DROP, The Pension Bomb

January 28, 2014

 

For a number of years I have received the agenda for the monthly meeting of the City of Memphis Pension Board. I have attended a number of these meetings. Here are a few things that you need to know.

1)    The board consists of the Mayor, the Comptroller and five employees with at least ten years of service, a retiree and only one citizen member. So it is obvious that this is rigged to approve whatever the employees want within the pension ordinance. Temporary Mayor Myron Lowery tried to appoint me to the board a few years ago and the Council voted it down.

Being familiar with meetings and agendas, I noted the agenda for the next meeting this Thursday, January 30. There were listed 30 DROP applications which will cost the City $1.62 million dollars per year in pension payments over the next three years while the DROP applicant is still working. Then I remembered that there were four periods during the year for DROP applications and January was one of the four. I went back to January, April, July and October 2013 and looked at those agendas and there were a total of 116 DROP applications amounting to $4.8 million dollars per year.

I need to explain the DROP (Deferred Retirement Option Plan) provision of the pension system. This provision allows an employee to continue working for one, two or three additional years (most if not all choose 3 years), and to receive salary and pension at the same time. The pension payment goes into a special account and at the end of the drop period the employee will receive a lump sum payment which can be rolled over into a retirement account. The pension is frozen at the level that the employee starts his final retirement years (1, 2 or 3). The employee’s and the City’s pension contribution cease as of the start date of the DROP program.

The County does not have a similar program.

The effect of this DROP program is to increase the overall cost to the City of Memphis. Since most take the 3 year option, we are increasing the size of the retirement community adding those still working for three years to the retirement payroll. The cost to the City is large in that the City must come up with additional money (by borrowing) to pay salaries and pensions at the same time. This is something that must be studied closely and probably deleted in upcoming reforms. Examine what happens with the addition of a DROP program. From the pension plan’s viewpoint, when an employee chooses the DROP option, it is exactly as if the employee has retired since actual pension payments will begin. If the pattern of incidence of retirement changes under the DROP Plan, then from an actuarial standpoint, the assumptions concerning retirement may need to be revised to take this actual experience into consideration. Using lower assumed retirement ages will result in higher required contributions to properly keep the plan in balance. Using a quick calculation and a 5% interest rate, just the above year 2013 will cost $250,000 in interest for the cash to pay salaries and pensions at the same time. And this has been going on for years.

 

 

 

2 Responses to “DROP, The Pension Bomb”

  1. The article in the Commercial Appeal this morning indicates that the City’s consulting firm made clear that the benefits of especially the police and fire departments are much richer for employees of those departments that comparable cities. Yet police and fire employees’ current salaries are already comparable with peer cities. So how do our City fathers and mothers justify things like DROP?

  2. […] follow and actively engage in discussion on the MemphisShelbyInform blog. Yesterday’s post, “DROP, The Pension Bomb,” is a must-read on an issue we all need to understand. We are collaborating with Joe on several […]

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