Defending DROP: OP&F sets the record straight about a report from the Buckeye Institute: Dipped in Gold

Transcription

1 Defending DROP: OP&F sets the record straight about a report from the Buckeye Institute: Dipped in Gold A report recently released by the Buckeye Institute attacks the Deferred Retirement Option Plan (DROP) which has been in place at the Ohio Police & Fire Pension Fund (OP&F) since January The report is full of biased claims, implications and extreme examples that in no way represent either the average public safety worker in Ohio or how the program actually operates. OP&F has responded below to the most flagrant of the errors and misrepresentations that were included in the report, along with supporting facts that provide a true representation of how the program works. The Buckeye Institute report was written without consulting OP&F to learn the background of DROP, how it works and how it is sustainable. DROP was designed as a benefit enhancement for OP&F members to save a lump sum of money for retirement and to keep experienced police officers and firefighters on the job. DROP was passed in 2002 by the Ohio General Assembly with a unanimous vote in the Senate, and with only two no votes in the House. What is DROP? The DROP program allows OP&F members who are eligible for a normal service retirement to defer retirement and stay on the job for a period between three and eight years. During the DROP period, the monthly pension amount calculated when the member entered DROP accrues, along with a portion of the member s salary contribution, interest and an annual cost of living allowance. When the member retires, this amount is available in a lump-sum or amounts can be withdrawn either monthly or quarterly. To receive the benefit of DROP, members must stay in the program a minimum of three years, and no longer than eight years. By retiring before three years, the member will lose the accumulated interest. If the member does not retire before the eight year deadline, they lose their entire DROP accrual. For details on the program, contact OP&F or refer to the Member s Guide to DROP, available at DROP was designed as a cost-neutral program that will not be an additional cost to OP&F and also will not have an adverse impact on OP&F s ability to pay pensions. 1. REPORT CLAIMS: taxpayers have no idea how OP&F operates or what its participants are paid upon retirement. (p. 9) Absolutely false. As a public organization, our financial and operating data are open for examination and are published annually. Also, benefit calculation formulas and examples are printed in our member guidebooks. In addition, our annual report includes data showing the amount that benefit recipients receive annually and how many receive these amounts. OP&F does not publish names and address of members, as personal history records are exempted by statute. 2. REPORT CLAIMS: The highly secretive DROP program (p. 4) What is secretive? OP&F is prohibited by state law from releasing specific member information not just those in DROP. We provide data on the number of DROP participants both statewide and in specific cities and our financial reports outline DROP liabilities and expenses. OP&F also assists municipalities in budget planning by supplying the number of DROP participants from a specific city and how many will reach their 8-year maximum dates in the upcoming months. 1

2 3. REPORT CLAIMS: The Buckeye Institute report uses $100,000 as a base pension example for an OP&F member. (p. 4) As of 10/1/2010, OP&F had only one retired member who received an annual pension over $100,000, and 35 who received above $80,000. This is out of a total of 25,712 retirees and survivors of members who receive a monthly benefit. As of 1/1/2010, the average annual OP&F benefit is $35,650 (service and disability retirees). 4. REPORT CLAIMS: As a taxpayer, you are on the hook to contribute 19.5 to 29.5 percent of each police officer s salary and 24 to 34 percent of each firefighter s salary to the Ohio Police & Fire Pension Fund (OP&F). Your contribution is so high because of costly programs like DROP. (p. 1) DROP began in Those contribution rates have remained unchanged since 1986 (for employers) and 1988 (employees), many years before DROP was even proposed. These rates are higher than other retirement systems due to the fact that police and fire work is dangerous. There is a considerable risk to be harmed in these professions; therefore a lower retirement age can be expected. 5. REPORT CLAIMS: many in upper management receive lump sum payments of nearly one million dollars. (p. 1) Beginning in 2011, OP&F will see the first DROP participants reach their 8-year maximum participation. Of the 589 who will reach their maximum participation in the first 7 months of 2011, only two will have a DROP balance of more than $1 million. According to Buck Consultants, OP&F s actuary, the average lump sum value as of 1/1/10 for those who entered DROP in 2003 was $423,000. If we assume that they stay in DROP the full 8 years, the average balance is approximately $500, REPORT CLAIMS: The DROP program is an expensive burden for the taxpayers to bear even though OP&F claims that the program is revenue neutral. (p. 4) It is mandated by the Ohio Revised Code that an actuary prepare a report every five years to determine if there is any financial impact on OP&F of offering DROP to members. The April 24, 2008 report concludes that to date, the DROP, as currently in effect, has not had a negative financial impact on the Ohio Police & Fire Pension Fund. The amount of benefits provided by OP&F since the implementation of DROP has not resulted in a need for additional contributions by taxpayers or members. OP&F has instructed its actuary to provide annual updates to this study and through 2010; DROP continues to not have a negative financial impact. A primary goal of DROP, keeping experienced police officers and firefighters on the job in Ohio s cities and towns, has been achieved through DROP, as evidenced by careers being extended, and this extension of careers has resulted in significant savings in the retiree health care program. 2

3 7. REPORT CLAIMS: Government workers are guaranteed large lifetime pensions through their defined-benefit retirement plans where there is no need for disciplined savings or working hard to get ahead... (p. 3) Beyond being totally baseless and insulting to all public employees, the conclusion is flawed even under the author s logic. Working hard and earning promotions results in a higher salary which in turn results in a better pension benefit. The average OP&F pension is $35,650 a year. The Buckeye Institute seems to believe this is too much for a 25-year career that includes a daily risk of being shot, burned, injured and exposed to disease. The abysmal savings rate in the private sector is not something to which we should aspire across the labor market. The mandatory employee savings provision of defined benefit plans is one of their most advantageous features. 8. REPORT CLAIMS: For the privileged class of government employees, however, early retirement is an entitlement. (p. 3) DROP is open to all ranks, not just upper-management police officers and firefighters. DROP is not aimed at any particular group; it is open to any member that meets the eligibility requirements. 9. REPORT CLAIMS: Government workers are guaranteed large lifetime pensions (p. 3) As of 1/1/2010, the average annual OP&F pension benefit is $35,650. OP&F members do not pay into Social Security, and even if they qualify for Social Security benefits from another position, the Government Pension Offset and Windfall Provisions substantially reduce or eliminate any Social Security benefits that may have been earned by these public safety officers. More than 28 percent of police and fire retirees receive less than $28,000 a year in benefits, or the mere pittance that the report notes that Social Security provides. (5,249 of 18,378, or nearly 29 percent, receive $28,000 or less annually in OP&F benefits). 10. REPORT CLAIMS: all our estimates err on the conservative side. (p. 9) The Buckeye Institute s conservative estimate is based on an annual benefit example that is nearly $65,000 more than the average annual pension benefit. Also, your salary examples are for a deputy police chief in Columbus ($116,057) and a police commander in Cincinnati ($99,905). These are top-line positions at major metropolitan police forces. This is hardly a conservative estimate or representation of the average public safety worker. 11. REPORT CLAIMS: It is more than likely that the average officer moves through the ranks more quickly than he does for this analysis. Therefore, his DROP lump-sum and pension payments will likely be higher than displayed in this analysis. (p. 9) The report assumes that most or all officers rise to the highest ranks of their departments before retirement. There are only a very limited number of these high ranking positions. 3

4 12. REPORT CLAIMS: In 2009, over 70 percent of Columbus operating budget was allocated to police and fire, with the average expenditure per public safety employee totaling $128,977. (p. 1) This implies that the entire amount is spent on salaries, benefits and pension contributions. The report does not indicate that an operating budget also includes equipment, comprising of items such as fire engines and police cruisers, or upkeep and maintenance of fire houses and police precincts. This is the first of many pieces of incomplete information which seems to be designed to fit the author s pre-determined conclusions. OP&F has calculated that the City of Columbus contributions to OP&F equal 11.3 percent of the city s operating budget (employer share and any employee pick up amount). 13. REPORT CLAIMS: they have the option of working after they have technically retired. (p. 3) Simply untrue. DROP participants have deferred retirement and continued on the job. While in DROP, they are not considered retired and have not filed a retirement application. When they enter DROP, the remaining on-the-job time is limited to between 3 and 8 years to fully realize the program s benefits. 62.5% of all DROP participants who entered the program in January 2003 have retired and left the program prior to their maximum participation. The average participation in DROP is 3.8 years. 14. REPORT CLAIMS: In the case studies throughout, the report does not adequately explain pension funding. During the officer s 18 years of true retirement, he collects nearly 34 times the amount of money he contributed to OP&F during his working life. (p. 6) This statement leads readers to believe that the overwhelming portion of pension funding is paid for with employer contributions (taxpayer dollars). In fact, investment returns are by far the largest component in the pension funding formula. The average life expectancy of an OP&F member after retirement is 24.3 years. On average, OP&F retirees receive the value of their own member contributions after 2.5 years of retirement. They receive the value of the employer contributions after an additional 5.4 years of retirement. The remaining years of pension benefits are funded by OP&F investment returns. 15. REPORT CLAIMS: While private sector workers do have the option of saving for retirement in IRAs and in 401(k)s, they are prohibited from touching these investments until they reach age If they withdraw from these accounts early, they face severe income tax penalties. (p. 8) These DROP withdrawals are subject to the same federal and state income taxes as an IRA or 401(k). Additional research by the author would have found the following exception: The Internal Revenue Service has reduced the age at which the 10 percent early withdrawal tax penalty applies for public safety officers to age 50 from age 59½. Also, DROP participants are not able to withdraw their funds early, period. They must wait a minimum of three years before retiring (if they want to realize the full benefits of DROP) and then receive a distribution. Also, those who do not retire by their maximum 8-year participation date face a severe penalty losing their entire DROP accrual. 4

5 16. REPORT CLAIMS: If police officers and firefighters were dependent upon Social Security for their retirements, they would have to work until 67. (p. 9) Is the Buckeye Institute suggesting that the physical demands of police or fire work allow workers to perform at the appropriate level until age 67? The Institute needs to examine IRS rules regarding public safety officers. Also, OP&F funding recommendations have asked for an increase in the minimum retirement age to 52 from REPORT CLAIMS: the pension fund will not release the names, ranks, salaries, or pension information of those who participate in the program. (p. 9) OP&F is abiding by the law of the State of Ohio. Cumulative information is available in OP&F financial reports. 18. REPORT CLAIMS: Remove the 5 percent fixed interest rate or tie it to the market interest rate. (p. 9) As a part of OP&F s funding recommendations presented in September 2009 to the Ohio Retirement Study Council, OP&F recommended lowering the interest rate to 3 percent. These recommendations were widely reported in media outlets across the state. A 5% fixed return is hard to come by at this time, but this is a very time specific statement. Where were rates 5, 10 years ago? Where will rates be in 5, 10 years? The DROP rate was based on potential portfolio returns and is a reduced version of this expectation. The current economic and investment environment make the 5 percent fixed return vulnerable to criticism, but this may not be the case in future years. 19. REPORT CLAIMS: Remove the COLA increase while the officer is in DROP. (p. 10) Again, as a part of OP&F s funding recommendations presented in September 2009, we recommended that COLAs be delayed until age 55, except for the survivors of deceased members. 20. REPORT CLAIMS: By raising the minimum retirement age to 55 (or not allowing access to the pensions until the individual reaches age 67 like Social Security) and terminating DROP, all experienced police officers and firefighters would be required to stay on the force longer before collecting their pensions (or move on to other work). (p. 11) Did the author consider the consequences of this suggestion? If the OP&F member retired at 55 and was not able to access the benefits earned for 12 years, it would create a significant unemployment dilemma for this population finding a job for 12 years at age 55. The other option would be a top-heavy public safety force that included older police officers and firefighters, many who would not be physically able to do the work required. Finally, and again, OP&F s funding recommendations presented in September 2009 recommended changing the minimum retirement age to 52. Questions? Contact OP&F Communications Manager Dave Graham at (614) , or at dgraham@op-f.org 5