DROP: Mend It, Don’t End It

BY BRETT MANDEL/ In a city where approximately 60% of the budget goes toward employee compensation, our central challenge is finding ways to maximize the competence and productivity of our workforce. We need to use every tool in our toolbox to achieve those goals. We have a managerial tool in our hands. If we end the DROP program, we may never get a chance to put it to good use.
So mend it, don’t end it. Fix it, don’t nix it. Improve it, don’t remove it.
The impact of DROP on the City’s annual budget is much more complicated and unsettled. Predictably, there are calls from the Mayor to do away with the program, but such a reactionary response betrays a lack of managerial skill and a lack of a reformer’s will.
Used correctly, the tool of DROP could save the City millions and allow the City to best configure its workforce to respond to the challenges that confront us.
In a City where rationalizing the size of the workforce is a major challenge and where long-term planning is often sacrificed for the need to deal with today’s crisis, DROP was presented as a management tool that could help the City plan and save.
DROP (Deferred Retirement Option Plan) is a retirement-incentive program introduced in Philadelphia in October 1999, modeled on similar programs in other cities.
One compelling reason to create the program was to keep the more-experienced employee, especially in the uniformed forces, from leaving the payroll and leaving the City without effective agency leadership. By encouraging workers to commit to staying on the job for a period, DROP helps retain institutional knowledge and gives the City the managerial certainty to accomplish succession planning, reconfigure organizational personnel, and/or reduce payroll expenses.
Knowing a valued employee would be retained for a number of years, agency leaders could train that employee’s (lower-salaried) replacement and evaluate ways to reduce top-heavy management by replacing, for example, three departing employees with two promoted employees.
Here’s how it works. The employees who elect to participate in the DROP make a commitment to retire no later than four years after entering the program. While the workers remain employees of the City, they (and the City) stop making contributions to the pension system; so their take-home pay increases and the City saves money.
In addition, the employees no longer accrue any additional service credit for pension purposes, so the long-term value of the employees’ pension does not increase as it otherwise would with continued service.
While enrolled in the DROP, the still-employed workers receive a pension payment that is deposited into an escrow account that is guaranteed to earn at least 4.5% interest annually. When the employees ultimately retire, they receive a lump-sum check for all the accrued pension payments as well as the interest earned.
D.R.O.P. TURNS INTO A BUSINESS

It is easy to see why employees would want to enter the DROP, as it essentially allows them to increase take-home pay while working (by eliminating employee pension contributions) and, at the same time, start accruing pension payments, which are guaranteed to grow at a 4.5% interest rate.
It is also easy to see why the City would want to utilize the DROP program. It reduces costs in the short run by eliminating pension contributions for participants, gives the City the predictability to plan to reduce the size of the City workforce in the future, and generates long-term gains when pension funds grow at historical rates.
As long as our pension-fund investments earn a return of more than 4.5%, our employees’ behavior doesn’t change radically in response to the DROP incentive, and our leaders are prepared to use the DROP tool to manage the size of the workforce, the program is a can’t-lose proposition.
But things certainly change. It didn’t take long for employees to recognize if they were thinking of retiring anyway, DROP could generate a nice benefit for sticking around for a few years. Their change in behavior, encouraging some to retire earlier, has increased pension costs.
Also, with the underperforming economy, pension funds certainly did not earn more than 4.5% interest in recent years and keeping that interest promise has been costly in many years. When the DROP originated, the stock market was performing well and the fund enjoyed returns of 11% in fiscal year 1999 and 9.5% in fiscal year 2000.
When the stock market started to decline, the fund absorbed losses of -5.5% and -5.2% in FY 2001 and FY 2002, respectively. We all know what has happened in the most-recent years.
Even with that cost, the City could have taken advantage of the program to make major strides in reducing the costs associated with its workforce. But the City never responded with a compre- hensive plan to use the tool of DROP to make dramatic changes to the size and configuration of its workforce.
While the City workforce did drop from a recent high of 24,500 in FY 2003 to 22,900 in FY 2005, the numbers have not changed much in the five years since and the City employs about 22,500 workers today.
While nearly 7,000 workers have already left City employ through DROP and more than 2,000 are currently enrolled in the program, the City has made almost no change to the size of the overall workforce in recent years.
Of course, there could never be a program that presents a benefit without someone looking for an edge. So it is with DROP. First, City officials decided to allow certain employees to enter the DROP program, collect the DROP payout, and return to the payroll.
This was obviously never the purpose of DROP and any excuses that some employees are too valuable to let go fly in the face of the mechanics of the program, which create the certainty of a four-year window when employees’ replacements should be trained to take over.
Then, a few elected officials decided that they would like a piece of the DROP action. Certainly, nobody could make the case that DROP should apply to elected officials and, happily, State lawmakers recently ended elected officials’ eligibility for the program.
Still, many elected officials who are already in the program have or are looking to run for re-election and then return to office after having “retired” to take advantage of the DROP payment.
While the cases of retired-but-retained officials and elected office-holders entering DROP are few compared to the scope of the overall program, they have become emblematic of what taxpayers see as the greed and excess of those who run Philadelphia.
STOP IT? OR D.R.O.P. IT?

Give a child a hammer, they say, and all the world becomes a nail. So it is with this tool. If DROP is seen as a tool to increase individual wealth, then it will be a benefit to be protected by the City’s bargaining units, a perk to be extended to high officials, and a scam to be exploited by scoundrels.

However, if DROP is used as a tool to create effective succession planning and workforce management, then it can be used to help configure City agencies to efficiently serve the citizenry.
My father always told me that it’s the poor craftsman who blames his tools. If one is hitting his thumb instead of the nail, it is not the hammer’s fault. Hit the nail on the head and it works quite well.
Rather than drop DROP altogether and lose the possibility of being able to use this tool effectively, the City should make two minor changes to the mechanics of the program and one major change in mindset of administration officials to make it work for Philadelphia.
First, rather than a guaranteed return of 4.5%, DROP participants should earn a much-smaller guaranteed return of, say, 1.0% plus a variable rate of return tied to the performance of the pension fund. This way, the pension fund is not devastated during slow-growth periods and DROP participants can share in the benefit when the investments perform well.
Second, the City must shut, lock, and bolt the door after employees enter DROP and ultimately leave City service. No more retiring and rehiring. No more post-DROP consulting arrangements.
Finally, and most important, the City must use the tool of DROP much more effectively. Informed with the certainty created by the DROP participants’ timetable for retirement, the City should reassess workforce planning to best manage our organizational approach toward fulfilling agency missions. We should use the tool of DROP to ensure we have a lean management structure overseeing a workforce that is deployed effectively to meet the needs of the citizenry.
It is not about doing more with less. It is about doing what we should be doing most efficiently.

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