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DROP can be fixed, says Council study - not so fast, says CP's Ralph Cipriano
Evan M. Lopez
DROP can be fixed, says Council study - not so fast, says CP's Ralph Cipriano
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| Evan M. Lopez |
This is the first of two reports by CP contributor Ralph Cipriano, who's 2010 story "The Billion Dollar Boondoggle" exposed the program's costs to be substantially higher than previously thought.
On Tuesday, City Council President Anna Verna unveiled a new study of the city's now-infamous Deferred Retirement Option Plan (DROP) that claims it costs less that previously reported.
DROP is a pension perk that allows city employees to pick a future retirement date and then treat themselves to a double-dip during their last years on the job. For a maximum of 48 months, employees enrolled in DROP get to simultaneously collect their salaries and their pensions, with the pension money stored in a tax-deferred account and paid out the day the employee retires in a lump-sum cash bonus that averages more than $100,000.
The DROP program also allows elected officials (like City Council members) to ?retire? for a day, collect fat bonuses, and then go back to work the very next day and resume collecting their salaries.
Last year, a City Paper exposé (Cover Story, The Billion Dollar Boondoggle, Ralph Cipriano, April 22) found that the program begun in 1999 is costing taxpayers more than $1 billion in past and future cash bonuses, according to city records reviewed by City Paper.
Mayor Nutter joined the fray last August when he unveiled a Boston College study that said that since 1999, DROP had cost the city $258 million in extra pension costs. The Boston College study, however, looked at only the pension side of the double dip, and ignored salary costs.
The City Council, which includes six members scheduled to receive more than $2 million in future DROP bonuses, then commissioned its own study, by Bolton Partners Inc., a Baltimore actuarial firm, to challenge the findings presented by the mayor.
On Tuesday, Council president Anna Verna unveiled the results. Bolton Partners found that Boston College professors had made several substantial errors that overstated the cost of DROP by nearly $160 million. Bolton put DROP s added cost to the pension fund at approximately $100 million.
Verna, who will collect a DROP bonus herself next year of $584,777, took occasion at the unveiling of the Bolton study Tuesday to proclaim that DROP can be fixed but first we need another study.
The city has already spent $80,000 on the Boston College study, and $30,000 on the Bolton Partners study. But Verna announced that she s asked an actuary to prepare a cost analysis that would weigh several proposed reforms of DROP (see below), and figure out how to make the program cost-neutral for taxpayers.
And who, says Verna, should perform this cost analysis? Why, the very man who helped create DROP in the first place.
Since 1995, with the exception of two years, Kenneth A. Kent has served as actuarial consultant to the city pension board. From 2000 until 2010, the city has paid two firms that employed Kent more than $3 million for his expertise.
Based on Kent s advice, the pension board designed a DROP program that was supposed to be cost-neutral. The city was supposed to earn an annual 9 percent return on investments, so it could afford to pay employees enrolled in DROP an interest rate of 4.5 percent.
Instead of earning that 9 percent interest rate on investments, though, the city in the past dozen years has earned only 4 percent. Based on that 9 percent projection, Kent estimated back in 2000 that the city pension fund would swell to $8.5 billion last year. He was off by $4.5 billion. Instead of being cost-neutral, the program has proved very, very expensive.
When Kent and the pension board designed the DROP program, they also did not foresee a stampede of some 10,000 applicants, which is why DROP has been so expensive.
An undaunted Verna proclaimed on Tuesday that Kent would finish his analysis by early April, and then the Council would hold public hearings on DROP.
With Kent s track record, don t be surprised if you find the Nutter administration commissioning another study.
I'd bet that because the Councilmember's own study, by Bolton Partners Inc., a Baltimore actuarial firm, was done to "challenge the findings presented by the mayor", that the "assumptions" used, while likely chosen within the "reasonable" range (to maintain the professional nature of their work), were skewed to the end of the range that would generate the results desired by those hiring (and paying for) the study .... meaning to produce the LOWEST (reasonable) cost of the Drop program.
Now of course, the Mayor may have hired a firm and made it clear he desired a report with the "highest" reasonable cost.
The point I'm making is to take the results of such "studies" with a great degree of skepticism .... by paying careful attention to who is paying the consultant's bill.
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