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Do the unions have a point on DROP? (Short answer: No.)
Caught this piece from the local CBS affiliate on the unions' somewhat predictable reticence to eliminating the city's money-sucking Deferred Retirement Option Plan. Key quote:
Do the unions have a point on DROP? (Short answer: No.)
Caught this piece from the local CBS affiliate on the unions' somewhat predictable reticence to eliminating the city's money-sucking Deferred Retirement Option Plan. Key quote:
But the matter came up today at the regular meeting of the city's pension board, raised by Carol Stukes, one of the four union representatives on the board.
She called Nutter's study âa cut-and-paste jobâ and she joined in the call for a new actuarial study of DROP:
âI don't feel comfortable with the documentation that is used for this report. I firmly do support the union — and I represent District Council 47 — getting another study done.â
Of course, in situations like this, "conduct another study" is nine times out of 10 code for "delay until everyone isn't so pissed, then continue business as usual." Which is what this is.
On the other hand, calling Boston College's study, which you can download here, a cut and paste job isn't necessarily wrong. After all, the city only paid $80,000 for it, which, in the actuary world, isn't a whole hell of a lot. And Boston College was forced to rely on data provided by the city, so there's that, too. As Joe Boyle, the actuary who analyzed the program for our investigation, told us last week: Since it costs at least $300,000 to do an annual audit of the city pension plan, "I don't think Boston College is going to tell us anything we didn't already know. I question why the city had to do this in the first place."
Indeed, the report did tell us what we already know: DROP wastes a bunch of money. But how much? Boston College said about $22 million a year; Boyle came up with a significantly higher figure. The difference in their methodologies: For starters, their report didn't include the 48 VIPs who have "retired" or will soon "retire" under DROP, cash their six-figure bonuses, then un-retire and come back to work the next day (including Council President Anna Verna, whose DROP bonuses alone will cost taxpayers half a million smackers).
Since they were also looking to see if the program had any benefit — the city started the program purportedly to entice high-valued workers into staying on the job longer — they apparently edited out of their dataset thousands of employees for whom city data was incomplete (see p. 10). Anyway, this is how BC researchers calculated costs:
The cost of the DROP program equals the sum of the following: 1) the annual amounts payable by the pension plan to DROP participants, minus the amounts that the pension plan would have paid had the employee retired at his counterfactual retirement age, discounted by a rate of interest and annual survival probabilities, and 2) the expected present value of the employee pension contributions from the date of entry to the program to the counterfactual retirement date.
Later in the paper, they go into more detail:
How much does the DROP program cost the employer? We first illustrate the calculation by reference to a hypothetical employee, and then present our estimates of average and total cost of the DROP program. The employee is a firefighter, born in June 1940, who commenced service in October 1960. He entered the DROP program in June 2001, when he was 61, and left exactly four years later in June 2005. At the time he entered the DROP program, his salary was $40,000 a year. He is a member of the pre-1988 pension plan and is therefore entitled to the maximum pension of 100 percent of salary. He therefore received a lump sum of $174,946 in June 2005, and a monthly pension of $3,333 thereafter.
Using our econometric model, we calculate that in the absence of the DROP, this employee would have retired in December 2003; the DROP program delayed his retirement by 18 months. Assuming 2.5 percent inflation and 1.1 percent real wage growth, he would by then have been earning $42,955, and at the same 100 percent pension, would have been entitled to a pension of $3,580 a month. The effect of the employee's participation in the DROP program is to reduce the pension plan's expenditure by $3,580 a month for the 18-month period from December 2003 to June 2005. The pension plan suffers a one-time outflow of $174,946 in June 2005. From July 2005 onward, the plan's outgoings are reduced by the difference in pension benefits of $247 a month.
In other words, they calculated how much the pension plan might save over the employee's lifetime by having them freeze in their lifelong annual pensions four years before retirement. Because they would get smaller annual pension checks, the report reasons, the long-term costs to the city go down. Boyle, for us, took a more straightforward tact: Since the program's inception, the city has paid out $725 million in DROP bonuses already, and is scheduled to shell out $338 million more in coming years. Basic math tells us that's more than $1 billion. That's not counting the interest on the loans the city has taken out to float its DROP payments.
I'm not an actuary or an economist, or skilled at next-level math. I've e-mailed Boyle for his take on the city report; if he responds, I will post it here.
Meanwhile, let's stop to consider what the city got for it's $258 million (or $1 billion, depending on whom you believe):
âWe find that on average, municipal workers delay retirement by over 1.25 years.â
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