When the Rendell administration created the Philadelphia pension perk known as DROP in 1999, it was out of a simple notion – that some employees who were about to retire were so essential that the city had to find a way to keep them working while a replacement was found.
Almost right away, however, the Deferred Retirement Option Plan became a way for city workers with at least 10 years on the job to get a nice little pay bump (sometimes not so little) upon retiring.
That send-off check has cost the beleaguered pension fund millions it cannot afford. That’s why every mayor since Ed Rendell has tried to get rid of it. And all have failed, because City Council and city workers and their unions like the perk.
Could the next mayor have better luck? And would he or she even want to take down DROP?
James F. Kenney and Lynne M. Abraham, the two mayoral candidates who have a history with DROP, simply said the perk would be part of labor negotiations. Neither would commit to keeping or getting rid of it.
Still, Kenney has been mentioning DROP in his campaign leading up to Tuesday’s Democratic primary. At forums and debates, he has proudly pointed out that he is the only City Council member who has advocated getting rid of DROP. “I almost lost my seat because of that vote,” Kenney has said.
Abraham, whose last job with the city was as district attorney, took a $370,361 DROP payment when she retired in 2009.
State Sen. Anthony Hardy Williams said he was not familiar enough with DROP to comment on it. But, he added, he would be willing to “revisit it in terms of how it’s structured.”
Nelson A. Diaz, who was a Common Pleas Court judge when DROP was created, said that as mayor, he would seek to end the perk. “Its intent now has no connection to government needs,” he added.
T. Milton Street Sr. has said that as mayor, he would recruit experts to address the city’s pension crisis.
Doug Oliver has not responded to requests for comment on DROP.
Despite some changes, DROP is still churning out big checks each year. In the last five years, it has cost the pension fund $411 million.
Last year, the Pension Board paid $93.4 million in DROP payments to 647 retiring employees. The highest check – for $551,269 – went to retiring Fire Commissioner Lloyd Ayers.
This is money the Pension Board – which has $10.5 billion in obligations and assets of $4.8 billion – can ill afford.
“It’s time to drop DROP,” said David Thornburgh, CEO of the Committee of Seventy. “It’s long overdue.”
Despite multiple warnings and efforts to do away with it, the perk has proved too popular to kill.
The city’s unions have maintained that the news media have blown DROP – which they say is a benefit that workers have earned and paid for, albeit indirectly – out of proportion.
City residents, however, have made their feelings on DROP known at the ballot box.
In 2011, voters turned away City Commissioner Margaret Tartaglione and Councilman Frank Rizzo, in part because both had enrolled in DROP before seeking reelection. Rizzo collected a $194,518 check after losing his bid for reelection, and Tartaglione took home $288,000 at the beginning of her last term in 2008.
The same year, DROP also played a role in the retirements of five Council members who had taken DROP payments: Frank DiCicco ($421,122); Donna Reed Miller ($185,572); Jack Kelly ($384,827); Joan M. Krajewski ($274,587); and President Anna C. Verna ($566,039).
Councilwoman Marian B. Tasco was the only one to be enrolled in DROP and survive in 2011. She collected a $478,057 DROP payment and returned to what proved to be her last term in office. She is retiring this year.
To join DROP, all an employee needs is to have 10 years on the job and to be of retirement age, and indicate that he or she would retire in four years. At that point, the employee’s benefit amount is set – and the money begins accruing in a separate interest-bearing account.
Then, when the employee retires by the end of those four years, he or she receives the accrued pension payments in a lump sum – in addition to regular pension payments.
This allows for double-dipping, some city lawyers have suggested.
“When all is said and done, DROP is nothing more or less than a onetime four-year exception to the rule that no one may receive both a pension check and a salary check from the city,” Rick Auerbach, City Council’s legislative counsel, said during a 2010 committee hearing on DROP.
When DROP was created in 1999, it was a four-year pilot program. After four years, the Board of Pensions was to determine whether it was a drain on the pension system.
When DROP’s initial four years came up, then-Mayor John F. Street tried to end it, based on a city actuary report that estimated DROP could cost as much as $715 million if everyone who was eligible at that time were to take it.
The Pension Board and City Council ignored Street’s request, and DROP was made permanent.
A few weeks later, Street himself signed up for DROP. He received a $450,000 DROP payment when he left office in 2007.
When Nutter came into office, he, too, tried to get rid of DROP.
Instead, Council members passed legislation in 2010 that prohibited elected officials from participating in DROP. Yet they made sure to grandfather themselves in so they could take advantage of DROP if they wished.
After two reports that DROP had cost $100 million to $250 million, Council in 2011 passed legislation that increased the retirement age by two years for most workers for DROP purposes, and dropped the interest rate that DROP accounts earn. It had been 4.5 percent, but it’s now pegged to Treasury bond rates.
Those changes, however, were challenged by AFSCME District Councils 33 and 47, which filed a formal complaint with the Pennsylvania Labor Review Board.
“They claimed we could only change DROP through collective bargaining,” Rob Dubow, the city’s finance director, said in an interview last week.
In January, a state labor hearing examiner ruled in favor of the unions. The city appealed to the Pennsylvania Labor Review Board and is awaiting a decision.
The Pennsylvania Intergovernmental Cooperation Authority’s special report on the city’s pension crisis, published in January, listed getting rid of DROP as one of its top recommendations.
“The changes that have occurred . . . are unlikely to result in a significant reduction in the program’s annual cost,” the report said.
To the argument that DROP helps with succession planning, PICA said: “The fiscal health of the Pension Fund is a far greater challenge to the city than succession planning.”
PICA suggests that the next administration try to eliminate DROP.
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