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March 24, 2004   Email to Friend 

DROP Windfall Costs State Millions
Paul Till

As the Alabama Legislature trolls for additional tax dollars, the dual heads of the Alabama Education Association have laid up for themselves a retirement "bonus" that could exceed $1 million cash each, in addition to their regular pension of at least $200,000 annually when they retire, paid out of The Retirement Systems of Alabama (RSA).

Dr. Paul Hubbert, executive secretary of the AEA, and Dr. Joe Reed, associate executive secretary, meanwhile continue drawing their annual salaries of $342,000 and $338,000 respectively. Both were chief proponents of the Deferred Retirement Option Plan (DROP) passed by the Legislature in 2002.

That law provides that a public employee with 25 years of service can sign up for retirement benefits when he reaches age 55 but continue working for another three to five years. During those years, the retirement funds are put into a special account, which the person can claim in a lump sum when he actually retires. At the end of three to five years, he may continue working or retire and begin drawing regular benefits in addition to the "bonus." In the case of Hubbert, $16,917 is set aside monthly and $18,281 is set aside monthly for Reed in their DROP accounts until they actually retire, according to figures from RSA. That would amount to $1,015,020 for Hubbert and $1,096,860 for Reed after five years.

Dr. Ed Richardson, who recently resigned as state superintendent of education to become interim president of Auburn University, accrues $10,624 monthly on an annual salary of $170,755. If he stays in the program five years, he would have a retirement "bonus" of $637,440, according to RSA.

Even for employees making substantially less, the "bonus" is significant. For example: Joe Public who works within the state retirement system, can work until he is 55, sign up for DROP and collect an $88,000 retirement bonus after three years, retire at the age of 58 to draw his regular monthly retirement and continue to have his health insurance paid by the state. He could even exit DROP and continue in his existing job indefinitely and collect his bonus whenever he leaves service. Many say such an incentive will attract a huge majority of public employees to the program as they become eligible.

Although the pension is a state plan and the Legislative Fiscal Office (LFO) says the DROP plan is costing the state an additional $27 million in tax dollars annually, Dr. Hubbert said in a letter to Alabama Farmers Federation, "Not one penny of taxpayer money is involved in the payment of retirement or healthcare benefits which I or any member of the Alabama Education Association staff receive."

The extra funds for DROP are in addition to the $421 million the Retirement Systems of Alabama says it will need from the state next year to help meet projected increases in pension obligations. The funds needed for DROP could grow as more state employees participate.

There were 4,145 employees enrolled in DROP at the end of 2003, with an average of 135 more added per month. That includes 3,217 teachers, 728 state employees and 201 persons from local government, according to LFO. The total active in the Retirement System of Alabama includes 125,000 teachers, 36,000 state employees and 45,000 city and county workers.

Participation is not limited to teachers or state employees. Local government employees and even some non-government personnel, such as Hubbert and Reed, are included in the state retirement system, and therefore can participate in DROP. The covered teacher group includes employees of elementary and secondary schools, junior colleges and universities.

Besides the AEA, other private groups with employees in the state retirement plan include the Alabama High School Athletic Association, Association of County Commissions, Alabama State Employees Association, Alabama Association of School Boards, Alabama Association of School Administrators, and other similar organizations.

The DROP was promoted to the Legislature two years ago as a plan to keep veteran public employees and teachers from leaving after 25 years of service to begin new careers. Other states had enacted similar programs where there were shortages of highly trained personnel which were hard to replace. Some other states limit the deferred option to three years.

Alabama, however, is one of few states--if not the only--to cover all members of the state retirement system, even if it might be fiscally desirable to reduce the number of employees in a certain field through attrition. Marginal employees also would be eligible. And since there is no requirement that the employee retire after his DROP period, he simply continues to work as long as he wants and collects his "bonus" when he actually leaves service.

Gov. Bob Riley and others have said elimination or modification of the DROP is on the radar screen when the state's fiscal crisis is reviewed during the 2004 session of the Alabama Legislature which began Feb. 3. Ending DROP was one of the recommendations of Riley's Commission on Education Spending last July.

Although almost everyone would agree that DROP is something this state cannot afford in its present form, efforts to change or eliminate it would be a tough battle with the AEA and State Employees Association. The Decatur Daily says the fact "that it allows employees who aren't needed to stick around for up to five years and draw a salary and pile up retirement checks is something that needs to be changed."

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