Saidel to Unions: DROP Lives

The city's fiscal watchdog makes a pension program permanent.

by Ralph Cipriano

Only in Philadelphia would the city’s official fiscal watchdog say it’s no big deal to blow $64 million. But that’s what City Controller Jonathan Saidel wrote in an e-mail last week to City Paper.

Saidel was explaining a key vote -- made by his special assistant, John Foulkes, at a city Pension Board meeting last month -- that made permanent an experimental four-year program known as the DROP, or Deferred Retirement Option Plan.

Saidel’s decision, which puts him at odds with city Finance Director Janice Davis, means that taxpayers will be stuck forever with the DROP, which Davis wanted to eliminate because it was too costly to the pension fund.

DROP is a legal double dip that allows veteran city workers to collect salaries as well as pensions -- they’re paid as a one-time cash bonus -- while working up to four final years on the job.

The cash bonuses run as high as $550,733 for Fire Commissioner Harold B. Hairston, and average more than $116,000 for the first 4,283 employees in the DROP, or a total of more than $500 million. (A complete listing of those involved is available at www.citypaper.net.)

When originally adopted in 1999, DROP was billed as a cost-neutral way for the city to hang onto its most experienced city employees. That's because, in exchange for those up-front cash bonuses, workers entering DROP freeze pension benefits and forego annual increases.

However, the city's actuary, Kenneth A. Kent, determined that the first four years of the experimental DROP had increased the pension system's liability by $64 million. The only people standing behind the pension fund are the taxpayers. The bill for the experimental DROP will be amortized over 15 years, so that it will cost taxpayers $7 million annually.

The original legislation imposed a test for the pension board to decide whether to keep DROP, namely that "the impact of the plan will not result in more than an immaterial increase in the city’s normal cost of annually funding the retirement system."

Webster's defines immaterial as "of no substantial consequence." The dispute between Saidel and Davis, however, is over what "normal cost" means.

Davis, who also chairs the Pension Board, says normal cost is an actuarial term that means the amount that taxpayers contribute annually to fund the pensions of active city employees. The normal cost, Davis said, is about $68 million, meaning the annual DROP bill of $7 million amounts to about 10 percent of the normal cost. "And that amount will rise as DROP ages," Davis said.

Saidel, however, says that normal cost could also be interpreted by people who aren’t actuaries as the "usual cost" of maintaining the pension system. The city will contribute $257 million this year to fund the pension system from a variety of sources. So when Saidel does the math, that annual $7 million DROP bill amounts to only 2.8 percent of what he defines as the normal cost.

Saidel has the tiebreaking vote on a pension board also comprised of four union representatives and four management representatives. In his e-mail, Saidel focused on accrued liability, which is also mentioned in the law as something the pension board should consider when evaluating whether DROP resulted in "an immaterial increase" in the city’s normal cost.

"The four-year test DROP increased the fund’s net liability by $64 million," Saidel wrote. "The fund’s total actuarial accrued liability is $6.7 billion. As a percentage, the cost of the test DROP in terms of increased actuarial accrued liability is $64 million out of $6.7 billion, or 0.96 [percent], which is less than one percent," Saidel said. "I believe this is not material."

In other words, Saidel took the cost of a four-year program that spends $64 million to benefit 4,283 employees and compared it with the entire liability of the entire pension fund that benefits about 30,000 active employees and about 31,000 retirees and beneficiaries.

When asked which city official was better at DROP math, Kent diplomatically responded, "They're both right," because the term normal cost is "open for interpretations."

However, Joe Boyle, an independent actuary following the debate at the request of City Paper, was less charitable.

"It's laughable," he said of Saidel's claim. "It doesn't make financial sense, but it probably makes political sense."

The vote may preclude any further concessions. Beforehand, even union diehards were willing to concede some features such an annual tax-deferred interest rate that amounted to a generous 4.5 percent.

"I anticipate that City Council will amend the DROP ordinance to provide a more realistic interest rate," Saidel wrote.

In the wake of the pension board's decision, however, a spokesman for City Councilman Jim Kenney, a big DROP booster, said the Councilman saw no need for any additional legislation.

"Labor now has everything they could have hoped for," agreed Davis. "They would vigorously oppose any effort to take something away."

Last week, Saidel declined further comment but on Tuesday, his office released written statements saying that Saidel viewed the DROP "holistically, in terms of the city’s future."

After DROP is in place for a while, Saidel wrote, it will ultimately save money because the population of city workers "is expected to have less service, make less money and be in a less-expensive pension plan."