Featured Post

Was it constitutional for Proposition 124 to replace PSPRS' permanent benefit increases with a capped 2% COLA?

In this blog I and multiple commenters have broached the subject of the suspect constitutionality of PSPRS' replacement of the old perma...

Monday, February 24, 2014

You take the good, you take the bad, you take them both, and there you have . . . "The Facts About DROP"?

PSPRS Administrator Jim Hacking posted this memorandum about the Deferred Retirement Option Plan (DROP), dated February 12, 2014, on PSPRS' homepage.  As document links like this can disappear, I have posted the memorandum verbatim (with the exception of a few format changes to make it fit):
The Facts About DROP
DROP was a mechanism initiated in 2000 to enable System employers to retain highly-experienced personnel who, prior to DROP’s implementation, tended to retire after completion of the 20 years of credited service required for retirement. Concerned about losing a significant portion of their senior workforce, the System’s employers designed DROP to entice senior employees otherwise eligible to retire to continue working for up to an additional 5 years. Under DROP, the retirement benefits that would otherwise be paid a retirement-eligible employee would be paid into a separate account (a “DROP Account”) which would bear interest at a specified rate.* The employee would continue working for up to 5 years, and after the employee actually terminated employment, he/she would be paid the deferred retirement benefits accumulated in the DROP Account, plus accrued interest. 
DROP’s benefits to the employer were two-fold: during the period the employee was enrolled in the DROP program, the employer would not have to make employer contributions toward the employee’s retirement, since the employee’s retirement benefits were already being remitted to his DROP Account.  These contribution savings were significant, and in some cases, equaled more than 25% of each employee’s pay during the DROP period. Second, the employer retained highly-skilled staff which it otherwise would lose and at great expense, have to replace with less experienced workers. 
DROP’s benefits to the employee were also two-fold: while the employee would not receive the benefit of his already accrued retirement benefits until such time as his DROP period expired, he would nevertheless continue working during his DROP period and receive a paycheck. Further, the employee would have a “guaranteed” return on his DROP Account and not have to worry that his retirement benefits would be dissipated in the securities markets.
While the media has made much of the fact that some participants in the DROP program are receiving significant lump sum payments upon expiration of their DROP periods, the fact remains that the amounts paid DROP participants are simply the money they otherwise would have been paid had they retired before participating in the DROP program, plus interest.
The employers actually incur less payroll expense for DROP employees, because they often save more than 25% in payroll expense for each DROP recipient. And while the DROP program has been terminated for new hires effective January 1, 2012, the program definitely achieved its purpose while in effect. During the past 13 years, the System’s employers were able to retain a great many of their senior level employees for 5 years beyond their 20 year normal retirement date,** and we expect these numbers to fall precipitously as fewer employees qualify to participate in DROP over the ensuing years. The result will be that as time progresses, more employees will retire upon their normal retirement date, employers will have to bear greater employment expense for new hires, and employee turnover will be heightened.
* DROP Accounts of employees with at least 20 years of service before January 1, 2012 are credited with interest at the System’s assumed earnings rate (currently, 7.85%). DROP Accounts of employees participating in the System before January 1, 2012 but with less than 20 years of service before that date (and who elect to participate in DROP thereafter) accrue interest at a rate equal to the System’s average annual return on the market value of its assets over 7 years (currently, is 3.2%).
** This is evident by data reflecting that, four years after implementation of the DROP program, only 280 employees retired in contrast to the following year, wherein 648 employees retired upon expiration of the maximum 5 year DROP period. This means that DROP increased by 200% the number of retirees who elected to continue working beyond
their 20 year normal retirement date.  4841-9854-1592.1

While this memo is called "The Facts About DROP," it seems a bit short on information showing the cost versus benefit of the DROP.  Other than the second footnote, there is no statistical data about the DROP, and even this footnote is of limited value.  What was the value of those additional 368 statewide employees who worked one more year than those who retired the previous year?  Is there any quantifiable measure to show that employers got more arrests, less crime, less property damage, fewer injuries, or better medical outcomes of EMS patients because those 368 employees delayed their retirements one year?  Was there no other incentive that could have retained these employees ?  None of these questions are answered.

The real questions here are financial.  Did employers really save money as stated in the memo?  Without the DROP, what would employers' annual required contribution (ARC) rates now be if employers and employees had fully paid their contributions into PSPRS over the last 13 years?  What if PSPRS had not been paying interest on DROP benefits in excess of its annual returns, even in years when PSPRS had negative returns?  What would PSPRS' funding ratio be if there had never been a DROP?  As for the experience question, what is the average years of service at retirement before and after the DROP was implemented?  And again, what benefits are gained by the extra five years of service for an average employee and can it even be quantified in any measurable way?  PSPRS is the only one that has the data to answer these questions, which are the most important ones if you are trying to defend the DROP to the media, politicians, and citizens.

I have previously written about how the DROP is essentially an end-of-career windfall for employees that increases costs for employers without providing them with any of its purported benefits (see "The folly of the DROP," part one, part two, and part three).  I see nothing in this memo that would change that opinion.

No comments:

Post a Comment

Relevant comments are welcome, but please adhere to the following rules:

1. No profanity or vulgarity.
2. No spam or advertising.
3. No copyrighted material may be posted unless you are the copyright owner.
4. Stay on topic.
5. Disagreement is fine, but please avoid ad hominem attacks.

Comments reflect the views of the authors alone, and do not reflect the opinion of this website.