DROP Pensions: A Sound Investment or a Waste of Taxpayer Money?

 
The chancellor of the University of Alabama System, the football coach at Troy University and doctors at state medical schools all made headlines in Alabama recently. They all were on a list of state employees enrolled in a lucrative retirement plan that will earn them lump sums of $500,000 on the day they retire. That's on top of the pension checks that they will get monthly.
 
Their plan, called the Deferred Retirement Option Program, or DROP, generated so much controversy that the Alabama Legislature closed it this year, figuring to save the state as much as $70 million. "The DROP program has overly taxed our retirement system and Alabama taxpayers cannot afford to sustain the continued high cost of this program any longer," Republican Governor Robert Bentley said when he signed the legislation ending the program last month.
 
But for 52-year-old Janet McCoy, the elimination of DROP may well force a decision to leave Auburn University, where she has worked for 26 years. "I love Auburn. I love what I do here," says McCoy, who works with young people in 4-H programs through the university's Alabama Cooperative Extension System . She had hoped to enroll in DROP in two and half years and retire at age 60 with a lump sum of $170,000. But without DROP - and with her pay frozen at $54,000 for four years - she figures she might have to work somewhere else to accumulate the retirement savings she needs. "It's so disheartening," she says.
 

DROPS face headlines and scrutiny 
Relatively few states have DROPs, but some of those that do, like Alabama, are giving the plans closer scrutiny. Proposals to end DROPs have been unveiled in Arizona and Florida and changes to the program are circulating in Maryland and Ohio. At the local level, generous DROP plans have been linked to billion-dollar shortfalls in the pension accounts of San Diego and Philadelphia.
 
Here is how a DROP typically works: Instead of retiring when they reach retirement age and getting a monthly pension, workers enrolled in DROP "retire" and then agree to stay on in the same jobs for a set amount of time. Meanwhile their monthly retirement checks are sent to special interest-bearing accounts. During that time, workers don't accrue additional pension benefits and contributions aren't made into their pensions, but when the workers retire for good, they receive the money that had been accruing in the special account as a lump sum. Once officially retired, these workers then begin collecting pension checks every month just as they would have under a traditional system. The lump sum money is theirs to keep.
 
The money in those special drop accounts can quickly surpass six figures. Two top officials at the Alabama Education Association had more than $1 million in their DROP accounts while famed University of Alabama Athletic Director Mal Moore had more than $850,000 in his, according to a Top 100 list of DROP participants provided to the New York Times Regional Newspapers and published in several Alabama papers. Troy University football coach Larry Blakeney has nearly $750,000 in his account.
 
With the parade of recent headlines about big pension packages for public employees and states facing billion-dollar deficits, it's easy to see why DROPs are being targeted. "There is an impression that a DROP is a big giveaway and a way that public employees manipulate the taxpayer," says Ron Snell, a pension expert at the National Conference of State Legislatures . But if properly designed, Snell believes, a DROP doesn't have to cost the state or city money. "The basic idea is a sound one," he says.
 
One way plans can get into trouble and cost the state money is by assuming unrealistically high interest rate returns on the dollars set aside during the DROP period and given as a lump sum to the workers when they retire. Another way to balloon the payout is to let workers stay past the three to five years that a DROP period typically allows.
 
"DROPs were established for good reasons, but they also can be misused and taken advantage of," says Keith Brainard, research director of the nonpartisan National Association of State Retirement Administrators .
 
Gradual expansion
The whole idea of a DROP was to retain workers who would be difficult to replace when they retired. Louisiana was the first state to adopt the system, and applied it only to police and fire employees whose dangerous and stressful jobs often led to early retirements. The plans were expanded to include educators as a way to keep skilled teachers in classrooms and universities. They were later expanded further, to general public sector workers.
 
The popularity of DROP plans took off during the 1990s when unemployment was low and states worried about future labor shortages with the Baby Boomer generation in some work categories gearing up to begin retiring.
 
Alabama began its DROP program as a way to keep teachers, targeting those who earned between $50,000 and $70,000, but was widened to include some workers who earned $200,000 or more. Some participating in DROP didn't always retire after five years, as they were supposed to. "In short, a program of this type is unheard of in the private sector, has been abused, and will become insolvent in 12 — 15 years leaving the taxpayers with an unfunded pension liability," said Republican state Senator Bill Holtzclaw, who voted to end DROP.
 
But its outright repeal angered many in Alabama, including Democrats who predicted that experienced teachers would finish their careers in neighboring states. "I wouldn't be surprised to see state employees and educators seeking employment in Georgia, Florida or Tennessee if the Republican onslaught on our public servants continues," said Alabama Democratic Party Chairman Mark Kennedy.

But last year's elections gave the GOP control of both chambers of the Legislature for the first time since Reconstruction, and with Republican support, DROP repeal passed both chambers, largely along party lines. Still, even among those who voted for repeal, there were some concerns about keeping experienced teachers. Even though Holtzclaw voted in favor of closing DROP, he introduced legislation that he said would create a "new and much improved" retirement system for teachers making less than $75,000 annually. "I had little compassion for those in the program who are making six-figure salaries," he said , but he wanted to help retain good classroom teachers.
 
As for Auburn University employee Janet McCoy, she says killing DROP hurts people like herself for whom the program was originally designed: workers with valued experience. "I'm not bashing the legislature," she says. "I know the state has budget problems." But she says the program was eliminated without understanding the consequences. "It will be interesting to see if people leave; if there is a brain-drain."
 
X

Related Stories

PCS.PRODUCTION.1.20140221.1210 (PEWATLVMWAPP01)