COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC HEARING AND PUBLIC MEETING BEFORE THE COMMITTEE OF THE WHOLE - - - Room 400, City Hall Philadelphia, Pennsylvania Tues.,6/8/99, 10:27 a.m. - - - BILL 990221 - Amending Title of Philadelphia 7 Code entitled "Contracts and Procurement" by amending Section 17-107 entitled "Contractors, 8 Labor Management Relationships". . . BILL 990288 - Amending Title 22 of Philadelphia 9 Code on "Public Employees Retirement Code". . . RES. 990391, 392, 393, 394, 395 - Appointing 10 Lynn Martin-Haskin, Kenneth Kaiserman, Josh Grimes, Arthur Holst, and Curtis Silva, 11 respectively, to the Board of Directors of the Old City Special Services District. 12 (Full text of all bills and resolutions contained 13 herein.) 14 PRESENT: COUNCIL PRESIDENT ANNA C. VERNA, Chair COUNCILMAN DARRYL CLARKE 15 COUNCILWOMAN JANNIE BLACKWELL COUNCILMAN DAVID COHEN 16 COUNCILWOMAN JOAN L. KRAJEWSKI COUNCILMAN JAMES F. KENNEY 17 COUNCILMAN MICHAEL A. NUTTER COUNCILWOMAN MARIAN B. TASCO COUNCILMAN ANGEL L. ORTIZ COUNCILMAN FRANK DICICCO COUNCILMAN BRIAN J. O'NEILL COUNCILMAN RICHARD T. MARIANO COUNCILMAN FRANK RIZZO CHARLES MCPHERSON, Chief Financial Officer - - - VINCENT VARALLO ASSOCIATES, INC. Registered Professional Reporters Eleven Penn Center, Suite 600 Philadelphia, PA 19103 (215) 561-2220 2 6/8/99 - COMMITTEE OF THE WHOLE I N D E X Res. 990391, 92, 93, 94, 95 Cynthia Filo, Executive Director. . . . . . . 4 Old City Special Services District Bill 990288 Ben Hayllar, Chairman, Pension Board. . . . . 10 Joseph Herkness, Executive Director . . . . . 14 Board of Pensions and Retirement Israel Zeitz, Retired City Employee . . . . . 75 Carol Stukes, Pension Board Member. . . . . . 82 Bill 990221 John Kromer, Director, OESS . . . . . . . . . 84 William Hankowsky, President, PIDC. . . . . . 91 Richard Feder, Esq., Deputy City Solicitor. . 94 Rich McNeil, Esquire. . . . . . . . . . . . . 154 Building Trade Unions Counsel Len Lombardo, Council Representative. . . . . 167 United Brotherhood of Carpenters Maritza Ortiz, Esperanza CDC. . . . . . . . . 210 6/8/99 WHOLE COM. - Res. 990391, 2, 3, 4, P R O C E E D I N G S
Good morning, good morning. This is the public hearing of the Committee of the Whole. I would ask Mr. McPherson to please read Resolutions 990391, 990392, 990393, 990394, and 990395.
Resolution No. 990391, a resolution appointing Lynn Martin-Haskin to the Board of Directors of the Old City Special Services District of Philadelphia. Resolution No. 990392, a resolution 13 appointing Kenneth Kaiserman to the Board of Directors of the Old City Special Services District of Philadelphia. Resolution No. 990393, a resolution 17 appointing Josh Grimes to the Board of Directors of the Old City Special Services District of Philadelphia. Resolution No. 990394, a resolution 21 appointing Arthur Holst to the Board of Directors of the Old City Special Services District of Philadelphia. Resolution No. 990395, a resolution 25 appointing Curtis Silva to the Board of Directors 4 6/8/99 WHOLE COM. - Res. 990391, 2, 3, 4, 5 of the Old City Special Services District of Philadelphia.
Good morning. Please identify yourselves for the record please.
Good morning, Madam President. My name is Cynthia Filo (ph.), and I an the Executive Director of the Old City Special Services District.
Good morning. John Taxin, President, Old Original Bookbinders Restaurant and Chairman of the Old City Special Services District.
Good morning, Madam Chairwoman. My name is Joshua Grimes. I am a Board Member of the Old City Special Services District and a nominee for reappointment.
Yes. The candidates of Arthur Holst, Dr. Lynn Martin-Haskin, Curtis Silva, Kenneth Kaiserman were unable to attend today as they are out of town on business. They 5 6/8/99 WHOLE COM. - Res. 990391, 2, 3, 4, 5 are the only candidates that are here today, that we are going to be discussing.
Thank you. If you have a statement to make, I would appreciate your proceeding.
Thank you. Just briefly, I'm very excited about being here today to place before the committee the following names for the Board of Directors for the Old City Special Services District. Each of these individuals have a diverse background that will serve to enhance the District in its mission to keep Old City, Philadelphia, clean, safe, and a wonderful place to do business, eat, shop, and visit. In July of '98, in response to the Old City business community, the Old City Special Services District began fulfilling its mission to make Old City clean and safe. Sidewalk cleaning and maintenance, along with graffiti removal from sidewalks, furniture, lighting fixtures, building facades occur seven days a week. And I'm pleased to announce today that we've just started high-pressure power-washing of all the sidewalks 6 6/8/99 WHOLE COM. - Res. 990391, 2, 3, 4, 5 within the District. That's going to be going through November. Each of the nominees today for the Board have special backgrounds that will serve to enhance our Board of Directors. Arthur Holst is the Government Affairs Manager for the Philadelphia Water Department and has been involved in various activities, community and business relations. D. In political science, all from Temple University. Curt Silva has been involved with the real-estate business for the past eight years. Presently, he serves as the vice president of Lincoln Property Company, which is located in the Penn Mutual Building at Fifth and Walnut. C. as a financial analyst, and he also was involved with the Georgetown Business Improvement District. So he has direct background. Kenneth Kaiserman is the President of Kaiserman Company Incorporated, a real-estate development firm. He has been involved in many 7 6/8/99 WHOLE COM. - Res. 990391, 2, 3, 4, 5 civic and cultural organizations, ranging from the Friends of Rittenhouse Square to Pennsylvanians Against Handgun Violence. He was an original member of the Board of Directors and he is being reappointed today. His prior service has been valuable to the start-up of the District. Lynn Martin-Haskin most recently was the Associate Director of Greater Philadelphia First. Just last week, she left that position to begin a position with Development Counselors International, an economic-development company located in New York City. However, she will be heading up the Philadelphia office right in the Old City District, so we're excited to have her on the Board. She has been involved in Old City as the Chairman of the Historic East Market Street, which is HEMS, which is a historic development and a historic preservation organization. She's also been involved with the Old City Civic Association. Her work with HEMS was instrumental in creating the Old City Special Services District. And lastly, we have Joshua Grimes, Esquire, who is here today. He too was an original member of the Board of Directors and is 8 6/8/99 WHOLE COM. - Res. 990391, 2, 3, 4, 5 here for reappointment. He also served as the co-interim Executive Director of the District. He's an attorney in private practice here in Philadelphia, Incorporated and the Lights of Liberty, Incorporated, two hospitality organizations which are very active in Old City. Mr. Grimes is also the trustee of the American Flag House and the Betsy Ross Memorial. He is also a lawyer for several real-estate developers with holdings in Old City. I wanted to thank Councilman DiCicco for his continued leadership in making the Old City District a reality. I also wanted to thank the other members of Council for their support of the ordinance bringing the Old City District to light. Each of you should be proud of your work, and when you come to the streets of Old City, you will see what a wonderful place it is to do business, eat and shop. Madam President, I would ask for the suspension of the rules in this matter, and my colleagues and I are pleased to answer any questions you may have.
Thank you. 9 6/8/99 - WHOLE COMM. - Bill 990288 Are there any questions from members of the committee? (No questions.)
Thank you. I would like Mr. McPherson to please read the title of Bill No. 990288.
Bill No. 990288, an ordinance amending Title of The Philadelphia 15 Code entitled "Public Employees Retirement Code" 16 by amending certain provisions, including Section 17 22-310, entitled "Deferred Retirement Option Plan 18 (DROP)," to provide for at least test DROP 19 Program, under certain terms and conditions. 20
Please identify yourself for the record and proceed with your testimony. 10 6/8/99 - WHOLE COMM. - Bill 990288
I'm Ben Hayllar, Director of Finance. I serve as Chairman of the Pension Board. With me is Joseph Herkness, the Executive Director of the Board of Pensions and Retirement. Also with us are the elected employee members of the Pension Board: Carol Stukes, John Reilly, Sarina Tenant, and Charles Johnson. I'm also pleased to report that also with us in support of this bill is Les Yost, the President of the Firefighters. We are here at a testify in favor of Bill 990288. This bill would create a new option for our employees contemplating retirement. Essentially, a DROP Program means a "Deferred Retirement Option Plan" that allows an employee the option of accumulating a lump-sum pension payment that is awarded to them at the time they take their retirement or take their pension. An employee who chooses to enter the DROP Program would declare that he or she would retire on a specific date three years in the future. At the time of the declaration, the employee's pension credit is frozen, even though they work an additional three years and even 11 6/8/99 - WHOLE COMM. - Bill 990288 though they would receive any salary increases, longevity, pay, and other benefits that may come their way. For pension purposes, at the time of retirement, the pension is calculated on the years of service and salary level they had at the time of declaration. During the three years between time of declaration and the time they retire, the Pension Fund pays their monthly pension amount into an escrow account. During this time, the City ceases to make payments to the pension on their behalf, and the employee ceases to make contributions to the Pension. Three years after declaration, when the employee retires, they receive their monthly pension in addition to the accumulated amount of three years of pension payments, plus interest that is in their escrow account. There are certain disadvantages to this plan that we recognize. One, once an employee has declared, they must retire after the period. Secondly, the lump-sum payment is taxable unless rolled over into an IRA. This plan has been carefully designed 12 6/8/99 - WHOLE COMM. - Bill 990288 so that it will not incur any additional cost to the fund. However, because DROP plans are somewhat new in the pension business. As a precaution, we have set up this program as a three-year test period. If after three years, the Pension Board and its actuary find that the DROP pilot program has in fact cost the pension a substantial amount of money, it will retire the plan, leaving those who are still in the plan to complete the program but not allowing new employees to enter. If it is determined that the plan has not cost the pension plan money, it would simply continue accepting new applicants. An employee must be of normal retirement age and must have ten years of credited pension service to be eligible for participation in the DROP. In the event that an employee sustains a disability that is service-connected, the employee will receive a service-connected disability benefit plus the accumulated benefit in the DROP Program. If an employee becomes disabled for non-service-related disability, the employee at separation will receive the DROP benefit at the 13 6/8/99 - WHOLE COMM. - Bill 990288 start of their normal monthly benefit. If an employee dies while in the DROP Program, the employee's designated beneficiary will receive the death benefit as provided by law, plus the accumulated funds in the DROP account. Although service credit for pension purposes is no longer earned and the employee's pension earnings are already established, the employee is still considered a regular employee for all other purposes. They will continue to accrue sick leave, vacation time, and any pay increases taking place during three-year period. While the accumulated balance of the DROP Program is taxable, the employee may elect to roll the balance into an IRA.
If the employee elects to receive the balance directly, percent 18 will be withheld for federal taxes. If the 19 employee rolls it into an IRA, no federal tax will 20 be withheld. The Pension Board will set the rate of interest earned on the escrow account while the participant is in the DROP Program. 5 percent but shall be reviewed annually by the Board at the beginning of 14 6/8/99 - WHOLE COMM. - Bill 990288 the plan year. During discussions with Councilmembers earlier, we determined that a technical amendment will be made that would allow the Board to prospectively and retrospectively adjust the interest rates, depending on how the pension had performed. 5 percent to 9 percent. Mr. Herkness and I would be happy to answer any questions.
Thank you. Mr. Hayllar, how many employees are eligible for the DROP Program?
Joe Herkness, Executive Director of the Board of Pensions and Retirement. There is approximately 5600 employees who are eligible by being normal retirement age or older across the entire City employment.
Mr. Hayllar, 15 6/8/99 - WHOLE COMM. - Bill 990288 on of your testimony, you indicate that the lump-sum payment that the employee receives after retirement is taxable. Does the employee have an option to roll over his or her payment into a retirement account so as to avoid the tax hit?
Absolutely. Historically, in other cities where these people enter DROP programs, they're looking for the benefit so they can buy something that would be of benefit to them during retirement. That's why they're often called "Winnebago" or "Boat Plans." But if the employee did not want to do that but just simply wanted to increase their estate or have money for later years of retirement, they can put it into an IRA and avoid federal taxes.
Mr. Hayllar, you also state that the plan has been carefully designed so that it will not incur any additional cost to the fund. Will you identify what are the potential cost components of the DROP plan.
The biggest problem is that the existence of the DROP Program changed the average age of retirement of our employees. Right now on average, our employees retire at age 61. 16 6/8/99 - WHOLE COMM. - Bill 990288 If that age is substantially reduced, the Pension Fund will be making additional years' payments, therefore costing it money. We believe that in the end with the DROP Program, that basically, the 61-year average retirement age will be withheld, but that's our fundamental concern. It could alter the retirement pattern. We don't think so but we want to be cautious about this.
What is the difference in cost to the Pension Fund if a person elects to retire at age 55 versus entering the DROP plan?
The difference in cost to the fund if the person enters the DROP plan versus staying as a regular employee, is that what the --
If a person elects to retire at the age of 55 versus entering the DROP plan. They don't enter into the DROP plan.
I'm not sure if there would be a cost to the fund. The benefit payment would have to be paid. And if the person went out 17 6/8/99 - WHOLE COMM. - Bill 990288 at 55, there would be -- as that individual, there would be an actuarial loss in the experience since the estimate is that they would go out at 61 on average. The issue is the history of the fund is that non-uniform are retiring at 61. If the next time we do an experience study and that average changes to 60, 59, or 58, then that creates an experience loss to the fund, to the city's General Fund. So that that experience loss is then amortized over years and paid into the fund. 13 So if everyone who is eligible to 14 retire at 55 retired and went out, there would be 15 an increased cost to the City's General Fund because the average age of retirement would begin to drop, and then there would be a loss. And then they amortize that loss over a 15-year period. So it's kind of a long-winded -- there would be a loss for that individual, but if it didn't affect the average, then there would be no 22 change in the City's contribution to the fund.
Can you tell us what the Pension Fund's assumed rate of return is. 18 6/8/99 - WHOLE COMM. - Bill 990288
If the fund is expected to earn 9 percent, why is fund only paying 4.5 percent on the funds in the DROP Program?
Well, 4.5 was a happy medium between the ranges that we set. There is an administrative cost that the rate of interest does help offset, and this is something that the Board -- the Board's interest would clearly be to keep the interest rate as high as possible. But because we are simply starting off on a very cautious foot, we thought 4.5 was a cautious and prudent step. If after a year we discovered that 4.5 percent was way low, with an amendment that I discussed a minute ago, we can retrospectively as well as prospectively increase the rate on the escrow accounts.
Can you tell us why the length of time a person could participate in the DROP plan is limited to three years. Why not five or seven? How did you select 19 6/8/99 - WHOLE COMM. - Bill 990288 three years?
There is no real empiric answer. It was felt that three years was an appropriate period for people to make a decision as whether they're going to retire. It's somewhat unfair to ask somebody to commit, Well, I will retire in five years. Three years seemed a little bit more human, that the person may decide I'm going to retire, and then if they declared for five years, they may be working years they don't want to work at that age. It's a personal decision. We felt that three years was a little bit easier for a person to project when they actually wanted to go out. It's not an empiric answer. It was just our sense of --
Well, if an employee decides to enter into three-year DROP plan and then maybe in the second year decides, "I have had it, I'm going to resign or retire," what happens in a case like that?
They can separate retirement -- you don't have to stay to three years. You can stay any time between zero and 20 6/8/99 - WHOLE COMM. - Bill 990288 three years. The 36 months is the maximum amount of time. That's what's irrevocable. You can't return to employment. You could leave after 2 years or 1 year, any time between 0 and 36 months.
If an employee enters into the DROP Program and then retires, may such an employee later re-enter City service and resume making contributions and acquire additional service credits?
Returning to employment is covered in the ordinance -- in the red ordinance. This is pre-DROP. There is a specific ordinance section that deals with return from retirement. In the particular case in the existence of a DROP plan, at this time and under the present language of the ordinance, there would be no 19 prohibition to entering a DROP upon return from retirement. There is no language in the bill that prevents this. We've been kicking this around in the last month on a what-if basis, what happens if somebody is rehired after being retired. I don't mean retired after being in the DROP. If you're in the DROP, you can't get back in and get in in a 21 6/8/99 - WHOLE COMM. - Bill 990288 second DROP, we're not talking about that.
We're talking about somebody who's maybe retired now and then becomes next year, reemployed by the City. Under the present situation, their pension is suspended and then they work with the City and then return to retirement at some other time. If someone returned to employment and made application for the DROP, under the present language of the bill, there's no bar to that at this point. So once again, it's kind of long-winded yes, they can get into the DROP.
Thank you. Mr. Hayllar, you indicated that once a person enters the DROP Program, his or her pension is frozen at that point. Does entering the DROP Program impact the employee's health and welfare benefits or lump-sum payments at his or her point of separation from City service?
Thank you for asking that question. The answer is no. And our Law Department and Labor Relations have so stated in writing. 22 6/8/99 - WHOLE COMM. - Bill 990288
We want to make sure that we want to have it on the record.
Thank you. At this time, the Chair recognizes Councilman Nutter.
On , No. 5, this is in Section 22-310, small letter a., it reads: "Except as otherwise provided by this section, an election to participate in a DROP is irrevocable." Can you tell me what other section of the bill makes any reference to the irrevocability or the revocability of DROP participation?
Councilman, on the -- actually of the pink cover, Section 310 -- I need a vision plan here. Section 310-2 entitled "Basic Concept of a DROP," it says, "Eligible employees who elect to participate in the DROP make an irrevocable commitment to separate from City service. . ." 23 6/8/99 - WHOLE COMM. - Bill 990288
I understand that, I saw that. The question is, the sentence reads, "Except as otherwise provided by this section." And what I'm asking is, is there some other provision in another section that makes reference to the ability to revoke DROP participation?
I'm not an attorney. I don't know why that says "except as otherwise provided." They would have to --
Well, it may have been written with the anticipation that in future, if there are amendments, it would allow for it.
What I'm asking is, right now, is there any provision in this particular bill that allows for revocability in the context of that particular sentence?
Okay. That having been said, is there no opportunity if a person goes, I guess, over to the Board of Pensions and Retirement, you know, I've been thinking about this and I think I'd like to enter the DROP Program. And by the end of the week after various 24 6/8/99 - WHOLE COMM. - Bill 990288 conversations at home, the person decides on Friday, you know, I think I really want to reevaluate that decision I made on Monday. Is there any period of time in which there is actual revocability?
The irrevocability would take place when the individual employee signs what will probably be a series of forms and declarations to make sure that they clearly understand what they're doing.
The reality is, if we have, you know, several hundred people who are interested in this, they will sign a paper just basically saying "I'm interested." That would be their ticket, so to speak.
We will then interview them 'cause it's going to take a retirement type interview.
We would then interview them, and by that time, that could take several, several weeks, maybe a few months if there's a 25 6/8/99 - WHOLE COMM. - Bill 990288 thousand people who are interested. We will get to them, it's not a problem, 'cause we can go back. And when they do join, we can set the interest rate, and the payment per month is permanent, and we can return their contribution. So administratively, that's not a particular problem. If they're interested, they will have plenty of time to go over what the ramifications are of that decision, and we can certainly help on the numbers because the benefit will be calculated, it will frozen. They could do some estimates on what they think they might earn in raises over the period of the DROP, and they'd have an idea.
So they sign the paper, and then subsequent to that, based on how many people are participating in the program, at some subsequent point in time, they would have an interview and go over all of the materials.
That's right. Just like 6/8/99 - WHOLE COMM. - Bill 990288 when --
But you're saying the day they first sign, prior to interview and discussion about the future, they are --
Yeah, that just says "I'm interested." You know, and take a ticket. You know, here's a line.
It's going to take us at least -- let's say for the sake of argument that a thousand people signed the form and said, "I'm interested in the DROP Plan and put me in for the interview."
That would take us several months to catch up with a thousand.
The day you sign the interest form is not the day that you are technically signed up for the DROP, is it?
That just gets you to the point of being able to schedule an interview.
And the day you sign those forms, the more serious forms, then you are signed and you are locked in. Is that --
Okay. From reading the bill, it indicates that the employees -- you're going to hold their sum funds between the time they sign up and up to three years that they are then supposed to retire. Is that correct?
If I understand the question, the concept is that while they are working for the City and enjoying any pay raises, longevity raises, the Pension Fund is simultaneously paying their pension -- not to them but to an escrow account that waits for them on the time of separation.
Right, right. So it's almost as if they had retired, but there are no payouts to them. The dollars are going to this escrow account.
And according to Section d. on , those funds, though, are not going to be segregated from the other assets of the retirement system.
Now our actuarial assumption continues to be a percent return. 9
And I think the Chair touched on this issue earlier, but I'd like to go back to it. Let's say that the Pension Fund made a 9 percent return next year and someone signed up for this particular program -- I'm sorry, signed up for this particular option. The payout is 4.5 percent, funds have not been segregated from the pension system, so the pension system earned 9 percent.
The person is earning 4.5 percent. What happens to the other 4.5 percent?
It remains with the fund. But if you have that big a spread, the 29 6/8/99 - WHOLE COMM. - Bill 990288 Board would move the interest rate up to try to reduce the difference between what the fund actually earned and what the escrow account earned.
But I assume the move on the interest rate is prospective, not retroactive, isn't it?
In the bill, it is prospective. In our conversations with Council some weeks ago, this issue was raised, and we have a technical amendment that --
Council as in "this Council" or counsel as in "your counsel"?
All right. I'm sorry. I must have missed that meeting.
That was raised, and so we will have it prospectively and retrospectively.
So let's say the person does 3 years, the Pension Fund earns 9 percent those 3 years, they get their 4.5 30 6/8/99 - WHOLE COMM. - Bill 990288 percent each year they retire. Are you saying that -- and then the Board then subsequently decides to move the 4.5 rate to 7. Are you saying that you're going to go back and make them whole for 2.5 percent for each of the three years? Is that what you're saying?
On an annual basis, if the Pension Board misses the mark on what they projected the earnings would be, the funding --
I didn't say they missed the mark. My example was they got 9 every year.
I think the answer is yes, but I'm having a little trouble understanding your question, which is my fault.
Okay, I'll go back. Pension Fund makes its 9 percent return every year for 3 years in a row.
The employee has signed up 3 years ago and they earned 4.5 percent every year for those 3 years. They then retire. The Pension Board makes a decision at a later 31 6/8/99 - WHOLE COMM. - Bill 990288 point in time to raise the 4.5 rate to percent. That employee -- if you're saying that you're going to go back and retroactively make them whole, that person is 2.5 percent short a year for 3 years. 7 Are you saying that you're going to go back and give them 2.5 percent for those three years when the rate was at 4.5 percent, although you have now subsequently raised it to 7 percent?
Yes, but that's done on an annual basis. You don't wait for the three years to pass.
All right, so you're going to go back in the first year after you're going to give 'em 2.5 percent.
And the next year after, you're going to give them another -- well, maybe you're at that 7.
Okay. The Board would try to retroactively correct any reduced interest that may have occurred because they initially set the escrow account interest rate too low. 32 6/8/99 - WHOLE COMM. - Bill 990288
Why didn't you do the escrow rate at the same rate of return that we anticipate for the Pension Fund if all the dollars are still in the pension system and not being segregated?
I think Joe may have a more specific answer, but it is the way of negotiating with the employee members, the Board, and our thinking through the system that you wanted to have some control over what those accounts earned. And because there is an administrative cost to it, it didn't necessarily want to have the earnings be the same.
What's the advantage to -- I mean, what possible kind of additional administrative costs would we be talking about?
We have to set up escrow accounts for each participant. The Pension Board's staff has to monitor that, they have to counsel these people in detail when they sign up 33 6/8/99 - WHOLE COMM. - Bill 990288 for the escrow account. So there is additional work to be done.
Councilman, in addition to that, when we requested from our actuary a plan that would be, quote -- although I don't really like the term -- "revenue-neutral," but it would be a plan that would not change the projected costs, the projected contribution of the City's General Fund and put a frame of the plan for Council, which had to be delivered to Council. Council could amend that plan at hearings such as this, but we were charged with sending a plan over that was basically revenue-neutral. The actuary's position was that this would be one way of handling it. The other recommendation was that the employee contributions, if they continued to be taken out, then that would clearly offset any potential actuarial loss, but we rejected it, the Board rejected that.
Let me finish with this. 34 6/8/99 - WHOLE COMM. - Bill 990288 Your potential additional costs, I guess, based on what you're saying, Joe, is that the pension system is paying out dollars essentially three years early to an escrow account because a person is really, for your internal purposes, technically, untechnically, is considered retired as it relates to the fund. They are not paying in any additional money.
The difference between your having to pay out and their not paying in any money is what you're looking at as a potential cost to the fund because there are no 15 dollars coming in from the public employee, right?
That's one component of it. It's a potential change in the City's contribution based on the potential experience loss. Now, experience losses are absorbed, normal experience losses, on an ongoing basis, are absorbed by the City's General Fund. For instance, if people continue to live longer, that costs the Pension Fund -- the cost to the Pension Fund goes up. That's an actuarial loss. The City 35 6/8/99 - WHOLE COMM. - Bill 990288 is on the hook for that. In this case, we're putting in a new option. So the charge to the actuary was, give us an option that today will not guarantee an increase in the City's expected contribution three or four years down the road. He used the components of what generates the actuarial loss or gain, and this is where we ended up with the 4.5. And if that shows that there is not a loss, then that 4.5 percent can be increased, and it can be increased retrospectively to the employees who entered the plan from day one. That's the technical amendment that the Finance Director was alluding to.
Can I try it another way? 'Cause I think I finally understand your question, and it's the correct one, and my answers weren't on point. If you recall, the one thing that we're most concerned about is dropping the average age of retirement 'cause that will cost the fund the most amount of money. This setting of the interest rate of the escrow account is the only control we have to offset that if we're watching 36 6/8/99 - WHOLE COMM. - Bill 990288 that rate go down. The only other mechanism we have to control that cost from keeping the fund from being drained is to terminate the plan. That's the thing we don't want to do. So this gives us some control over costs. If we're seeing the retirement age come down, and if the rate on the escrow account is low to offset that, the individual will get it back by the increased pensions they get by the additional years of retirement that they have.
All right. Lastly, what's the impact of the five-year smoothing method that we used with regard to the pension system on the DROP?
The impact on the DROP plan would be an experience loss. If there was an experience loss --
If the experience in the fund, if the average age of the non-uniform employees went from 61 to 59, right?
That creates an experience loss because people are going out earlier so that the General Fund would be expected to pay more. There's no question, I don't think there's any argument about that, if your retirement age drops, your fund contribution would have to increase.
That cost is then amortized over a 15-year period, very similar like to a mortgage. And then there's an interest assumption applied to it, and then the City's General Fund is given a bill every year that says this experience loss is costing you, for the sake of argument, you know, $150, and you can pay X-amount a year for 15 years. That would then go in when we make that calculation. Smoothing is the interest assumption on the investments -- that's the other side of the actuarial equation when we talk about funding. The investment earnings are smoothed over a five-year period to avoid the large deviations of the capital markets, the ups and downs. They would like to have it generally rolling. And 38 6/8/99 - WHOLE COMM. - Bill 990288 that's in place now. This would all go into one pot. But the DROP plan's costs would be basically, does this affect the expected payout of the individuals who elect to go in the DROP? And that's the only place there is, and that's an experience, you know, loss, which is then amortized over years. In the original language 10 of the DROP that -- I imagine it -- I can't speak 11 for the General Fund people, but it puts a little 12 bit of pressure, is that let's not put something 13 in that would almost guarantee a material increase 14 in the City's contribution and that someone in the 15 future could point to and say the DROP must cease. You know, we wanted to avoid that, and that's what the charge to the actuary was.
Okay. I'd like to ask you, through the Chair, if you could get us information on what you anticipate the administrative costs to be to administer this particular program.
We could do that, you know, if there's an X-number of people we think we would absolutely need on a permanent basis. We've 39 6/8/99 - WHOLE COMM. - Bill 990288 been talking about that. It's very difficult on a permanent basis. Some experience in other plans, the level of participation is over 60 percent in the city of Dallas, it's between 70 and 80 percent of the eligibles. But these are mature DROP plans, if there's such a thing. It takes a while for it to -- people talk about it. Do we like it, is it a good experience? But we think if we can have 30 percent out of the box.
What's the pool of eligible people that we're talking about?
It's over 5600 that are eligible based solely on their normal retirement age -- that's right now. Now, this continues to roll. If of it, 5600, we get 30 percent. If 30 percent says, "I think I'll check this out," and they say, "Put me in, I'll take a ticket" well, that's going to take us several months to get to the interview before they make their final decision. It's not an administrative problem, that particular issue, because we can retroactively apply the interest and the monthly 40 6/8/99 - WHOLE COMM. - Bill 990288 payments, and we can retroactively give them their contributions back. But after the initial rush, would we need a, quote, DROP unit that would become, you know, expert in the advice and be able to give people information. Probably the answer to that is sensibly yeah. And what would that be? You know, maybe two people, two counselors, you know, all the time, plus answering questions and information. You know, we could put some sort of an estimate together. But, you know, I don't know in the size of the City's contribution, which is several hundred million, I don't know that it would impact that contribution.
I do have some concerns that may not rise to the level of reservation about the bill, but I will at least express the concern about the issue that I raised earlier with regard to the escrow interest rate versus the Pension Fund's anticipated or looked-for rate of return. 41 6/8/99 - WHOLE COMM. - Bill 990288 And to the extent that the employees can get as high an interest rate on their escrow dollars as possible, short of covering, you know, any extraordinary administrative costs that go with this particular program, I think that if they're going to enter into this, we should do our best, quite honestly, not to skim off the top of their money that is going to be returned to them three years after they sign up for this particular program.
You're welcome. The Chair recognizes Councilwoman Tasco.
Thank you very much. While the employees are working for the three years, they don't receive any pension benefit, that money is put in the escrow account.
I guess my 42 6/8/99 - WHOLE COMM. - Bill 990288 question is somewhat along the lines that Councilman Nutter had, and he may have answered it, it's a little more complicated for those of us who are not investment bankers to understand.
Well, he was getting complicated answers. I think our answers were getting better as he kept asking them.
Now, if this monthly pension is placed in an escrow account, it is not reinvested with the other pension money?
So there is no 18 other account set up for this money; it's all a part of the Pension Fund.
It's a ledger item that Marian Tasco has this account, which is running at this date.
So all of this money is a lump sum, and we are investing the money, and the rate of return is supposed to be 43 6/8/99 - WHOLE COMM. - Bill 990288 percent. And of the greater return, you are saying you will set aside percent for the 4 pension money that's in there. 5
It starts at 4.5. And at 6 the beginning of each plan year, the Pension Board 7 adjusts that rate of return for the escrow 8 accounts. It can be between 3.5 to 9 percent, but 9 it starts at 4.5. The dynamic of the Board -- because there are four employee members and the controller and then four administration members -- is to probably keep that number as high as possible. But as I finally got around to trying to explain to the Councilman, the big dynamic is the fear of reducing the retirement age and causing the fund to put out more money because now you have more years of retirement to pay. This becomes the only lever we have to adjust for that. So if that seems to be happening, the Board can reduce interest rate so that the fund is kept whole.
Mr. Herkness, why would anyone want to participate -- I mean, what is the advantage of this DROP Program to anyone? 44 6/8/99 - WHOLE COMM. - Bill 990288 Could you explain that to me.
Why would an employee what to go into the DROP as opposed to continue working?
Suppose an employee -- I guess I can figure it out by myself, but you have to be at least 61 to get into the program.
No. Normal retirement age in the old pension plan, Plan J, is 55 for non-uniform employees. For the police and fire, it's 45. In the new pension plan, Plan 87, it's 50 for police and fire, and 60 for non-uniform. So there's tiers of eligibility. But the 5600 people that are eligible are all normal retirement age in the plan that they're in. So technically, if this plan was passed, the next day, there's 5600 people that basically could take advantage of it if they so chose.
How many of them will do it? 45 6/8/99 - WHOLE COMM. - Bill 990288
There's about -- I think there's 1100 firefighters, that's ball park. And there's about 1700 police officers of that 5500.
Mm-hmm, mm-hmm. So my question was, why would anyone want to --
Let's say that they were thinking about retiring in the next year or two. And let's say for the sake the argument that their pension was $30,000 presently. And they say, Well, I might get a percent raise next year, I'll get another 2.5 percent accrual, so my pension might go up or percent. But if I go into the DROP plan, I work for 2 years, I get a credit of $30,000 per year plus the 4.5 interest, if it doesn't change, which is tax-free.
Wait a minute, back up, back up. They get credit for 30,000. 46 6/8/99 - WHOLE COMM. - Bill 990288 What is 30,000?
So after one year, you have 30,000, plus 4.5 percent, which is tax-free, which is probably equivalent to at least 5.5 percent if you had 30,000 that you were getting taxed on. So the next year, you have another 30,000, plus the growth of 4.5 percent on the original 30. So it ends up at about 62, 63,000, ball park. You then say, Okay, I'm going to retire. You leave and you now have 63 or so thousand dollars that we will pay you in a check, and you begin to collect your $30,000 pension, which doesn't grow at all, that stays, that freezes. So you then go to your $30,000 annual pension, plus you have a lump sum of $60,000. If we take 20 percent right off for taxes, then you'll still have that large figure, which is about 13,000 from that. And you have about $50,000. You know, your average employee in the 47 6/8/99 - WHOLE COMM. - Bill 990288 City of Philadelphia doesn't get rich working. They have long careers, they have excellent pensions when they leave. But my perception is, they don't have large sums of accumulated dollars. We have college loans, we have home equity loans, and everybody has our individual bills. This is a financial planning tool. You know, I was asked that question about why the police should go into this. Well, it's an optional plan, you don't have to go into it. It just gives you a leg up, gives you a lump sum going into retirement or whatever you want to do. I think at least it's a solid option specially structured so that it doesn't cost the City's General Fund contribution anything. Somebody says, How do you do this? I say, Well, we're magicians. You know, the City doesn't make the contribution of between 6 and 8 percent of a payroll that size, so the City's General Fund all goes into the savings pot. So this balance -- what's in it for the City is they stop making between 6 and 8 percent of payroll contributions on behalf of the employee. The employee then receives a raise equal to his or her 48 6/8/99 - WHOLE COMM. - Bill 990288 pension contributions, which in the old plan was percent for police and fire. On a tax basis, 4 they would probably net about 4.8, but the 5 employee has an immediate 4.8 net increase in 6 salary, and then knows that he or she will be retiring at least in 36 months and will have a lump sum plus possibly a separation check which is, if there's time and if there's vacation time is sizeable. So it's a pretty decent financial planning tool in.
Especially for elected officials like Councilman David Cohen. (Laughter.)
But he would have to announce his retirement. And then in the end of the first year -- at the end of the first year of last term, he could declare, but he had to go. Now, a mayor would obviously want to think about this because they know after the beginning of their second term, they know.
The Councilman announced his retirement yesterday. In the year 2023.
2023, okay. 49 6/8/99 - WHOLE COMM. - Bill 990288 (Laughter.)
You'd have to wait till the next term since you voted on the legislation. You know about that.
If you vote on the legislation, it's your next term, which would be January.
So in January, you can announce you're going to retire in three years, and you get your --
Do I repeat again about all stories about my retirement are not to 50 6/8/99 - WHOLE COMM. - Bill 990288 be believed. Even in 2023. I'll probably change my mind about 2020. With respect to one of the questions that Councilman Nutter asked, you stated that the Board, when they change an interest rate, if they so decided to, they could do it retroactively as well as prospectively. Could you tell me where in the Act that's provided for.
It's not. In our conversation with Council earlier, this issue was raised, so we have an amendment that will allow for the retrospective as well as the prospective. Right now, the bill says "prospective."