Philadelphia DROP program cost $237 million, study finds

A new study of the city of Philadelphia’s controversial employee retirement option known as DROP shows it’s cost the city at least $237 million since its adoption in 1999.

But changes in the program will likely reduce costs going forward. And — at the moment — there’s no movement in city government to eliminate the Deferred Retirement Option Plan, which city unions want to keep.

Under DROP, employees pick a retirement date four years in advance and keep working while they start collecting pension payments, which go into an interest-bearing account.

The result is a lump-sum payment on departure that can be in the hundreds of thousands of dollars. When enacted, the plan was supposed to be cost neutral.

Harvey Rice, director of the Pennsylvania Intergovernmental Cooperation Authority, which sponsored the study, said it didn’t work out that way.

“The report shows that the DROP is not cost-neutral, and so it costs the pension fund additional monies, which they don’t have,” Rice said in an interview.

The study, by the Center for Retirement Research at Boston College, estimates the program cost between $237 million and $277 million over the past 16 years.

As big as the numbers are, they’re a pretty small fraction of the city pension fund’s $6 billion unfunded liability.

“It’s a factor,” Rice said. “All this adds up to contribute to the pension fund’s problems.”

This study is an update to another from 2010 that prompted Philadelphia City Council to reduce the interest rate at which the employee’s deferred payment accounts accumulate, a change that should reduce the cost over time.

The study notes most of the retirees included were enrolled in an older pension plan that was eliminated for new hires in 1988.

As more retirees come from the newer plan, the study noted, it’s likely DROP will be less costly.

Mayor Jim Kenney has proposed eliminating the DROP program in the past, but the administration isn’t currently pushing for that in City Council, which has been resistant to the idea.

City finance director Rob Dubow said in an interview the city is focused on other changes in employee pensions, which should have more impact than getting rid of DROP.

One of the original goals of the program was to keep veteran city employees on the job longer.

The study found that police officers on average stayed on the force nearly five years longer, and firefighters stayed nearly six years longer.

There was little effect on the tenure of other municipal workers.