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Tweaking DROP

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andrew-cuomo2.jpgIn New York, Gov. Andrew Cuomo on Wednesday (6/8/2011) proposed a major overhaul of the state's pension program, which covers state workers, teachers and all local government employees.

Cuomo wants to double employee contributions from 3 percent to 6 percent.  For all new employees he wants to raise the retirement age, end the practice of public employees padding their final pensions by working overtime, and increase the time it takes to vest for a pension.

These reforms are needed, said Cuomo -- a liberal Democrat -- because pension costs have become a runaway train of local and state government, with costs rising exponentially each year. "The pension system as we know it is unsustainable," he said.

Meanwhile, back in Cloud Cuckoo Land, City Council spent most of the day Wednesday (6-8-2011) debating ways to preserve and protect the city's notorious DROP program that provides lump sum payments to retiring employees who join.

There have been dueling estimates of the cost of DROP, but -- just to cut through the verbal underbrush -- here is what is known for sure: it does cost more money to have it than to not; it also apparently serves to encourage city employees to retire early, and thus collect pensions longer than they normally would.

In short, it is actuarially unsound and adds additional burden to the city's pension fund.

It would be an affordable luxury if we had a surplus in the pension fund. We do not. The city's pension plan is seriously under funded. It has only 45 cents for every dollar it will need to pay in pension benefits.  There are a limited number of ways to deal with this problem: (a) greatly increase the fund's earnings, something unlikely to happen anytime soon given the state of the economy and the stock market; (b) change the benefit structure to lower costs; (c) continue to increase the city's payments to feed the fund and make up for shortfalls.. (Option D would be a combination of all of the above.)

For the last decade, the city has opted for Option C, paying out more and more money to sustain employee benefits (of which pension costs are the major component) while reducing spending in other areas of government accordingly. The accompanying chart helps tell the story.

increases-decreases.jpgWhen the decade began, 17 cents of every dollar the city spends went to pay for employee benefits. Today, the figure is 25 cents. By the end of this decade, it could be as high as 35 to 40 cents. 

Despite those increased payments, the pension fund is in worse shape today than it was 10 years ago.  The day may come -- though no one even dares whisper this -- when the city, under pressure from a court somewhere, will have to make huge additional payments to stabilize the fund. It will make the current school deficit crisis look like a walk in the park. And who will pay for these additional payments? The taxpayers.

If that happens, we will have reached the point where city government will exist primarily to pay for the fringe benefits of its employees.  Not to highlight the obvious, but that is not supposed to be the function of government.  The function of government is supposed to be delivery of services to citizens.

Yet, the trend lines are clear. By taking Option C, we already have reduced the capacity of government to deliver basic services. 

Something in Cuomo's statement triggered my memory. Where had I read that word "unsustainable" before? I went looking and found it on Page 21 of the Mayor's Five-Year Plan.  Here is the two-paragraph excerpt:

"The City's rising pension payments places a significant strain on the City's General Fund. Meanwhile, the City's Pension Fund remains poorly funded. In FY2000, the General Fund incurred $220 million in pension costs and the pension fund's assets were 77% of its liabilities. By FY2009, pension costs more than doubled to $459 million, and the pension fund's assets had dropped to 45% of its liabilities. Over the same time period, City revenues grew by only 35%.

"The situation is untenable and unsustainable more and more of the City's resources go toward paying pension costs and cannot be used to provide services. Despite these dramatically increasing payments from the City's general fund, the funding ratio is extremely low."

Nutter has not proposed anything as dramatic as Cuomo. To his credit, the mayor did seek and got some pension changes in the contracts awarded the police and fire fighters in arbitration.  They were relatively small changes, but they were a start.  He has been hopelessly weak, though, when it comes to getting concessions from the city's blue- and white-collar unions, who make up the majority of city employees.

Of course, it's one thing to be weak and another thing to whore for the unions, which is what Council is doing with DROP. They say they are tweaking it to make it more palatable. But, palatable isn't the issue. We shouldn't be talking about tweaking any pension perks when the fund is unstable and the current costs are -- here's that word again -- unsustainable.

Tweaking DROP. What a concept. That's like putting a fresh coat of paint on your walls while your house is on fire.

 

-- Tom Ferrick

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