Webb said.

Webb also said it was difficult to assess whether the city received any real value from DROP, with the exception that "high-quality" employees postponed their retirement for some period.

DROP stands for Deferred Retirement Option Plan. The Rendell administration put it in place in 1999 for a variety of seemingly contradictory reasons, including encouraging police and fire personnel to stay on the job, while encouraging other nonuniformed employees to leave. Its supposed value as a planning tool for administrators has never been used by the city in a meaningful way.

DROP allows employs to choose a retirement date four years in the future. The decision freezes their pension benefits, but the city immediately starts putting the employee's pension payment in an interest-bearing account. When the employee leaves, they take the money in the account and start collecting their pensions.

The program was initially touted as adding minimal costs while giving the city a strong tool to help with succession planning.

But critics said drop was costly and created the appearance that employees were "double-dipping," collecting both salaries and pensions.

And when high-ranking city officials - and later, elected officials - enrolled in DROP, quit briefly to collect their lump-sum payments, and then returned to their jobs, it unleashed taxpayer fury. Union leaders blame those actions for tainting a program they argue is a valuable benefit with minimal cost.


Contact staff writer Miriam Hill at 215-854-5520 or mhill@phillynews.com.


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