City of Philadelphia true cost of DROP (Deferred Retirement Option Plan)

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Organization: 
Philadelphia City Council: Councilman At-Large, Allan Domb

City:

Philadelphia

State:

Pennsylvania
Organization Overview: 

Philadelphia City Council is the legislative branch of city government

Project Name: 
City of Philadelphia true cost of DROP (Deferred Retirement Option Plan)
Project Type: 
Program Evaluation, Strategic Plan, Policy Analysis
Project Overview: 

Introduced by then-Mayor Rendell in 1999, the DROP program was supposed to keep top talent on the job longer, while helping the city better plan for retirements. Under DROP city workers set a retirement date up to four years in advance. At that point, their pension benefit is frozen, and they start accruing pension payments in an interest-bearing account. Workers receive those payments in a lump sum when they retire, in addition to their full city pension.

City officials thought the program’s costs could be minimal because workers would lock in lower benefits. But a report from Boston College says the program has cost the city $258 million because workers are timing their retirements to get the optimal pension payment and DROP payout. Adding to the controversy, elected officials had been allowed to enter—six city council members enrolled—and a loophole allowed them to run for re-election and resign for a day to get their payout and then return to office. This has since been legislatively corrected but presented the types of abuses this program allows.

The Pension Fund is roughly 45.8% funded, with an unfunded actuarial liability (UAL) of $6.167 billion as of July 1, 2017. Since its inception, DROP has drained the pension fund of precious assets to pay future retirees. The Pension Fund is currently below what experts say is a safe zone and affects the bond rating for the city. A future ancillary research project might be to analyze the true cost of DROP and what the status of the City’s Pension Fund and UAL would be if DROP had never been enacted.

With the increasing municipal obligation, retiree healthcare benefits, and salaries of retirees, the City is asking how they can continue to fund this program. The annual draw on the pension fund increases, therefore, putting greater pressure on the investment managers to seek greater returns. This creates a situation that is not good for the future retirees and citizens (stakeholders) of the City of Philadelphia. New York City and Boston have also enacted programs similar to DROP and have since decided to end the program. How does Philadelphia compare?

PLEASE NOTE: This project may be done by either a full-time student or executive student, but may be more suited for a student who is able to dedicate time during regular business hours to interact with the Councilman’s office.

There are two options for the project deliverables:

OPTION 1:

A research paper that:

  1. Introduces the history and current state of Philadelphia’s DROP and describes the problem
  2. Presents two in-depth case studies of New York City and Boston, two cities that have adopted programs similar to DROP and have since ended the programs. Present for each city: what the deferred retirement program was, why they chose to end it, what has been the effect since they ended it, and how this can inform Philadelphia’s choice and future path
  3. Recommends next steps for Philadelphia based on the cases

OPTION 2:

A separate capstone project deliverable option for a student with a strong finance background may be to produce a research paper analyzing:

  1. What will happen financially in Philadelphia and to the pension program if the DROP program continues
  2. Or, what will happen financially in the City and to the pension program if the DROP program is ended
  3. A recommendation of which to choose
Spots Available: 
1-2

Eligibility:

Full-time or Executive

To Apply:

Contact Euria Chung at echung@upenn.edu.

Fels Institute of Government

The Fels Institute of Government
3814 Walnut St. 
Philadelphia, PA 19104

(215) 898-7326
felsinstitute@sas.upenn.edu

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