Committee Hearing, June 8, 1999

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.

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.

Fine. And the other candidates are not present?

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 all very much.

Thank you.

Thank you.

Thank you.

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

Thank you. 21 Good morning. 22

Good morning.

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?

This is why Mr. Herkness comes to these meetings.

Wonderful Mr. Herkness.

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

It's 9 percent.

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.

Right.

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.

Right.

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.

The clock does not start.

Thank you. At this time, the Chair recognizes Councilman Nutter.

Thank you, Madam Chair. Good morning.

Good morning.

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.

Right.

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?

No, sir.

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.

Right.

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.

Right.

We will then interview them 'cause it's going to take a retirement type interview.

Right.

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.

I understand that.

But once they sign that paper --

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.

Okay.

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."

I understand that.

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?

Absolutely correct.

That just gets you to the point of being able to schedule an interview.

That's correct. 27 6/8/99 - WHOLE COMM. - Bill 990288

Your interview might be a month from now.

That's correct.

And the day you sign those forms, the more serious forms, then you are signed and you are locked in. Is that --

That is correct.

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.

That is correct. 28 6/8/99 - WHOLE COMM. - Bill 990288

And according to Section d. on , those funds, though, are not going to be segregated from the other assets of the retirement system.

That's correct.

Now our actuarial assumption continues to be a percent return. 9

That's correct.

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.

Mm-hmm.

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"?

City Council.

All right. I'm sorry. I must have missed that meeting.

That was raised, and so we will have it prospectively and retrospectively.

That's on an annual basis, though, right?

Right.

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.

If they wanted to, yeah.

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.

Mm-hmm.

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.

Yes.

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 9?

I'm sorry?

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 try it another way.

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.

Right.

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 --

What does that mean?

If the experience in the fund, if the average age of the non-uniform employees went from 61 to 59, right?

Mm-hmm. 37 6/8/99 - WHOLE COMM. - Bill 990288

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.

Right.

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 don't think so.

Right, I doubt it.

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.

Understood.

Thank you. Thank you, Madam Chair.

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.

That is correct.

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?

It stays in there. It's like -- it's like a --

It stays in there, all right.

It's like a mutual fund.

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 being policemen?

How many of them will do it? 45 6/8/99 - WHOLE COMM. - Bill 990288

Being policemen.

How many of 'em are police?

Mm-hmm.

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 --

Why would someone want to go in?

Mm-hmm.

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?

The 30,000 is your pension payment per year.

Mm-hmm, okay.

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.

So we couldn't do it until the next term.

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 --

Yes.

Okay. All right, David? Thank you very much.

Right.

The Chair recognizes Councilman Cohen.

Thank you.

You don't have to decide today.

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."

Okay, 'cause I was looking for it since it was a subject of discussion, and couldn't find it. Second question. On of the bill, under subparagraph g. entitled "Rehire," there's a flat statement that there is no return to regular employment from a DROP, that's clear. Once a person participates in a DROP, they can never be reemployed by the City. And then in the same paragraph, it says that a retiree may be rehired by the City subject 51 6/8/99 - WHOLE COMM. - Bill 990288 to the provisions of this title, but no former DROP participant who is rehired by the City may be eligible to participate again in the DROP. So the first line says there is no such thing as a rehire, and the last line says, But if he is rehired anyhow -- and I don't know how he gets to be rehired -- he's not eligible to participate in a DROP again. I -- you have to be more than a Philadelphia lawyer, I think, to understand that.

Yeah, we're neither.

How does a DROP participant who cannot be rehired by the City manage to get rehired by the City so that he or she is forbidden from participating the second time in a DROP Program?

We might have to go to staff for the answer, but I'll take a crack at it. You can be rehired. Under the present pension system, you can be rehired.

Right.

And there's a section in the ordinance that deals with how your pension will accrue if you are rehired -- first year, 52 6/8/99 - WHOLE COMM. - Bill 990288 second year, and if you stay three years, we recalculate the entire pension based on all your years of service. What I think that is saying is that if you are a DROP participant and you retire, you formally retire, you take your lump sum, and three years later, you are rehired by the City for some particular reason, you cannot re-enter a DROP Program.

But the law says you cannot be rehired if you participate in a DROP.

I don't think that you could prevent the City of Philadelphia or any organization from hiring somebody just because they took advantage of the DROP. You know, they can't get in the second DROP. I think we were talking about that earlier.

Well, then shouldn't we eliminate that first sentence that says there is no return to regular employment from a DROP when, in fact, there is?

When you're in the DROP, you cannot come back -- you can't return to normal employment. You can only retire, you can only 53 6/8/99 - WHOLE COMM. - Bill 990288 separate once you get in the DROP. You're still an active employee, right, follow me? You're still an active employee, you're a participant in the DROP plan. Then the only option you have is to separate employment.

Well, that's --

Between zero and three years. If you separate and you return to employment in the future --

Well, how do you do that? Doesn't this language prevent that?

Councilman, it's two different situations. One is a return from retirement, an employment return from retirement. The other one is discussing coming back into employment while you're in the DROP. You haven't retired yet. You cannot do that. That's what's irrevocable.

Councilman Nutter, I cannot follow that. That may be my inability to -- but I cannot --

I think it's in the -- it's probably more in the language, Councilman. 54 6/8/99 - WHOLE COMM. - Bill 990288 Mr. Herkness, the sentence that the Councilman is talking about specifically says that there is no return to regular employment from a DROP.

Correct.

Don't you really mean that while you are in the DROP, you cannot come back to whatever you call "regular employment"? Isn't that what you are really saying?

Yes, yes, that's right.

Because if you read it the way sentence is written, the Councilman is absolutely correct. In the first sentence you're saying that there is no return to regular employment from a DROP. Now, someone could take that to mean that once you have ever participated in a DROP, you could never come back to regular employment. And then a sentence or two later, it says that a retiree may be rehired by the City. You're talking about after the three-year period and when they have actually separated, retired, started receiving pension payments. 55 6/8/99 - WHOLE COMM. - Bill 990288

Correct.

Would it make it clearer if the sentence said, "There is no return to regular employment while a person participates in a DROP"? Isn't that what you're trying to accomplish? You're saying that once you sign up, you can't go back to regular employment during your three-year period?

We believe that's what it says. Is it possible to make it even more clear? Yes, that makes it even more clear.

Councilman, is that the point that you were trying to make?

I was just trying to find out what it meant. So I had assumed from the clear language from that first sentence that it meant that the City would not be able to hire -- rehire any person who had retired and who had gone through a DROP proceeding. Well, then I think that language has to be changed drastically in that first sentence. It's paragraph g. of . I'm only thinking of clarity. I couldn't under -- I was going to ask you, why do you forbid the hire? There may be 56 6/8/99 - WHOLE COMM. - Bill 990288 circumstances where the City may be anxious to rehire somebody, you know, for a special project, and I couldn't understand why this is forbidding.

Councilman, I think if you read g., it does say in the second sentence, Once entering a DROP, the employee is in the DROP until separation from City service, at which point, the member is retired. A retiree may be rehired by the City subject to the provisions of Section 22-204, but no former DROP participant who is rehired by the City may be eligible to again participate in the DROP." So that's like no second DROP, but if you're rehired -- so if you're in the DROP and you separate, you retire, and you're out for three years, and you come back as Council staff, then you come over to the Pension Board and say, "I want to get in the DROP plan."

Well, why don't we say that instead of some --

We say no --

Why don't we say that in the bill and make it clear?

Yeah, we say no because 57 6/8/99 - WHOLE COMM. - Bill 990288 Section g. says if you are retired, no former DROP participant who is rehired may be eligible to again participate in the DROP so. The Pension Board staff would say you're not eligible as a rehire from retirement employee for a second DROP.

Well, I understand that, that's clear, there's never been any question on that. What is unclear in the language is whether or not somebody who participates in the DROP may at any time return to employment by the City. The answer seems to be yes, once you finish the DROP, you're like every other retiree and can be rehired, and I expect that will happen. That is, that assumes the three-year period is ended, the person may be rehired on the very next day. That happens currently now, I understand.

Yes, sir.

'Cause I remember one time there were a lot of retirements from the Police Department, but the City felt they lost too much talent and they hired a whole host of people at the end of the early retirement. But I think the language ought to be cleaned up. I don't think the language ought to 58 6/8/99 - WHOLE COMM. - Bill 990288 remain in its present form.

Councilman Cohen, would language like this help to clarify? "There is no return to regular employment for a person during their participation in a DROP"?

That would that would be an improvement. I can't say whether it would --

He's so tough with the compliments.

It's difficult but it's certainly a vast improvement over what exists now. All I think we ought to do is to pass a law that's clear.

Right.

And that if people read it, they ought to be able to understand it.

Right.

And that's what I'm driving at.

Right.

One other question. I thought I'd seen it and now I can't find it again. At the time person enters the DROP, do 59 6/8/99 - WHOLE COMM. - Bill 990288 they make their choice as to -- say it's a husband-wife situation, husband working, has a wife who he wants to receive pension if he passes on. Is that an irrevocable decision made at the time the employee enters the DROP?

Yes. In order for your DROP to be determined, the amount of payment will depend on your survivorship option selection and you will make that at the time you enter the DROP. In other words, the amount of money that you will receive during the DROP credited to your account will depend on the survivorship option that you select. So that's a very, very important option, which is why you cannot rush entrance into the --

And you can't change that once you make it?

You can't change it unless certain circumstances took place -- a death, if the survivor predeceases you and you're in a particular plan, you have an option to change it. But if nothing changes other than you just decide to change your mind, you cannot change that. 60 6/8/99 - WHOLE COMM. - Bill 990288

Is there a provision to that effect in the bill?

Pardon me?

Could you refer to what section of the bill refers to that, Mr. Herkness.

I don't know if we address survivorship, but that's in order to -- in order to retire, you have to make a survivorship selection.

And that's the --

To get a payment, you have to do that. If don't do that, you're not going into the DROP. You can take that to the bank.

Okay, I see.

We had a lawyer try to tell us that we had a problem there, but you're not going to get out of our offices unless you make -- for DROP purposes, unless you make a survivorship selection. We're just not going to okay it because we wouldn't know what to put in the account for you.

Right. Now, I don't 61 6/8/99 - WHOLE COMM. - Bill 990288 understand really why there should be an amendment to provide retroactivity on the interest rate. It seems to me if we make a bargain with an employee, it ought to be a bargain, and that both sides ought to live up to it. And the bargain is, you're going to get 4.5 percent rate. I understand the City wants to have a cushion. The only other option I could see is why don't we have an option, if an employee wants to do his or her own investment, would the City lose anything if they made the payment available immediately to the proposed retiree instead of waiting for the three years? Maybe the employee feels he or she could do better in their own plan of investment.

They can do that in their 457, but I believe if they touch the money --

Could you speak into the microphone.

I'm sorry. I believe they can do that through their 457 Plan, but they can't touch this money until they actually separate from the City. There is also an issue again of 62 6/8/99 - WHOLE COMM. - Bill 990288 administration and keeping track of all these individual trades if you had separate accounts. We're trying to start off with the most efficient system possible. We can always improve it going forward, but if we make it too complicated now, it just may not work.

Okay, thank you.

Are there any other members from members of the committee? The Chair recognizes Councilman O'Neill.

Thank you, Madam President. Gentlemen, I have a copy of the proposed amendment that was circulated.

You have the only copy.

I have the only copy, I'm sorry. And basically, I appreciate you drafting this; it's in response to my concerns from the briefing last week. That while we be cautious up front with the 4.5 rate, because we don't know what is going to happen, that there be a mechanism for a review assuming that the Pension 63 6/8/99 - WHOLE COMM. - Bill 990288 Fund did as well as it was intending to do, that there be a way of increasing that interest rate retroactively similar to a dividend that might be paid on an insurance premium that -- where there was good experience. So to the extent that we have good experience, as we expect, the fund doesn't make out -- it just breaks even, and the DROP people go up from this 4.5. And what I was hoping this amendment would say is that prospectively, obviously anytime for any new person in this test, the rate could be changed -- for instance, downward. And there's a mention here of 3.5 percent. But I hope we can somehow make it clear that if I start in the DROP Program this year at 4.5 percent, next year someone's not going to retroactively make that 3.5 percent and cut me down a point over what I agreed to get in at. And that's not clear here. This amendment would allow it to be done retroactively as well as prospectively.

I think we can work on that.

Okay. The second 64 6/8/99 - WHOLE COMM. - Bill 990288 thing is, why is the retroactive upside limited to percent? And I can understand some 4 administrative fee or maybe a percent or something 5 less than the rate of return of the fund; I just 6 don't understand the cap. I mean, even when we 7 were dealing with the cap on the COLA bill, we 8 were going 9 percent and 1 percent over and on and 9 on, but we weren't capping any, you know -- because again, if the fund would make percent, 11 then instead of the DROP people getting the 12 benefit of the area between 9 and 13 or even, say, 13 take off a point for some fee expense, 12 percent, this caps it at 9. I just don't understand how that levels everything out, and I would hope that the retroactive number may be like 1 percent, up to 1 percent less than the actual return on the fund. There's a couple of things I'm hoping it would accomplish. One is to get more people into the fund and into the DROP Program, and then also get them to stay in, because they would see that potential. Particularly the first year, get in as many people in that first year as possible. And I think we can -- if you're agreeable, we can 65 6/8/99 - WHOLE COMM. - Bill 990288 get this language worked out fairly quickly. I mean, I don't want to hurt fund, but I want to help the DROP Program in terms of its return as much as possible.

I think we can address that. I don't think there's anything magical about the percent cap except we believe there 9 needs to be a cap in there, just for purposes of self-restraint, but I'm sure we can work out something that meets those ends.

Okay, thank you.

Thank you,. The Chair recognizes Councilman Cohen.

Just one question. This is a three-year program; is that right?

Yes.

So that the decision by an employee to retire under the DROP Program can be made at any time during the three years after this bill becomes law?

Yes, yes.

In other words -- and say if somebody joins the program two years and eleven months down the road, the program has 66 6/8/99 - WHOLE COMM. - Bill 990288 one month to go, somebody joining at that point would be able to continue for the three years.

Yes.

Is that right?

Yes.

Yes.

So everybody's clear. Okay, I wanted to make sure. So it's not that if go in after one year, you're only going to have two years.

That's right. If this is --

You're going to have your full three years --

Yes.

-- to continue to work after you've signed off on all of the papers as we talked about earlier.

If, despite all our best efforts, this is a disaster and we have to end it, those people in the program get their three years.

Very good.

We just don't accept new participants. 67 6/8/99 - WHOLE COMM. - Bill 990288

All right. Thank you.

Thank you. Are there any questions from members of the committee? The Chair recognizes Councilman O'Neill.

A couple quick questions. One, are there any other DROP programs in the country that have ceased to exist once they begun? I know it's a fairly new --

Not that I know of. John Reilly, one of the Board members is a member of the National Commission of Public Employee Retirement Systems. John might be able to answer that. I don't know if there's ever been a DROP that ceased. They seem to be expanding them either in the length of time or the number of people that are eligible. There are about 50 DROPs, 35 to 50 now. There are no less than 30 plans looking at it. In my opinion, there's probably over a thousand plans. In the next five years, this will spread wild fire when people begin to understand just what the advantage is to 68 6/8/99 - WHOLE COMM. - Bill 990288 a public employee.

Thank you. Mr. Reilly, please identify yourself for the record.

Madam President, my name is John A. Reilly. I'm a member of the Board of Pensions and Retirement for the City of Philadelphia. Brian, the question you asked was about the irrevocable when you join the program. The answer is yes, except for Baltimore. In Baltimore, you go into the system when you're eligible, you do your three years, then you go back in the system. Everybody else --

No, I think you misunderstood me. What I'm looking for is, we're testing this, it's a three-year trial.

Oh, yes.

And I appreciate the caution approach.

Right.

But in reality, have there been any other DROP programs that proceeded cautiously then just found it was a 69 6/8/99 - WHOLE COMM. - Bill 990288 loser and stopped it?

No, they haven't. In fact, Houston, Texas, started five years, and they just upgraded to seven years. Dallas, Texas, their plan is now six and a half years old, there's no limit. You go into it, it started six and a half years ago, and they're still in it.

Now, a follow-up question, and I'm not sure who should answer this, but three years seems rather modest in terms of the DROP period, and again, I understand the caution initially. When would we in Council and also eligible employees look for a threshold period where you could say in a year, eighteen months, two years, we'll know whether we can push this to five years or seven years, depending on --

We're going to calculate the, quote, costs as best we can. The first will take place in no less than nine months so that the Board, when it receives its report in one year, would have the decision of whether to move that interest rate. We will have at least nine months' experience and will give them an estimate. The following year, we cold do the same. We would 70 6/8/99 - WHOLE COMM. - Bill 990288 then have almost two years. So we will have this information well before the three-year, you know, deadline so that Council or the Board can make its decision. And the --

So if that first group wanted to extend, then you would have some time during that three-year period where you could make decision as a Pension Board to recommend extending the program for three years to five years for an individual or to seven years or whatever.

That's certainly possible. I mean, Council could amend plan, you know, at anytime and make it three or five.

Right, but is there any time that you're thinking now, Boy, by 18 months, we ought to have an idea of whether this not only is a good thing rather than a bad thing, but we can go into that longer DROP period, which I believe helps everyone if it's possible to do.

After the meeting in the afternoon after we had the Council briefing last 71 6/8/99 - WHOLE COMM. - Bill 990288 week, we met with the actuary and committed to between six and nine months, we would have the numbers of people who would be in, and we could have a ball park figure for those, the early entrance into the DROP, and then begin to project it and then kick those numbers around, whether there was an actuarial loss or gain. And if there was, is it attributable to the DROP? It's difficult to attribute 100 percent of someone's decision to a DROP plan. So that's the challenge that the actuary and the Board will have, to say, Well, this projected change might be $100, but is it $100 attributable to a DROP decision? It's a difficult thing, but in nine months, we will have some numbers so that the Board's first decision is twelve months afterwards on the interest rate, and they can move that. We believe that they could move it prospectively, even under the present language, under the amendment that you're alluding to. You could then make it retrospectively to the day one when the people are in it, and let's say you moved it to seven or eight, then the people would have a 7 percent credit retroactively. 72 6/8/99 - WHOLE COMM. - Bill 990288 We're going to give 'em a DROP statement, what we're calling a DROP statement, within 90 days after they sign up so that they'll get their payment and it will show what grows at the rate of the interest. If the rate of interest would change, we would expect to send 'em a new statement so they will be able to look and plan on what their DROP account will grow to, and then they can make a decision on when they want to get out.

Okay, thank you.

Thank you. Are there any other questions from members of the committee?

Do you know how long it will take to get that language worked out?

I'm sorry, I didn't hear your question, Councilman.

This amendment needs some tweaking, just needs a little bit of work to --

It depends on your availability. 73 6/8/99 - WHOLE COMM. - Bill 990288

I'll do it anytime.

The Council President's office has copies of that amendment.

Point of order.

Yes?

Madam President, we do not have a copy of the amendment.

I don't think any of us have a copy of the amendment.

I can quickly explain what we're trying to accomplish because this is going to get. . . Councilwoman, what the amendment attempts to do is, instead of leaving the 4.5 percent as the rate of return, and that's it, have a mechanism for the Board of Pensions to review what the actual experience was and, hopefully, bring the 4.5 percent up additionally later on, within a year. And that's the language we're trying to work out. It's how high up that can go above 4.5 and ensure that it won't go below 4.5 as well, but the language will be clear. And that's what we're going to be working on. This doesn't quite do it, 74 6/8/99 - WHOLE COMM. - Bill 990288 but it gets pretty close.

And someone's going to be working on the amendment before we go into our public meeting?

Yeah, yes.

Council staff does have a copy but it was not a complete amendment and not ready to be introduced, but we'll have a satisfactory amendment ready for Council, I guess, next week.

If it's as simple as Councilman O'Neill is saying, why couldn't you work something up today before we adjourn the meeting?

Okay, I don't think it's a problem.

Tom's in, Tom Erekson's in. I think we could go forward quickly.

'Cause we have another bill to hear, and hopefully after that bill, we will go in a public meeting. And I don't see any reason why we couldn't have the amendment ready. 75 6/8/99 - WHOLE COMM. - Bill 990288

No problem.

Fine.

Okay, I think Mr. Erekson is right here, so he'd be more than happy to work with you on that. And Councilman O'Neill, maybe you could speak to Mr. Erekson. Do we have anyone else to testify on this bill? (Audience member raises hand.)

Kindly approach the witness table and identify yourself for the record.

Good morning, Councilwoman.

Good morning.

My name is Israel Zeitz. I'm a retired City employee, 1988. I was asked or requested by many of the civil service people, City employees now that do not want to have their names published to come and represent 'em at this hearing as being opposed to the bill. But from what I hear, the bill opposes itself. Mr. Herkness said that you're going to have the money held in escrow because they didn't 76 6/8/99 - WHOLE COMM. - Bill 990288 want to put 'em out at 55. What's the difference if you start paying them at 55 or if you hold the money till 58 and they get the money? There's still going to be that amount of money coming out, but besides that, there will be no money going in. The people that had sent me here had requested that we go to something that the City has done since 1954, when they first incorporated this with the amendments, that you give incentives to people to go out on pension. If they go out on pension, not only will the City not have to pay for the pension money going into the Pension Fund, the City won't have to pay for their benefits or hospitalization, the City won't have to pay Social Security and other things. We are in a two-tier system as was mentioned before, it may even be three by now. The people that are in the higher tier would retire, thereby the people at the high levels of those pay ranges would leave and the people filling those positions, if those positions would be filled, will be filled by people with a lower pay range, thereby the City saves money there. Also, the new employees that take over for the 77 6/8/99 - WHOLE COMM. - Bill 990288 open vacancies would be under the second tier and get much less benefits. But getting back to this Pension Fund, there is nothing here for the 30,000 employees that are not eligible a pension, but there is a plethora of things for people that are going on pension. They can come back and serve -- besides serving as Councilman Cohen had mentioned, besides serving the City again, they may be able to pick out a higher job and go out on pension again at another higher rate after collecting 50 to 80 percent raise that they did over those three years that they were working under this DROP plan. So the people that sent me, which is a few that didn't want to speak mainly, they feel like --

How many years have the employees who sent you here have with the City?

I'm sorry, I didn't get --

How many years of service do the employees who sent you here have with the City?

They average somewhere 78 6/8/99 - WHOLE COMM. - Bill 990288 around years. They're in a position to take the next positions, yes. But they can't take them as long as these people in the higher positions will not leave if they stay instead of retiring. There's no incentive to leave. That's what their concerns were.

I don't 9 understand that at all, sorry. 10

They asked me to come 11 down. Instead of having a DROP plan, give an 12 incentive similar to 1988. Have the people get an 13 incentive to leave instead of taking -- the 14 money's coming out of the -- the money will be 15 coming out of the pension anyway, no matter how 16 you look at it. The Pension Board will not be 17 saving any money with this DROP plan. They have 18 to pay the money out whether it's after they 19 retire at 55 or whether they go till they're 58, 20 the money's coming out.

Are there any questions from members of the committee?

What is the concern that the people have who you say asked you to come here? What are they concerned about? 79 6/8/99 - WHOLE COMM. - Bill 990288

Well, the concern is that the City of Philadelphia was always looking to find a way to put people on early retirement instead of keeping them because it was costing the City to keep the employees. If they could get rid of the higher-priced employees, the people that were here longer, then they would be able to fill 'em with lower-paying jobs and open up jobs for other people to come in, or eliminate jobs, which has happened in 1988 when I left and they closed my district.

And as a result of this bill, how are these people hurt that you are representing?

They are staying instead of leaving, and they are eligible to go on retirement, and some of them were going to go on retirement till this bill hit the floor.

Oh, you mean you're representing people who are currently working?

Yes.

For the City, not retirees.

Yes. No, no retirees. 80 6/8/99 - WHOLE COMM. - Bill 990288

Oh, I --

These are people that are working for the City, yes.

Oh, people who are working for the City.

They asked me to represent them because they couldn't be here and they didn't want to have their name on the record.

And they feel there isn't a sufficient --

Councilman, we're not saying it's compulsory for employees to enter into the DROP Program; it's their choice, it's their choice. (Applause.)

So we're not compelling anyone to join the DROP Program.

But the DROP Program was supposed to save money for the Pension Fund, for the pension. The DROP system, as Joe Herkness said, is going to keep the money in the pension system, but they're still going to have to pay it out after the three years. I can't see how this is going to help 81 6/8/99 - WHOLE COMM. - Bill 990288 the Pension Fund.

I think Mr. Hayllar will respond to that.

The intention, sir, is not to save money for the Pension Fund; the intention was to provide an additional benefit that we can now afford because of the Pension Bond and other things that Council and the administration has done. Our goal is to be revenue-neutral, and we believe the DROP Program, as constructed, will be neutral, but our goal is not to save money for the plan.

Madam President?

Yes, Councilwoman Tasco?

Maybe we don't understand the issues as presented to us this morning. What we might -- what the gentleman might want to do is have his people put their position in writing so that we can understand what points they are concerned about, just for clarification and information. 'Cause I don't understand -- I don't know how you get hurt. 82 6/8/99 - WHOLE COMM. - Bill 990288 (Unidentified person responds inaudibly off-mike.)

If you want to say something, please come up to the witness table and identify yourself and give us a response.

Hi, my name is Carol Stukes. I believe the gentleman's trying to say that the people who he represents think they're going to get hurt because the people who will go into the DROP Program at their own option would not make space available for those who move up and get promoted, and that's what his issue is; am I correct?

That's correct, absolutely on the head.

But what the gentleman don't understand is, whether the person's going to the DROP or not, they never have to retire, so that option to promote may not never be there.

That answers the question. Is there anything else you would like to add, sir? 83 6/8/99 - WHOLE COMM. - Bill 990221

That's fine, no. 3

Thank you very much. Is there anyone else to testify on this bill. (No response.)

Before we hear testimony on our next bill, I would simply like to announce that the Law and Government Committee meeting schedule to meet today at noon has been recessed until Thursday, June 10th, 9:00 a.m. The next bill to be called for consideration is Bill 990221. The title is, amending Title of The Philadelphia Code 17 entitled "Contracts and Procurement" by amending Section 17-107 entitled "Contractors, Labor Management Relationships," by revising and prevailing wage ordinance by extending the prevailing wage requirements to include all building and construction work contracts with City agencies and City-related agencies, and by extending the prevailing wage requirements to building or construction work contracts on which 84 6/8/99 - WHOLE COMM. - Bill 990221 City, City agency, and City-related agency funds are allocated or spent, all under certain terms and conditions. May we hear from the administration first on this bill. (John Kromer comes forward.)

Good morning Mr. Kromer.

Good morning, Council President Verna and members of the Committee of the Whole. My name is John Kromer. I'm Director of the Office of Housing and Community Development. I have submitted written testimony on this bill and so I just want to make a few brief comments on what is proposed. First of all, a comment with respect to the current applicability of prevailing wage to programs that are administered through the Office of Housing and Community Development program. Prevailing wage currently applies to nearly all of the rental housing development, new construction and vacant structure rehabilitation. And the reason for that is because most of that type of development, rental housing, is done through the 85 6/8/99 - WHOLE COMM. - Bill 990221 Low-Income Housing Tax Credit Program. And so to organize a project for tax credit financing, it really isn't feasible to think about fewer than eight units. Generally, the developers assemble projects that range from 30 to 70 units. You just capital organize a tax credit deal with fewer than eight units. So the majority of rental development is already subject to the prevailing wage requirements. The Mend II Program, a rental repair program administered by the Redevelopment Authority, is not subject to that requirement, but Mend II accounts for a very small number of units. The home ownership programs that are administered through the Community Development Block Grant Program do not require that prevailing wage be paid if they are community development block grant funded. However, those programs really can be divided into two categories. One is large-scale development, such as Poplar-Nehemiah and the current Cecil B. Moore sales housing. And on both of those ventures, there has been prevailing wage applied to a substantial portion of each of those ventures, although not required 86 6/8/99 - WHOLE COMM. - Bill 990221 by federal law. The other home ownership activity is the Home Start Program administered by the Philadelphia Housing Development Corporation. Again, prevailing wage is not required, but Home Start involves a relatively small number of packages of houses for rehabilitation, frequently 7 or 8 or 9 or houses per package during the 10 course of the year. So that is the applicability of prevailing wage at this time. Prevailing wage is also not required with respect to the home repair programs -- Basic Systems Repair Program and the Philadelphia Home Improvement Loan Program administered by the Redevelopment Authority.

I'm sorry, did you say that it is not?

It is not required, that is right. One point of information. The Mayor had scheduled a meeting between representatives of various City agencies and representatives of the building trades to discuss some of these issues several weeks ago, and a follow-up meeting is 87 6/8/99 - WHOLE COMM. - Bill 990221 scheduled for this Friday at the Redevelopment Authority to discuss how we could implement some of what is being proposed here, and I look forward to that further discussion. I think we can accomplish a lot. I just want to make two brief comments on the effect of this proposal. One is that if the prevailing wage is required for all of the programs across the board, then the home repair programs, Basic Systems Repair Program and the Phil Program, the Philadelphia Home Improvement Loan Program, really will change substantially. My understanding from the building trades representatives who met with me and others in the Mayor's office several weeks ago was that they were not concerned about these programs. My concern about these programs is that much of the participation, much of the contractor participation is by neighborhood-based, Philadelphia-owned, small repair firms. And if prevailing wage is required here, I can't predict, you know, who will be involved and who will not be involved. Maybe it will be the same proportion of Philadelphia-based firms. But the cost of each 88 6/8/99 - WHOLE COMM. - Bill 990221 unit of repair will definitely go up. The cost of delivering the program will increase, and fewer units of basic systems repair will be produced every year. That is just one effect of the program. So I am concerned about the repair programs. And, again, my understanding from Ed Keenan and the representatives of the building trades was that the repair programs really were not the focus here. My final comment with respect to the issue of employment of Philadelphia workers. I sat here exactly one week ago in the budget hearing on the Community Development Block Grant Program and heard expressions of dissatisfaction from Councilmembers about the level of Philadelphia employment associated with Section 19 108 finance downtown development ventures. The two ventures that were illustrated through statistics distributed by Kevin Brooks of my office both happened to be prevailing wage ventures. Now, does that mean that you can conclude that prevailing wage will mean 89 6/8/99 - WHOLE COMM. - Bill 990221 insufficient neighborhood employment, Philadelphia employment? No, you can't, but I know that this is a concern of Councilmembers and it's a concern of mine as well. And I hope that in the meeting that is coming up this week and in further discussion of this subject, we can set specific goals for Philadelphia resident employment on all City-funded work. I had attached an example of a housing development venture to my testimony. This is the Cecil B. Moore Phase I-A Sales Housing Development, and this is a development that was not required --

Mr. Kromer, I'm sorry. I don't have that attachment and I don't know if anybody else does. You don't have a copy of his statement?

I will then furnish that later to the Chair.

Please.

You will see that the statistics on that venture are similar in some respects to what had been presented last week. 90 6/8/99 - WHOLE COMM. - Bill 990221 And so my expectation would be that Councilmembers, at least some of them, would want to see us do better. And so my hope is that at the meeting with the building trades representatives, we can discuss how to equal or better that performance while maintaining the prevailing wage standard that is being requested. So I think these issues can be addressed and I look forward to working with Council and with the building trades to implement a program that achieves the goals of the building trades but also provides for the neighborhood employment, Philadelphia resident employment that we all value. Thank you.

Mr. Kromer, can you give us your definition of prevailing wage.

I will defer to the experts on the definition. And if Gerry Murphy is here, I think he would be the best source of that definition.

Yes, The Chair recognizes Councilman Kenney. 91 6/8/99 - WHOLE COMM. - Bill 990221

I had requested earlier from the representative of the building trades who are going to testify in favor of this bill to give us a kind of history and a short synopsis of what exactly is prevailing wage, how it came about and what it entails.

That's fine.

And I think they are prepared to do that post the panel from the city.

Great, thank you. Mr. Hankowsky, are you prepared to testify?

Yes, I am. I have written testimony, which I've prepared, which I'd be happy to quickly go through. I'm William Hankowsky, President of the Philadelphia Industrial Development Corporation, and am here today to testify about Bill No. 22 990221. PIDC has reviewed this legislation, and we'd like to offer a few comments. First, we believe that this legislation would apply to PIDC and our related authority of 92 6/8/99 - WHOLE COMM. - Bill 990221 the Philadelphia Authority for Industrial Development, or PAID. I think, as you all know, PIDC and PAID serve as the City's economic development implementation agencies. In this role, we operate loan programs, a series of 11 7 industrial parks, and the conversion of 8 approximately 1,000 acres of closed-fence 9 installations. We deal with a myriad of clients 10 from small, family-owned businesses to Fortune 500 11 corporations. PIDC and PAID do or have received 12 appropriations from the City, entered into 13 contractual relationships with the City, and 14 operate under a legal authority either granted by 15 established by City ordinances. Hence, one, we 16 believe this bill would cover us. 17 My second comment is that PIDC and PAID 18 do directly contract for building or construction 19 work at various times. PIDC and PAID have no 20 objection to being covered by the City's prevailing wage requirements for such work that we directly undertake. I want to be clear that we are not opposed to this aspect of the proposed legislation. My third comment does deal with that 93 6/8/99 - WHOLE COMM. - Bill 990221 aspect of this bill which gives me some concern. I believe, as currently drafted, this bill could be interpreted to apply to those firms, businesses, or projects to which PIDC or PAID provide financing or land. These firms and their projects are implemented in a variety of ways. Sometimes they purchase specialized equipment which requires manufacture installation. Sometimes they use their own employees to undertake a renovation project that we might finance. I believe that allowing this bill to cover our clients' projects would be a detriment to the growth of businesses in the City. We'd like to allow the flexibility for the companies to execute projects the way they'd like. And in this regard, I propose that the bill be amended to include the following addition: "Provided, however, that where a City agency provides funding to a private individual or private entity which has legal title or will require legal title to the buildings or construction work on which the funds are being expended, the limitations of Chapter 17-107 shall 94 6/8/99 - WHOLE COMM. - Bill 990221 not apply." This amendment actually parallels language included in state statutes with regard to state loan programs -- for example, the Pennsylvania Industrial Development Authority Program -- and, therefore, would be consistent with our overall guidelines. Thank you. And I'd be pleased to answer any questions you might have.

Thank you. Maybe we ought to hear from all of the witnesses first. Mr. Feder?

Thank you, Madam Chair. Richie Feder, from the Law Department, Deputy City Solicitor. I'm here because I have expressed to the Administration and to Councilman Kenney's office two legal concerns with this bill. I believe I have solutions to those two legal concerns, but the Administration has asked me to testify about those two problems. And then I have an amendment here which I believe would rectify the problems I'm going to identify. The two legal concerns I have is that 95 6/8/99 - WHOLE COMM. - Bill 990221 this bill, as written, would have City Council and have the City directly regulate the affairs of various public authorities. Those authorities are generally considered State agencies -- the RDA, PAID, PHA are all State agencies. Although the City funds a lot of them and the City has contracts with them, they are entities of the State, and the City does not have the power to directly regulate entities of the State and tell them what to do. Traditionally what we have done in this instance, and Council has done this in the past, most recently with the imposition of the McBride Principles. What Council has done is rather than directly regulating the affairs of the authority, Council requires the City, in its contracts with the authority, to require by contract that the authority would provide for prevailing wage. And so then the City would not be regulating, through its police powers, the affairs of the authority, but rather, the City would be entering into a voluntary contract with the authority, and the authority could choose whether to enter into it or not, as a condition of accepting City funds. 96 6/8/99 - WHOLE COMM. - Bill 990221 And so what I have here an amendment which would -- it's virtually verbatim from the language that's used in the McBride Principles and has also been used in other ordinances adopted by this Council, which would require that the City, when it enters into a contract with one of the City-related agencies, it would require the City to include language in that contract which would require the City-related agency itself to impose prevailing wage. The other legal issue that we've identified is the problem that in some of these instances, the City-related agencies are actually spending federal dollars and may be subject to federal or State requirements, which may in some instances prohibit the use of our local prevailing wage ordinance. And so what we have done here is propose an amendment exactly the same as that used in the McBride Principals Ordinance, which would allow the City to waive the requirements of prevailing wage if applying the requirements would cause the City agency to lose the federal or State grants. 97 6/8/99 - WHOLE COMM. - Bill 990221 And so, with the Chair's permission, I'd like to hand up a proposed which accomplishes exactly what I've just described.

Thank you.

And that concludes my testimony, Madam Chair.

Thank you. The Chair recognizes Councilman Kenney.

Thank you, Madam Chair. Just so the record's clear and the procedure that I'd like to follow this bill is clear. We will be hopefully taking some testimony today on this bill and then rescheduling the -- continuing the hearing on this bill to a date certain, which I believe Miss Diaz has indicated that June 16th is an available day, so I wanted to make sure that there was no effort today considering the request for additional conversation with OHCD and the concerns expressed by Mr. Hankowsky and the legal issues expressed by Mr. Feder that we do have some more discussion that we have to enter into. 98 6/8/99 - WHOLE COMM. - Bill 990221 But my question to Mr. Kromer is, and stipulating from your testimony that the home repair work is not something that is a concern, a major concern to the building trades in Philadelphia, but the construction or renovation of larger projects. What are the number of properties that trigger prevailing wage currently on OHCD projects, home construction, or renovation? Isn't there a number of properties that over a certain number, prevailing wage applies, and under a certain number, prevailing wage does not apply?

Yes. With respect to Community Development Block Grant-funded rental development, the requirement is triggered on ventures of eight or more contiguous units. There is another source of funding for our programs, and that is Federal Home Program. And with respect to development activities supported through Home, prevailing wage applies if more than 11 units are contracted together, either sales or rental.

And they're also contiguous.

I believe they could be 99 6/8/99 - WHOLE COMM. - Bill 990221 scattered as well with respect to Home, but the primary funding source is the Community Development Block Grant.

Part of the problem that has occurred and the reason that we're here today is that some developers take the literal language of this requirement and do it in a way to bypass intentionally the payment of prevailing wage. For example, on the eight or more contiguous properties, some developers will build five and then have a break and then build three and have a break and then build two more, and get to a to a large-scale development anyway but circumvent the spirit of prevailing-wage ordinances intentionally. And long ongoing discussions to try to get those developers to stop that process has been fruitless. The building trades, their representatives, people from the City Administration, to their credit, have attempted to have this conversation with the developers involved to no avail. Ad at that point in time, we wind up needing some vehicle, some legislative vehicle, in order to mandate it, to keep them from 100 6/8/99 - WHOLE COMM. - Bill 990221 trying to get around what we all intend to be a fair wage for this kind of work. So if we take the home repair program out of the mix -- and we can probably do that at some point with language in this bill -- and concentrate on what it is some of the developers are doing to circumvent prevailing wage, which is a readily accepted State and national issue, I think we'll get to where we want to be. I can tell you, this is not something that we necessarily wanted to do, but all of our efforts to discuss this and to negotiate this have gone for naught, and that's the reason why we're here today. I mean, do you recognize the issue or the situation that I'm talking about?

To the extent that developers are felt to be circumventing the requirements, we need to take that seriously because we are committed to upholding the requirements. And so at our discussion this week and later, I'd be very interested in reviewing the specific cases where that is felt to be true so that we can do something about it now. 101 6/8/99 - WHOLE COMM. - Bill 990221

Now, if you have a developer who acts in this manner, who requests a certain amount of money to accomplish a certain development project and then go through and does this kind of circumvention, the money that's saved in not paying the prevailing wage doesn't stay with OHCD, the Community Development Fund, it goes to the developer's bottom-line profit. Is that an accurate --

Well, I'd really like to look at specific cases with you because, as I said, the tax credit development cannot be structured in this way, and that's the biggest producer of housing in our program. The second biggest is the large-scale development, and that can't be structured in that way as well. That doesn't mean that we shouldn't take seriously the requirement, but we should be addressing that as a matter of our obligation to the federal government. So I would like to pursue that with you.

Okay, thank you Madam Chair. (Councilwoman Krajewski assumes Chair.) 102 6/8/99 - WHOLE COMM. - Bill 990221

Thank you. Councilman Cohen?

Mr. Kromer, do you know what is the occasion now for this action? How old is the prevailing wage in the City?

The prevailing wage requirement has been in effect for some time as a federal requirement, which we are committed to upholding.

But the Philadelphia ordinance has been in effect for many years, hasn't it?

Councilman, if I can, the prevailing wage ordinance has been on the books in Philadelphia since at least the 1950s. But Mr. Kromer has not been subject to --

What causes -- where has the law failed to provide the protection that this bill is aimed at giving? I mean, why does this issue come up at this time? I'm just trying to figure it out. We've done a great deal of construction work over many, many years. And I always thought that the prevailing wage law applied everywhere. 103 6/8/99 - WHOLE COMM. - Bill 990221

This is not an Administration bill, so I think the sponsors can address that.

Well, from your experience, do you know of any need for this particular provision? Is it additional safeguards?

Well, again, the concerns that I have, I think, can be addressed through some further discussion with the building trades, and I think we should pursue that, and that those goals need to be achieved, whether they have this legislation or not. As I said, we do have an obligation to the federal government. We also have a clear agreement -- what I feel is a clear agreement -- to promote the hiring of Philadelphia residents. And I think we all want to achieve both those things.

Well, I think it's important to have the discussion on the Philadelphia residents. There also have been hearings with respect to subcontractors who are very concerned, minority subcontractors who are 104 6/8/99 - WHOLE COMM. - Bill 990221 very much concerned about what they feel are inequities in the grant of contracts, and I'm hoping that's a part of the discussion 'cause we ought to clear that up. And then there is the matter of the living wage bill. Basically, the prevailing wage deals with workers at a higher level of income than the living wage, maybe double or triple the amount of living wage. I think workers at the lower levels ought to also be involved in these discussions. I think this is a good time for us to clear up all of the inequities in the wage system that exist, and labor ought to be recognized at every level as being central to, you know, any kind of effective performance, and they ought to be compensated properly. And the laws that exist ought to be complied with fully, and where the laws are inadequate, they ought to be changed to make sure we recognize, you know, the dignity and the work skills of the various people and that they get paid fairly, particularly where government is involved. And I think government has to be the model employer if government has the 105 6/8/99 - WHOLE COMM. - Bill 990221 responsibility for seeing to it that workers at every level are protected, and in the first instance, certainly, where government is involved. So I hope in these discussions that take place, all of these interests are involved, and we come forth with recommendations which will permit us at one point to deal with the living wage, with the situations between subcontractors and general contractors and with the situation of minority workers. We ought to clear the whole situation up so that Philadelphia can really rank number one nationally in its fair treatment of all workers. If there are discussions, since it is publicly known that I'm very much involved in labor issues, I'm making this declaration publicly 'cause apparently, discussions have been ongoing that I know nothing about. I would feel very much more involved if I were notified of these meetings. I would like to participate in them. I'm a member of the Labor and Civil Service Committee, which seems to me ought to be the committee that's dealing with this issue. And I just hope we finally put to rest all of these 106 6/8/99 - WHOLE COMM. - Bill 990221 labor issues and see that workers everywhere get proper and fair treatment they're entitled to. Thank you, Madam Chair.

Thank you. Councilman Nutter?

Mr. Feder, first let me -- there was an amendment circulated, and I think I heard you either talking about it or reading something that I thought I heard. Is this your amendment. It's a proposed amendment to Bill 12 990221, delete the amendment, the definition of City work?

Yes Councilman.

This was drafted by the Law Department?

Yes, sir.

Okay. Now, with regard to some of definitions, I've figured out pretty much letter o. on , City Agency Departments, Boards and Commissions. Letter p. and then the qualifier, small letter i., double i. and triple i., do you have a list or can you provide us any information on what various agencies come under these definitions or 107 6/8/99 - WHOLE COMM. - Bill 990221 qualifiers?

I certainly don't have such a list, but I can certainly try to develop one if you'd like.

That certainly would be helpful so I know who we're talking about. And lastly, Mr. Kromer, you and Councilman Kenney were engaged in a discussion I think about half to three quarters of which I heard and followed. Can you go back to the issue of some work that's being done and how many units and what triggers what? I mean, what's -- what is that issue about?

As I understand it, Councilman Kenney was concerned about developers who might be circumventing the requirements which trigger the payment of prevailing wage, and those requirements briefly are that for rental housing development funded through the Community Development Block Grant Program, a development eight or more contiguous units trigger the requirement. With regard to the Federal Home 108 6/8/99 - WHOLE COMM. - Bill 990221 Program, another funding source, not as substantial as the Community Development Block Grant, if more than units are contracted 5 together, then prevailing wage is triggered 6 regardless of whether it's rental or sales 7 housing. 8 Now, the issue, as I understand it, is 9 that a particular developer may organize a Phase I 10 development that may be seven units and a Phase II 11 development that may be six units. And there is an appearance that the regulations are being circumvented. And I indicated that to the extent that there are concerns about that, we need to address them because regardless of this proposed legislation, we have an obligation -- we the City Administration -- to HUD to enforce the prevailing wage. And if there's an attempt to circumvent, we need to deal with it.

And this is by the particular developers, either selection or application of what properties to -- this is, I guess, mostly -- this is primarily rehabilitation or is this new construction also?

I would expect it would be 109 6/8/99 - WHOLE COMM. - Bill 990221 primarily rehabilitation, but I would want to look at the specific cases that are the subject of the concern.

Okay. Now, on the handout that you referred to, I think you indicated that it was a part of your testimony, although when we got your testimony, it wasn't a part of it.