COUNCIL OF THE CITY OF PHILADELPHIA COMMITTEE ON LABOR AND CIVIL SERVICE - - - Room 400, City Hall Philadelphia, Pennsylvania Tuesday, May 13, 2008 10:05 a.m. - - - PRESENT: COUNCILMAN BILL GREEN, CHAIR COUNCILMAN WILLIAM GREENLEE COUNCILMAN CURTIS JONES, JR. COUNCILMAN JAMES F. KENNEY COUNCILWOMAN MARIA QUINONES-SANCHEZ BILL 080020 - An ordinance amending Title of The Philadelphia Code, entitled "Public 15 Employees Retirement Code," to make elected officials ineligible to participate in the 16 Deferred Retirement Option Plan (DROP), all under certain terms and conditions. 17 18 19 20 21 - - - 22 V A R A L L O Incorporated Litigation Support Services Eleven Penn Center 1835 Market Street, Suite 600 Philadelphia, Pennsylvania 19103 215.561.2220 215.567.2670 2
This is Councilman Bill Green for the Committee on Labor and Civil Service on Bill 5 080020. I note that a quorum is present. Committee members Greenlee, Jones and Kenney are present. Ms. Vidas will please read the bill into the record.
Bill 080020, an ordinance amending Title of The 13 Philadelphia Code, entitled "Public 14 Employees Retirement Code," to make 15 elected officials ineligible to 16 participate in the Deferred Retirement 17 Option Plan (DROP), all under certain 18 terms and conditions. 19
We have 20 public testimony from the Committee of 21 Seventy, Zack Stalberg. 22 Is there anyone else here to testify on the bill today? (No response.)
Mr. 3 5/13/08 - LABOR - BILL 080020 Stalberg, please approach. (Witness approached witness table.)
I am Zack Stalberg, President and CEO of the non-partisan Committee of Seventy. I am here today to testify on proposed legislation to prohibit elected officials from participating in the City's Deferred Retirement Option Plan. I appreciate the opportunity to testify before this Committee and thank Chairman Green. I also want to thank you for putting me first and last. The Committee of Seventy favors excluding elected officials from participating in DROP. 5 percent. But DROP is a deferred retirement program. There is an unequivocal presumption that an employee must actually retire in order to benefit from DROP. That presumption was violated when former City Solicitor Diaz apparently sanctioned a one-day retirement of two elected officials in order to receive DROP pension payments. Several other elected officials have since enrolled in DROP. Both of the officials who acted on Diaz's advice ran for reelection in November 2007, retired for hours in 19 January 2008, received their lump sum 20 DROP payments and then returned to work 21 the following day. 22 It is impossible to comment on 23 Solicitor Diaz's rationale. The opinion 24 has not been made public. His successor, Solicitor Smith, has indicated that for 5 5/13/08 - LABOR - BILL 080020 confidentiality reasons, she could not even confirm its existence. This loophole is not the only reason to exclude elected officials from this retirement program. DROP was enacted in 1999 for two reasons: To retain experienced employees, especially police and firefighters, by giving them an incentive to stay in their job for four years after they might have otherwise retired; and to allow the department in which a DROP enrollee is working time to choose and train a successor. Neither of these two reasons for the DROP program has anything to do with elected officials. With the exception of the Mayor, who has a two-term limit, it is up to the voters to decide when it is time for an elected official to go. We want to emphasize that our position is not intended to suggest that elected officials who are currently 6 5/13/08 - LABOR - BILL 080020 enrolled in DROP should not receive its benefits, nor are we singling out any elected official who has already taken advantage of DROP and officially retired, such as Mayor Street. Their participation is allowed by the rules that currently exist. Our position also does not take into account the financial impact to the City of including elected officials in DROP. However, this matter has been raised by everyone from PICA to the Greater Philadelphia Economy League to Mayor Nutter, who as a City Councilman sponsored legislation in 2004 to remove elected officials from DROP and presumably still favors the idea. Curiously, the actuarial report on DROP that was sought by and presented last month to the City's Retirement Board does not directly address this controversial point. We hope Council will review the cost of DROP among the many issues 7 5/13/08 - LABOR - BILL 080020 impacting the City's significant unfunded pension liability. We urge this Committee to reschedule a public hearing originally intended for May 6th on a resolution authorizing the examination of the state of the City's pension system, including existing plan entitlements, contributions and investment strategies and to prepare a report making recommendations to ensure the fiscal stability of the pension system. 5 billion pension bond issue proposal. Putting aside the financial impact on the City's pension crisis, the greatest cost of the DROP controversy is that it has fueled cynicism of local government. The long overdue reform you are considering should be passed by this Committee and by the full Council. Thank you very much.
Thank you. Are there any questions for 8 5/13/08 - LABOR - BILL 080020 Mr. Stalberg? Councilman Kenney.
Thank you very much. Good morning. Do you believe that elected officials' participation in the DROP program harms the pension fund?
I think we don't know that clearly enough. I received late yesterday the actuarial study on the pension program, and it is not instantly clear whether there is a no cost, a small cost or a large cost to elected officials participating in DROP. I think it requires -- the cost issue requires a deeper and better examination than that.
From your examination of the overall program, do you believe that the existence of DROP for all employees harms the pension fund in any way?
No. I 9 5/13/08 - LABOR - BILL 080020 understand. Just in general.
I know you're not opposing DROP as a program, but just in general through your research, have you been able to come up with --
-- an opinion on whether DROP is a good thing or a bad thing for the pension fund?
No. We don't have the financial expertise at the Committee of Seventy to determine that, and I have to presume that the participation of elected officials represents some cost.
Now, it was -- I don't know this for a fact, but there was discussion relative to Mayor Street's participation, for example, that it's kind of a roll of the dice for the employee, in that if you live long enough and you're not in the DROP, you will 10 5/13/08 - LABOR - BILL 080020 collect more money than you will in the lump sum. You're betting that you're not going to live as long as you may. And with all this actuarial kind of issues, there's really never -- it's kind of a science, but it's not exactly a defined science whether or not when you make that, I guess, end-of-career decision, do I do DROP because if I don't do it, will I live longer and wind up taking more money out of the pension fund by getting more monthly checks or do I bet that I'm not going to live as long as I would like to and want the lump sum. And does that in some way balance out the cost? I mean, they're all rhetorical questions, but I --
Right. I think most financial advisors would say take the lump sum benefit and have control over the investment options, but, frankly, that's not our expertise and it's not our issue. We think that elected officials really weren't designed 11 5/13/08 - LABOR - BILL 080020 to be part of this program and that it's cost a great deal of public confidence in elected officials that a couple folks have already taken the program and there's been a great deal of publicity about that.
And this question is also subjective, but it would seem that the fact that the two elected officials who did this, who dropped and then retired for a day and got reelected, in fact got reelected. So if the public was so outraged at their behavior, you would think they would have either lost or came very close to losing their election.
I think the timing of that was such that people were not aware of that, the voters were not aware of that until after the reelection. I could be wrong about that.
Is it the Committee of Seventy's position that we should change this law because it simply 12 5/13/08 - LABOR - BILL 080020 doesn't look good? Is it more what it looks like than what it is?
No. No. I think that DROP was designed for a couple key reasons, as I mentioned in my testimony, and they really don't pertain to elected officials; that it certainly doesn't look good and it certainly has de-valued the service, I think, of a lot of good elected officials.
I don't know what I'm -- I'm not at a point yet where I have to make that decision, but the issue of the one-day retirement and reelection is one issue. But the other issue is one of participating in a program if I intend to retire, if I am eligible age-wise and length of service-wise, that somehow this is not the employee's money, that somehow it's viewed by the public or those who are opposed to elected officials in DROP that somehow over the course of your 24, 30 years in government, you have not earned 13 5/13/08 - LABOR - BILL 080020 that money and are simply making an arrangement which accelerates -- well, actually decelerates your payments, saves the pension fund potentially some money and you get the benefit of the lump sum. The issue of retiring for one day and coming back I think has a totally different flavor to it and issue to it, but the fact that a public employee, an elected official, has worked for 20, 24, 28, 32 years, that somehow they're taking someone else's money I think is not really accurate.
I agree with you that that's not really accurate. I think that there are certain benefits to the DROP program that were intended for a certain class of City employee and, best I can tell, they were not intended for elected officials. The --
But at the time we were debating the legislation, I agree with you that it was not discussed. I don't think it was overtly not 14 5/13/08 - LABOR - BILL 080020 intended, but it was not discussed and debated. So it really was -- there's really no, I guess, legislative history on that specific issue, because I don't remember it ever coming up in the course of our deliberations on the original DROP.
I wasn't thinking of it at the time, of course, because I was a lot younger than I am now, but --
I think the presumption here is that it's a retirement plan, not a one-day retirement plan.
Correct. And we totally agree on that one. I'm concerned that the legitimate retirement benefits of a long-term employee, whether they're an elected official or not, is somehow going to be abridged as a result of what two individuals have done and 15 5/13/08 - LABOR - BILL 080020 what it looks like. If I'm going into DROP, if I do it, I'm not coming back. It's time to go. But I don't want it to be perceived that somehow you're doing some pension boondoggle, that this is not your money. You've earned that money. The agreement you have as a City employee is both sides contribute, and on the DROP program, which is supposed to save the pension fund money, you enter into this, you're going to leave in four years or less, and it's not somehow you're taking someone else's money, it's kind of what you have earned. And I think the two -- the one-day retirement and that issue I think needs to be untangled, because I think it does confuse both.
Perhaps you could respond to this, Mr. Stalberg. 16 5/13/08 - LABOR - BILL 080020 It's, I guess, my belief that because the DROP program is coterminous or four years, the same length of time as an elected official's service, essentially the practice is, people are planning to retire and sign up for the DROP after their reelection and essentially receive a golden parachute or a lump sum payment at the end of four years, which is antithetical to the purposes of DROP, because the purposes of DROP are to provide predictability in placing senior civil servants or police and fire who are in positions that require training or additional skills and also to encourage some of -- originally it was to encourage some of our longer-term City employees who had higher salaries to get out so that we could replace them with younger, less expensive people. And it seems to me that the fact that the DROP program is four years and a term is four years, essentially what we're doing is providing a golden parachute to people who have 17 5/13/08 - LABOR - BILL 080020 served the City and honorably perhaps for the last 30 years. Any comment on that?
Point of information, Mr. Chairman, if I may. The definition of a golden parachute is important to his answer, in that a golden parachute to me means something more than was coming to you in the first place. And the question I have again, the one-day retirement aside, is this a golden parachute or is this what you've earned in an accelerated fashion, which by getting it saves the pension fund money.
Well, I'm going to answer that question and then allow Mr. Stalberg to answer both of our questions. The privilege of the Chair. So Councilman Kenney's question is correct, and it goes to the basic question he was asking and goes to the basic question I was asking. So allow me to rephrase the question. 18 5/13/08 - LABOR - BILL 080020 DROP is a retirement program. If you retire when you're 65, if you choose to do that, you can get your benefits for or 30 years. If you 6 choose to retire when you're 70, 75, 7 which elected officials can do, then you 8 get less payment. But the fact of the 9 matter is, no City employee pays into the 10 pension system what they get out. In 11 other words, the contribution from the 12 employee does not merely equal the 13 contribution from the City in terms of 14 end benefits. 15 So, yes, it is their 16 legitimately earned pension money, but, 17 no, it is not money that they contributed 18 that then grew alone. It is money from 19 the City. 20 So the whole issue with respect to DROP costs money depends on the determination of whether or not the DROP program changed behavior of people so that they retired otherwise than they would have, and that is why it's so hard 19 5/13/08 - LABOR - BILL 080020 for the actuaries to make the determination as to whether or not it costs money to the City, because you have to somehow determine whether or not the existence of a DROP program changes behavior. It is my belief that what is happening now among elected officials and in the DROP in general is that people are retiring when they otherwise would, receiving a lump sum payment while they are receiving their salary essentially, and that costs the pension system money. As you noted, PICA has suggested it's 60, 70 million. The Pennsylvania Economy League came up with a figure of $40 million, and the Mayor's report is -- or the Administration's or Pension Board's financial impact is inconclusive. It says that the system experienced a gain of 62 million or a loss of 203.4 million, depending -- and I don't have the basis for those two assumptions yet, so it's hard to get a figure. That's why after 20 5/13/08 - LABOR - BILL 080020 this hearing we're going to hold the bill 3 to try to get to the bottom of this question. But based on all that background, do you have any comment?
I think it's both money that the individual has been entitled to and a golden parachute. There are some benefits attached to it. In my mind, it is not necessarily one thing or the other. The real question is, were those benefits intended for elected officials. The larger DROP questions, I'm afraid I'm not equipped to answer, but in terms of this bill, the real question is, was it designed to cover elected officials. And in my mind, I can only find two clear explanations for them, and I cited that in the testimony, and that's the reason we feel that elected officials should not be included in the program.
Any further questions for Mr. Stalberg? 21 5/13/08 - LABOR - BILL 080020 (No response.)
I was pleased to hear what Councilman Kenney just said, because one of the proposed that was sent around Council in my first weeks here actually would change the Charter to permit people who are in DROP today to have a 30-day window to get out and would then make them ineligible to run for office again for a number of years after they actually took their DROP payment, and if he is willing to support that, I would certainly introduce that or propose that again with him.
I don't really understand the concept. I'd be happy to talk to you about it after the hearing. My bottom line on this thing is that if it's for appearance sake, that's one argument. If it's because it's a 22 5/13/08 - LABOR - BILL 080020 negative to the pension fund that elected officials are participating, that's another argument. If overall the entire DROP program is a severe negative to the pension fund, that's another whole issue, whether or not we should continue with the DROP if in fact it's that detrimental to the pension fund. For me the issue is partially appearance, but the majority of my concern is whether or not elected officials' participation and participation in the entire program is a negative to the pension fund. It's a much more objective question and answer, and if we could ever find that out through whatever actuarial studies need to be done, then we can make a decision based on the facts. If it's an issue relative to what it looks like because an elected official has done it, that's a legitimate issue, but it's a different issue than the strength of the pension fund. 23 5/13/08 - LABOR - BILL 080020 And, again, I will argue for the record that this issue of golden parachute or no golden parachute to me is not accurate, because when you become a City employee, whether you are in the Sanitation Department, the Police Department or any other department or in City Council, you have an agreement with the City, your employer. You contribute so much money to your pension fund and your employer contributes so much money to your pension fund. That's part of the contract between the employee and their employer. So I don't think it should be portrayed as anything other than what every other employee gets as a result of being employed by the City of Philadelphia. Whether or not we decide as a panel and as a body to change that because of the appearance is a totally different situation that we need to discuss, but I, again, have difficulty in tangling up the appearance with whether 24 5/13/08 - LABOR - BILL 080020 or not elected official DROP or DROP in general is a detriment to the pension fund. And I think the appearance and the argument relative to the appearance puts in people's minds, maybe incorrectly, that the pension fund somehow is in jeopardy because of their participation. So that's where I am on this.
Thank you, Councilman. I completely agree that the pension fund is not in jeopardy because of elected officials' participation in the DROP, because there are enough of us to effect the long-term results in the pension fund. However, I want to repeat that the pension fund -- DROP was enacted for two reasons: to retain experienced employees and to allow the department in which a DROP enrollee is participating to prepare for a successor, and neither of those rationales apply to a City Council person.
There's one other, because I was here when we voted 25 5/13/08 - LABOR - BILL 080020 on it. The other reason why we passed it was because we were told that it was going to be beneficial to the pension fund on a positive side.
And in the face of a study that the Street Administration put down to City Council that said that DROP actually costs $70 million, City Council extended the DROP program. There have been other studies that range this cost of DROP from 40 million to 70 million, including the Pennsylvania Economy League, and the latest study that we just received from -- I don't know whether it was from the Administration or the Pension Board -- says that it's a gain of 62.1 million to a loss of 203.4 million. But for elected officials, it is not just a question of whether or not 5/13/08 - LABOR - BILL 080020 it costs money. First of all, I don't believe the purposes of DROP apply to elected officials, as I've said, and, secondly, yes, public perception of us is important, and that is another reason why I proposed to eliminate DROP for elected officials. Because as I traveled -- as I campaigned across neighborhoods in the City last year, I encountered many residents who perceived a disconnect between elected officials and the people whom they represent. I believe that reading about issues like loopholes in the DROP program have contributed to that disconnect. It is my hope that this legislation brings us one step closer to that divide and reaffirming our commitment to good governance in the City of Philadelphia.
Thank you. Based on some of the numbers that you've 27 5/13/08 - LABOR - BILL 080020 stated relative to the overall DROP program, you would be anticipating that someone would be introducing legislation to end the DROP overall. I mean, if it's that negative to the pension fund, you would suspect that our fiduciary responsibility would be to eliminate it.
There's another testimony here that I find very interesting from the Director of Finance and the Chairperson of the Pension Board that speaks to some of the points that Councilman Kenney speaks of in terms of the loopholes and how it's been used for 28 5/13/08 - LABOR - BILL 080020 favored employees. I'm assuming this is going to go on the record, but I wanted to --
-- ask a point of clarification. Are we expected to vote on this in terms of this morning? Because then I'd like to go on the record on a few things.
My intention is to go into a public meeting and to hold the bill to allow us to get more specific information on the cost and benefits, because I think data is important before we make this decision. But I will -- so go ahead and get on the record what you'd like.
I think that we're all kind of arguing the same points. There's several different issues, and I look at as three different issues. It's, one, the perception that elected officials are disconnected and kind of get a privilege for special 29 5/13/08 - LABOR - BILL 080020 rules. I think the other issue is the financial impact that we're speaking to. And then the third issue around who gets to skirt around this as in the case of employees. Although the resolution only speaks to elected officials, my recommendation is that we ask for some kind of deadlines around when we're going to do this financial analysis. I'm prepared to vote for something of this nature just because of perception. I think that there's a certain amount of voter apathy to elected officials and I really believe that we should be held to a higher standard, and if people feel that what we're doing is wrong, then we should respond to it. That said, I also think that given the realities of where our underfunded pension fund is, the discussion around whether we engage in a $4 billion loan or bond issue to fully fund it is one that should also be had. And I agree with Kenney, as much as we 30 5/13/08 - LABOR - BILL 080020 want to separate those, they're not going to be separated, because the public does not have the stamina to sit through these long discussions. So my recommendation would be to the Chair, if you're going to hold this, that we ask the Administration on a time schedule to give us some preliminary numbers and that we come back. But, I mean, I think that we can have this discussion on three different fronts and not agree on all three, but I think we do agree that there is a major perception problem, and that's why we're here today, because people all over the City feel that there's certain privileges that have been allowed, notwithstanding the fact that there have been certain employees who have been allowed to -- think of Police Commissioner Sylvester Johnson and others that were so public. So I don't know how much longer we're going to be at this in this 31 5/13/08 - LABOR - BILL 080020 discussion, but I don't think it's one that we're going to resolve today. Therefore, I ask that you close it.
Yes. And, in fact, I thought that the current study would have more specific information, and basically it punted and didn't address the issues. I had conversations with the Finance Director and Budget Director about what assumptions they would make with respect to DROP. And really the problem is determining whether or not DROP costs the pension fund money is based on the subjective intent of the pool of people that take DROP, and that's a hard thing for actuaries to put a number on. In the past, they've made assumptions. Those assumptions have said it costs money. What this current most recent study does is make assumptions with respect to behavior at the two extremes and says it either saves 62 or costs 203. If you say the assumptions shouldn't be at the extremes but 32 5/13/08 - LABOR - BILL 080020 somewhere in the middle, that's definitely a cost to the pension system, but it is something that is hard to quantify, which is why we are going to try to get more information and have testimony from the people who have done the studies, to try to get to the bottom of it. Although I agree with you, Councilwoman, that regardless of the overall pension system, for which we do have separate hearings that we're going to schedule in June, this bill should eventually pass. Any further comments?
The information you have on the study, are we going to get copies of that so that we can digest that information --
If I may just comment on Councilwoman Sanchez's remarks. I'd urge this Committee and Council to press as hard as possible to get the numbers and the best subjective judgments in terms of whether behavior has been changed or not. This issue became public, I believe, in January. The Committee of Seventy asked for a top-to-bottom study of DROP and its costs at that point, and the Mayor indicated that that was going to be done. At least the actuarial study that we've seen that was presented to the Pension Board doesn't really address the question. Punting is a good description of what is represented in that report. And it's now May. So I think if there 34 5/13/08 - LABOR - BILL 080020 are going to be answers to these questions that will allow you to make the best possible decision, I think it's going to rest on this Committee to really press it as hard as you possibly can. Thank you.
Thank you, Mr. Stalberg. I am going to at this time submit written testimony from Ben Hayllar, Benjamin Hayllar, which I'll provide to the Clerk, and I'll hold this hearing to the call of the Chair. Thank you. (Committee on Labor and Civil Service adjourned at 10:40 a.m.) - - - 35 CERTIFICATE I HEREBY CERTIFY that the proceedings, evidence and objections are contained fully and accurately in the stenographic notes taken by me upon the foregoing matter on May 13, 2008, and that this is a true and correct transcript of same. ______________________________ MICHELE L. MURPHY RPR-Notary Public (The foregoing certification of this transcript does not apply to any reproduction of the same by any means, unless under the direct control and/or supervision of the certifying reporter.)