Philadelphia Council proposes saving DROP program

City Council on Wednesday announced its intention to save the incendiary DROP pension perk with a plan to reduce, but not eliminate, the program's cost.

Council's proposal would continue the program for a one-time cost of $15 million to $20 million. Mayor Nutter has proposed ending it, based on an estimate that it has cost the city at least $100 million since it was begun in 1999.

In a 15-2 vote, Council in committee recommended passage of a bill that would alter DROP in two ways - by delaying eligibility for two years for nonuniformed workers and by replacing a 4.5 percent interest rate on pension payments with a more conservative figure based on U.S. Treasury bonds.

The Deferred Retirement Option Plan allows employees to collect pension payments for up to four years before retiring. The money goes into an interest-bearing account that is paid in a lump sum when the employee retires.

DROP's popularity with elected officials - including those who collected six-figure DROP payments and returned to office - fueled voter outrage that helped send veteran City Councilman Frank Rizzo to defeat in May's Republican primary, along with City Commissioners Chairwoman Margaret Tartaglione.

Council's bill could be up for a final vote next Thursday; Nutter's bill did not make it out of committee. Nutter said he would not sign Council's bill.

He has said the city's pension fund, which has only 47 percent of assets needed to pay its future liabilities, could not afford such a benefit.

"The only DROP bill I plan to put my signature on is the one I sent up," Nutter said Wednesday.

He did not say whether he would veto Council's version, a tricky proposition because that could leave Nutter and the city with the more expensive version of DROP.

Nutter said he was "very, very disappointed" in the action Council took, reiterating that he believed the program "needs to go away."

"The action today frustrates the interests of this great city [and] continues to place great financial pressure on our pension system."

Council's bill would not affect anyone already in DROP. It would grandfather in under current conditions anyone who would have become eligible for DROP within 90 days of whenever the bill became law.

Councilman Brian J. O'Neill successfully introduced an amendment Wednesday to exempt police and fire personnel from the two-year delay in eligibility for new DROP participants. Police and firefighters currently can retire at 45 under pre-1987 plans and at 50 if hired after that.

Actuaries for Council and the Board of Pensions and Retirement counseled that police officers and firefighters were doing what DROP intended - staying on the job longer than they would have without DROP without collecting their pension checks earlier.

"Their behavior has been the opposite of the problem," O'Neill said. "The cost is on the civilian side. We're dealing with the civilian side with this amendment."

John McNesby, president of the local Fraternal Order of Police, representing 6,400 officers, testified: "For both the officer and the Philadelphia Police Department, the DROP program is working exactly as you intended."

Civilian employees, in contrast, have been entering DROP and collecting their pensions earlier than they would have without DROP, drawing checks for additional years and straining the system.

Most of DROP's future cost would be driven by 2,600 non-uniformed workers covered by a pension plan that applies to workers hired before 1987, according to Tom Lowman, an actuary with Bolton Partners, Council's consultant on DROP.

Pushing the minimum DROP age for those employees from 55 to 57 is not expected to produce significant savings, leaving their DROP costs at between $15 million and $20 million if paid out today, Lowman testified.

An additional saving of at least $1 million a year is expected by reducing the interest rate on accumulating DROP funds and tying it to one-year Treasury bonds, which were paying 0.18 percent on Wednesday.

Herman "Pete" Matthews, head of District Council 33, the city's largest municipal union, which represents 9,900 blue-collar workers, promised a legal challenge.

"It's an absolute disgrace, that you would discriminate against one group, pitting one union group against another," Matthews said.

He and leaders of the city's other three municipal unions, including police and fire, warned Council that DROP had become a vested pension right that had to be negotiated in collective bargaining, and said Council would lose a court fight. Council members said that was one reason they did not want to unilaterally end DROP.

Council's action did not sit well with the city's fiscal watchdogs.

City Controller Alan Butkovitz did not testify Wednesday, but he said he remained opposed to Council's proposal because it did not wipe out DROP's cost.'

"DROP was supposed to be cost-neutral from day one," Butkovitz said of DROP's origins in 1999. DROP's cost is hard to predict, because it depends on how workers change their retirement decisions in reaction to incentives.

"If it isn't cost-neutral, it doesn't accomplish what they said," Butkovitz said.

Sam Katz, chairman of the board of the Pennsylvania Intergovernmental Cooperation Authority, the five-member body appointed by the governor and state legislature to oversee the city's five-year financial plans, criticized the action.

"We were told [in advance] there was overwhelming support to retain the perk, and that there were no arguments that could be made, or financial information that could be supplied that would cause that conclusion to be different," Katz said.

Councilman James F. Kenney voted against the bill along with Councilwoman Jannie L. Blackwell. Kenney said DROP should be eliminated; Blackwell said she opposed treating various unions differently.

Ten Council members are still eligible to join DROP at a future date, though new Council members elected this year are banned from the program. Seven of the 10, including O'Neill for the first time Wednesday, have pledged never to join DROP.

The new bill, however, creates a new option for elected officials and other employees - the PLOP, or Partial Lump-sum Option Plan, in which employees can collect up to three years worth of pension payments in a lump sum, to be taken directly out of their future pensions based on life expectancy. Council's actuaries say that program would not cost the city.

Zack Stalberg, president of the Committee of Seventy, which advocated the extinction of DROP, called the proceedings a "charade."

Council President Anna C. Verna left immediately after the hearing and later declined to comment.

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