DROP A Good Deal For City Employees, But Adds To Jacksonville's Pension Woes
Published by Florida Times-Union on April 3, 2012.
When Richard Lundy retired from the Jacksonville Fire and Rescue Department last month, he left with a $5,970-a-month pension he built up over 29 years of service.
Those payments were bolstered with a $478,229 lump sum he got the day he left.
That money comes from about $380,000 in pension payments that accrued for the fire suppression captain over the last five years while he was enrolled in the city's Deferred Retirement Option Program. It also includes about $90,000 those pension payments earned at a guaranteed 8.4 percent annually over that period.
At the same time, Lundy continued drawing a salary, most recently around $90,000.
About 500 workers have signed up from the program, commonly known as DROP, in the past five years, the time period for which figures are readily available. Their guaranteed returns will add up to a combined $26.8 million to their payout when they leave.
Widely seen as one of the most lucrative perks Jacksonville offers its workers, the program is open only to public safety employees and allows them to decide to retire up to five years before they actually separate from the work force. During those years, the pension payments they would have otherwise received are saved on their behalf.
When they actually stop working, they receive a lump-sum payment that includes the saved pension payments plus guaranteed investment returns.
As a group, the DROP workers will cost the Police and Fire Pension Fund millions of dollars when they get their lump-sum payments, money the city is committed to providing.
About 80 or so public safety employees who have retired or are retiring from the city between January and next March will get up to a combined $4.6 million bump in pension payments because of that guaranteed return.
The guaranteed 8.4 percent annual return on investment, unusual among large Florida cities, makes the program particularly lucrative in light of the stock market performance in recent years. For the fiscal year that ended in September 2011, the fund earned just over 1 percent from its investments, although that number fluctuates widely depending on the exact time frame used.
The difference between what is paid out to the DROP retirees and what the fund actually earns is made up for by the rest of the fund, which draws upon contributions from employees and from tax revenues.
(It is not possible to break out the amount of city contribution that goes into DROP payments, but the $81 million Jacksonville contributed in 2010 is expected to more than double in coming years.)
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Police officers and firefighters are the only Jacksonville employees with the guaranteed investment return. Corrections officers have a DROP program, but the investment returns they are given are whatever the fund earns, with a minimum of nothing.
Nevertheless, Jacksonville's program, proposed in 1997 and made law in 1999, is far from unique in offering a DROP program for public safety workers; such programs are popular in southern and western states and are widely offered in Florida.
The city is more generous than many of its counterparts, however, when it comes to the rate of return. The programs offered in Tampa, Miami and St. Petersburg, for example, peg the rate of return to whatever the fund's assets are actually earning.
Fort Lauderdale does have a guaranteed rate of return: 7.75 percent.
When the 8.4 percent return was set, though, it was seen as a way to limit the size of payouts, as the fund was actually earning double-digit returns.
"We were making 15 percent to 20 percent, " said fund Executive Director John Keane, "and they didn't want them to have it" - a view echoed by others who were involved in the negotiations.
Instead, the rate of return was pegged to the 8.4 percent rate the fund officially assumed it would earn. That rate is expected to be lowered this year.
Still, said Thomas Lowman, chief actuary at Bolton Partners Inc. and a supporter of pension plans, the guarantee doesn't make sense from an investing standpoint, because the employee isn't shouldering any risk.
The typical proxy for risk-free investments are Treasury bills, which earn almost nothing.
"Why are we giving a risky rate, " Lowman asked, "to someone who's taking no risk?"
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DROP programs were first created in Louisiana in 1981 and were designed to be revenue neutral: When workers enter such programs, their pension benefits are capped, so it doesn't matter if they get a raise, and the percentage of income they'll receive as a pension doesn't keep on increasing.
At the same time, the workers are taken off the city books, so tax money doesn't have to be contributed on their behalf - at least on paper. The overall cost of the pension goes up, though, leading to larger contributions needing to be made later.
"DROP is a fine idea, " Lowman said, "but everyone think it's free, and it isn't."
Since the DROP program began, Keane estimates, the city has been able to put off making about $80 million in contributions, with the deficit made up for by investment returns when times were good and now by city contributions when they're not.
"They kicked the can down the road, " he said. "Now the can is rolling down the street toward them."
Workers entering DROP do keep on contributing, but at a reduced rate, dropping from 7 percent of their wages to 2 percent.
The city's contribution drops to zero because the worker is treated as though already retired - he or she is not accruing additional benefits - but experts say it hurts the bottom line.
"To say you're saving money because you're not making contribution is silly, " Lowman said. "It's going to get paid one way or another."
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Jacksonville's three pension plans are widely considered to be in dire shape, with the amount of money the city has had to contribute steadily rising: $32 million in 2003 to an expected $118 million in 2010.
The DROP payments, experts say, aren't a huge portion of the contribution, which has been increasing because of poor investment returns, retroactive changes to benefits and funding decisions made in the past.
But the size of the lump-sum payouts, combined with the guaranteed rate of return, creates difficulties.
"It's part of the headline problem, " said Lowman: The big payouts lead to raised eyebrows, even if the impact on the pension fund isn't large.
"It gives people who are trying to kill these plans, " he said, "ammunition I'd rather they didn't have."
In its waning days, the John Peyton administration proposed getting rid of DROP, but after bargaining with the Police and Fire Pension Fund agreed to a deal that increased the years of service employees need before joining the program.
That deal has since languished, but Brown has said that changing the pension system is one of his highest priorities; in recent days, the finance department has requested an array of documents from the Police and Fire Pension Board.
Chief Financial Officer Ronnie Belton, who is heading up that review, won't say if DROP has been discussed as a target for elimination, saying the administration is looking at a broad spectrum of changes.
Meanwhile, the number of employees going into DROP is increasing, with 45 more employees signing up for the program in March.