Solicitor: Phila. can repeal DROP, but outcome of court challenge uncertain

City Solicitor Shelley Smith and Mayor Nutter in 2008. Smith said her legal opinion provided "substantive guidance."
City Solicitor Shelley Smith and Mayor Nutter in 2008. Smith said her legal opinion provided "substantive guidance."
Posted: October 05, 2010

City Council can repeal the DROP pension benefit, City Solicitor Shelley Smith said Monday in a widely anticipated legal opinion that immediately drew criticism from the official who asked for it, Council President Anna C. Verna.

Smith's opinion says the 1999 legislation enacted by Council that created DROP left room for Council to amend the benefit for all employees except those already enrolled in it.

Verna, who had asked for the opinion to help Council assess its options, said she was frustrated because she found it inconclusive.

"Although we are all still reviewing the opinion, I can say this: It provides far less guidance than any opinion I can recall," Verna said in a statement. "Merely saying that removing DROP participation for most employees 'could' be constitutional is of no help at all. How likely is that to be the case? Is it probable? Is it possible? Is it unlikely but possible? We have no idea."

DROP allows city employees to collect large lump-sum pension payments upon retirement. At Mayor Nutter's urging, Council immediately introduced legislation last month after it returned from summer break that called for an end to DROP. Since then, the topic has remained in limbo as Council waited for Smith's opinion and the results of its own study of DROP's financial impact, which has yet to be completed.

Smith's 13-page assessment says a sentence in the 1999 law stating that DROP "will continue under the same terms indefinitely unless and until further amended by City Council" means Council has the right to repeal it.

Arguments that abolishing DROP could bolster the city's financially struggling pension plan and that the benefit was not collectively bargained historically also could help the city's case, she said.

She acknowledged, however, that if city employees challenged the repeal of the program in court, the outcome would be uncertain.

"As a matter of law, there is a general requirement to bargain terms and conditions of employment with city unions, including pension benefits," she wrote.

Her opinion cites two possible exceptions to that principle that could give Philadelphia the ability to abolish the program.

One is a 1997 case in which Commonwealth Court ruled that Plainfield Township did not have to bargain with unions before changing its pension laws. But Smith's advice also said it was not clear whether that case would apply to Philadelphia.

"Because the issue is so highly fact-intensive, and due to the absence of explicit precedent on the unique circumstances present in this matter, it is difficult to predict how a court would rule," the opinion says.

It says that other Pennsylvania cases have sometimes said employers can change employment terms if contract language allows it. But her opinion also says it is not clear what Smith refers to as the "Contractual Privilege" exception applies to DROP.

And it notes that courts have provided broad protections to union retirement benefits.

"A review of the cases indicates that Pennsylvania courts are generally reluctant to stray from the general statutory requirement that pension changes be bargained collectively," Smith wrote.

In an interview, she defended her work as providing an "absolutely sound legal basis" for repealing the law.

Verna, Smith said, "is my client. I don't want to get into a public fight with my client. I am frankly a little disappointed that she chose to lob a public complaint at me. The opinion answers questions that were asked and provides substantive guidance."

DROP allows city employees of retirement age to designate a departure date up to four years in the future. That freezes their pension payment and prompts the city to start putting their benefits in an account that earns 4.5 percent guaranteed interest.

When the employee retires, he or she gets the amount in the account and starts collecting a monthly pension at the lower, frozen amount. City officials for years have debated whether the program is costly, with one study saying it is expensive and another saying it may save the city money.

In August, Nutter released the results of a third study, from Boston College, that put DROP's cost at $258 million over the last 10 years.

Council, at Nutter's request, introduced legislation last month to eliminate DROP but said it wanted an opinion from Smith before holding hearings on the repeal. Council also commissioned its own actuarial study, which has not yet been completed. It is waiting for those results before scheduling a hearing.

Seven council members, including Verna, have enrolled in the program.

On Monday, Nutter urged Council to press ahead with legislation to get rid of DROP.

"The main issue here is, the DROP program cannot be sustained. We cannot afford it," Nutter said. "The biggest question at the moment is, when does the public hearing get scheduled and start the legislative process?"

Bill Rubin, vice chairman of the city's pension fund and adviser to Pete Matthews, president of AFSCME District Council 33, said he thought the opinion was "conflicted" because Smith felt pressure to accomplish what Nutter wanted.

"I think she's saying, 'I don't think the mayor is right in this situation, but I'm writing something that says he is because that's what I have to do,' " Rubin said.

Smith said Rubin had "zero facts" to support his statement. She also said it would not be ethical for her "to talk to one client about the substance of an opinion for another client."

Joe Rudolf, a lawyer with Reed Smith who represents public employers, though not Philadelphia, said the city could have trouble eliminating DROP because state laws typically have protected pension benefits whether they originated in an ordinance, as DROP did, or collective bargaining.

Even when a benefit did not result from collective bargaining, unions have successfully argued that it cannot be taken away except through negotiation if it has become a regular practice.

Tom Jennings, a lawyer for the city's police union, said, "I think this was a conclusion in search of facts. DROP is a term and condition of employment. It cannot be moderated without negotiation."

Rich Poulson, the lawyer for Philadelphia's firefighters, also said changing or repealing DROP required bargaining.


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

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