Monday, March 7, 2011

Gary Palmer: Eliminating DROP is not an attack on state employees

  During the first week of the 2011 legislative session, Alabama made a significant move toward getting its fiscal house in order when both the House and Senate committees approved legislation to eliminate the Deferred Retirement Option Plan (DROP).

  According to projections from the Legislative Fiscal Office, eliminating DROP could save the state of Alabama up to $70 million.

  In 2002, when the legislation establishing DROP was being considered, Marc Reynolds of the Retirement Systems of Alabama (RSA) told state legislators that the RSA estimated that 567 state and education employees would enroll each year. But state and education employees in all occupations saw the program for what it really was ... a huge financial windfall available to every state and education employee.

  As soon as DROP was established, state and education employees virtually broke the door down to get in the program. If the RSA estimate had been anywhere close, there would have been less than 2,300 enrollees in the first four years. As of 2006, there were 5,375 education employees and 1,457 state employees for a total of 6,832 enrolled in DROP - more than triple the RSA estimate. In her testimony on March 2, 2011 before the House Ways and Means General Fund Committee, Alabama Education Association Attorney (AEA) Susan Kennedy said there are currently about 8,400 state and education employees enrolled in DROP, with almost 1,200 more joining every year.

  This is not the first time the legislature has considered eliminating the program. In 2004, Governor Bob Riley's Education Spending Commission recommended that DROP be discontinued, but the legislation to end the program was defeated in the House Education Finance and Appropriations Committee.

  The real problem is that DROP has created a financial windfall for every state and education employee in the state retirement system, regardless of occupation or skill set. Moreover, many of these employees enrolled in DROP with no intention of retiring early. This created another form of double-dipping - they get their regular salary plus a minimum of 50 percent of their highest average salary deposited into a tax-deferred annuity with an interest rate of four percent guaranteed by the state of Alabama. Frankly, they would have been foolish to miss this opportunity to sock away extra cash. And those who never intended to retire early, once they complete their DROP enrollment, can continue to work and increase the pension they will receive when they finally do retire.

  Currently, state and education employees can retire at any age after they have worked 25 years. This has resulted in hundreds of state and education employees retiring in their mid-forties, going to work for someone else and building another pension. DROP was intended to encourage key employees to work longer for the state and allows them to enroll in DROP at age 55. And if they elect the five-year option, they can still retire two years short of the minimum age for receiving Social Security benefits and five years short of eligibility for Medicare. This is where the real problem is for the state retirement system.

  As Girard Miller wrote in Governing Magazine, "DROP plans have been nothing more than another way for employee organizations to outwit politicians and public managers - and siphon money off the pension fund." He added, "The mere existence of a DROP plan should signal that something is wrong with the pension plan. The idea of providing incentives to seniority workers to keep them in service - because their pension plan encourages a life of leisure well before age 60 - is a signal that the pension benefit is too rich."

  Girard states the obvious: "early retirement plans with full lifetime benefits are simply not sustainable in today's world of increased longevity, shrunken government budgets and underwater pension fund portfolios."

  The real issue is not just that DROP should be eliminated, but that Alabama's pension benefits for state and education workers must be reformed. The state cannot afford to have its employees eligible to retire in their mid-forties. If the state is concerned about losing valuable, hard-to-replace employees to early retirement, then the solution is to raise the retirement age to 62. This is still five years short of what is now considered to be the full or normal retirement age.

  Not only will raising the retirement age help the state keep valuable or hard-to-replace employees, it will significantly improve the financial condition of the state and the pension plan. Some state employees perceive the effort to eliminate DROP as an attack on state employees; truthfully, it is really about saving the state from financial ruin.

  About the author: Gary Palmer is president of the Alabama Policy Institute, a non-partisan, non-profit research and education organization dedicated to the preservation of free markets, limited government and strong families, which are indispensable to a prosperous society.

  This article was published by the Alabama Policy Institute.

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