DROPs are an expensive solution to a problem created by generous pension benefits in the form of early retirement for government workers. With public pension programs in some states and municipalities allowing workers to retire with full benefits at age 55 (or 50 for public safety workers), supervisors and administrators often complain they lose their most experienced workers too early.
Instead of simply pushing back retirement ages to something approximating private sector retirement, politicians have created lucrative deferred retirement plans to induce government workers to stay on the job longer.
Here's how they work: Once a worker reaches retirement age, he can continue working and collecting a salary under a DROP. Meanwhile, the pension he would have received if he retired is paid to him, but it goes into a deferred account with a guaranteed rate of return. Then, when the worker truly retires, he receives a lump sum payout from the deferred plan and begins receiving his monthly pension checks.
Around the country, DROP plans have become controversial because they can result in big paydays for some employees and can help drain pension systems at a time when these funds are already under stress. For example, according to a pension database operated by KCET-TV in Los Angeles, the top DROP payment made to a public safety officer in L.A. so far is $939,124 paid to a LAPD deputy chief in April of 2010.
In Alabama, news reports that the University of Alabama's athletic director and executives of the state's teachers' union, who were allowed to participate in the state's DROP program, each had DROP accounts totaling more than $1.3 million, sparked calls for reform which eventually led to legislation eliminating the program.
More reform is on the way. Arizona legislators voted recently to phase out their DROP program, while Florida legislators are considering ending their program. Pension reformers aimed at cutting the cost of San Francisco's government retirement benefits are also considering proposing to eliminate that city's DROP.