What’s the cost of DROP?

by Ralph Cipriano

This piece originally appeared as two stories on City Paper's news blog, the Clog. 

Part One:

On Tuesday, City Council President Anna Verna unveiled a new study of the city’s now-infamous Deferred Retirement Option Plan (DROP) that claims it costs less that previously reported. Verna also proposed a bold course of action for saving (and not trashing) DROP that relies on the very man who designed the DROP monster to fix it.

DROP is a pension perk that allows city employees to pick a future retirement date and then treat themselves to a double-dip during their last years on the job. For a maximum of 48 months, employees enrolled in DROP get to simultaneously collect their salaries and their pensions, with the pension money stored in a tax-deferred account and paid out the day the employee retires in a lump-sum cash bonus that averages more than $100,000.

The DROP program also allows elected officials (like City Council members) to “retire” for a day, collect fat bonuses, and then go back to work the very next day and resume collecting their salaries.

Last year, a City Paper exposé (Cover Story, “The Billion Dollar Boondoggle,” Ralph Cipriano, April 22) found that the program begun in 1999 is costing taxpayers more than $1 billion in past and future cash bonuses, according to city records reviewed by City Paper.

Mayor Nutter joined the fray last August when he unveiled a Boston College study that said that since 1999, DROP had cost the city $258 million in extra pension costs. The Boston College study, however, looked at only the pension side of the double dip, and ignored salary costs.

The City Council, which includes six members scheduled to receive more than $2 million in future DROP bonuses, then commissioned its own study, by Bolton Partners Inc., a Baltimore actuarial firm, to challenge the findings presented by the mayor.

On Tuesday, Council president Anna Verna unveiled the results. Bolton Partners found that Boston College professors had made “several substantial errors” that overstated the cost of DROP by “nearly $160 million.” Bolton put DROP’s added cost to the pension fund at “approximately $100 million.”

Verna, who will collect a DROP bonus herself next year of $584,777, took occasion at the unveiling of the Bolton study Tuesday to proclaim that DROP can be fixed ― but first we need another study.

The city has already spent $80,000 on the Boston College study, and $30,000 on the Bolton Partners study. But Verna announced that she’s asked an actuary to prepare a “cost analysis” that would weigh several proposed reforms of DROP (see below), and figure out how to make the program “cost-neutral” for taxpayers.

And who, says Verna, should perform this cost analysis? Why, the very man who helped create DROP in the first place.

Since 1995, with the exception of two years, Kenneth A. Kent has served as actuarial consultant to the city pension board. From 2000 until 2010, the city has paid two firms that employed Kent more than $3 million for his expertise.

Based on Kent’s advice, the pension board designed a DROP program that was supposed to be cost-neutral. The city was supposed to earn an annual 9 percent return on investments, so it could afford to pay employees enrolled in DROP an interest rate of 4.5 percent.

Instead of earning that 9 percent interest rate on investments, though, the city in the past dozen years has earned only 4 percent. Based on that 9 percent projection, Kent estimated back in 2000 that the city pension fund would swell to $8.5 billion last year. He was off by $4.5 billion. Instead of being cost-neutral, the program has proved very, very expensive.

When Kent and the pension board designed the DROP program, they also did not foresee a stampede of some 10,000 applicants, which is why DROP has been so expensive.

An undaunted Verna proclaimed Tuesday that Kent would finish his analysis by early April, and then the Council would hold public hearings on DROP.

With Kent’s track record, don’t be surprised if you find the Nutter administration commissioning … another study.

Part Two:

What’s the cost of DROP? It depends on who’s doing the math.

City Paper documented last year that the Deferred Retirement Option Plan (DROP) was costing taxpayers more than $1 billion in past and future cash bonuses paid to retiring municipal employees, according to the city’s own pension records detailed on Excel spreadsheets.



A Boston College study released last August by Mayor Nutter figured that since 1999, the DROP program had cost the city pension fund an extra $258 million. DROP is a double dip that has allowed some 10,000 city employees to simultaneously collect their salaries and pensions for up to four years, with the pension money coming in the form of lump-sum cash bonuses that average more than $100,000 per retiree. But the Boston College study looked at the pension side of the double-dip and ignored the salaries that employees collect while they’re in DROP.



On Tuesday, the City Council unveiled a new study by Bolton Partners Inc., a Baltimore actuarial firm, that said Boston College had gotten it wrong, and that DROP’s added cost to the pension fund was really $100 million.



City Council, which has six members signed up for more than $2 million in future DROP bonuses, hired Bolton Partners to punch holes in the Boston College study as part of a campaign to keep DROP.



But in the latest report’s executive summary, Thomas Lowman, Bolton’s chief actuary, made a declaration that called all of the city’s prior DROP studies into question ― but which confirmed CP's findings, that the program is far more expensive than previously thought.

“ It should also be understood that the BC (Boston College) DROP study and prior actuarial DROP studies focused solely on pension cost . . . and not any other payroll or personnel cost,” Lowman wrote. “In this sense, the BC cost is not intended to represent the full economic impact.”



Amen.



Meanwhile, City Council President Anna Verna used the occasion of the unveiling of the new DROP report to publicize some possible reforms that would allegedly make DROP cost-neutral for taxpayers, such as:



―Requiring employees who enter DROP to wait until they reach the minimum retirement age.



― Lowering the 4.5 percent interest rate paid to all DROP participants.



― Requiring employees enrolled in DROP to continue making contributions to the pension fund. Employees enrolled in DROP currently don’t have to make any contributions to the pension fund. Employees not enrolled in DROP contribute between 1.8 and 7.5 percent of their salaries to the pension fund.



― Giving city employees the option to receive only a portion of their DROP money as cash bonuses, and then “reduce their monthly pension checks by an amount that would pay for the lump sum.”



City Paper asked Joe Boyle, the Philadelphia area actuary whose pro-bono services led to our original expose, to review the Bolton study. Boyle says that although Bolton wasn’t asked to do a full-blown actuarial study to assess the cost to the taxpayers for DROP, nevertheless, he was impressed by both the Bolton study and by the proposals for reforming DROP.



“This is a pretty thorough analysis and their suggestions are to be lauded,” Boyle says. But, Boyle said, if all of the reforms are passed, the city will have scaled down what was originally a great deal into something that people can either take or leave.



“If they truly make this a cost-neutral program, then in effect, they’ve eliminated DROP as a benefit,” Boyle says. “There’s no advantage to taking DROP.”