December 12, 2017
The Deferred Retirement Option Plan, better known as DROP, has cost the city as much as $277 million since its inception in 1999, a new study finds.
Since 2010, the program has cost as much as $62 million, according to the study conducted by the Center for Retirement Research at Boston College and released Tuesday by the Pennsylvania Intergovernmental Cooperation Authority.
PICA commissioned the latest study of the effect of DROP on the city's pension system as an update to a 2010 analysis by the same Boston College institute.
"As is evident from this study, DROP continues to add costs to a pension system that is only 44.8 percent funded with an unfunded liability of $6.1 billion," PICA said in a statement. "Reform measures must be considered to lessen future additional costs to ensure the health of the pension system. PICA will continue to conduct research, consult with experts, and publish reports with recommendations to improve the fiscal sustainability of the pension system."
Introduced by then-Mayor Ed Rendell in 1999, the DROP program was intended to induce valued older workers to stay on the job longer.
When employees enroll in DROP they continue to work for Philadelphia government but effectively retire from the pension system. City workers can set a retirement date up to four years in advance and at that time their pension benefit is frozen and they start accruing pension payments in a tax-deferred, interest-bearing account. Workers receive those payments in a lump sum when they retire, and then begin to receive their monthly pension payments from the city.
At the time, it was thought the cost of DROP would be small because program participants would enroll at a lower benefit cost. But the 2010 Boston College study found the program was costing the city hundreds of millions of dollars because employees were carefully timing their retirements to maximize both the pension payment and DROP payment.
Moreover, a controversial provision allowed elected officials to enroll in DROP, run for re-election and then resign for a day – earning their payout – before returning to office.
The analysis also looked at DROP's effectiveness at increasing the retirement age, since that was one of the stated objectives when the program launched.
With more than 11,000 participants, DROP has increased the retirement age by 1.7 years, on average, across all City of Philadelphia Municipal Retirement System employees, according to the study. Members of the police and fire unions experienced an increase in retirement age of 4.8 years and 5.9 years, respectively. An insignificant increase in retirement age of about 0.2 years was reported for all other municipal workers.
The study found the following:
• Total estimated costs for the DROP program since 2010, based on three different pension fund investment return assumptions, are $41.0 million at a rate of 7.7 percent, $42.1 million at a rate of 6 percent, and $62.2 million at a rate of 3 percent.
• Total estimated costs for the DROP program since 1999, the year it was established, based on three different pension fund investment return assumptions, are $277.2 million at a rate of 7.7 percent, $252.6 million at a rate of 6 percent, and $236.9 million at a rate of 3 percent.