FRATERNAL ORDER
OF POLICE
PENNSYLVANIA
STATE LODGE
AUDITOR GENERAL'S OFFICE LETTER REGARDING DEFERRED RETIREMENT OPTION PLANS (DROP
Program)
Department
of the Auditor General
Commonwealth of Pennsylvania
Harrisburg, Pennsylvania 17120-0018
September 7, 2001
Office of Chief Counsel
Room 224 Finance Building Harrisburg, PA 17120
(717) 787-4546
Gary M. Lightman, Esquire
Lightman & Welby
2705 N. Front Street
Harrisburg, PA 17110
Dear Mr. Lightman:
Thank you for your inquiry
concerning the Department of the Auditor General's position on Deferred
Retirement Option Plans (DROPs). I am pleased to respond with the following
information.
First, however, I must offer a caveat. Both Article VIII,
Section 10 of the Pennsylvania
Constitution and Section 404 of the Fiscal
Code, 72 P.S. §
404,
prohibit the Auditor General from preapproving transactions that he will
subsequently audit. Therefore, although the
Department can provide general guidelines with respect to
DROPs, we cannot evaluate proposed plans and offer official opinions as to their
acceptability. Review of implemented DROPs will be made in connection with
audits conducted by the Bureau of Municipal Pension Audits.
DROPs,
as we understand them, permit employees who have reached their normal retirement
date to retire for pension plan purposes but to continue working for a set
number of years, usually between three and five. At the expiration of that time,
the employee must retire in the normal sense, that is, terminate employment.
Pension benefits are calculated as
of the date the employee becomes a DROP participant and are paid
into an interest-bearing account. The
participant makes no further contributions to the pension plan, and is credited
with no additional
pension
benefits. At the end of the DROP participation period, the employee receives the
funds in her or his DROP account as a lump sum, with monthly pension benefits
being paid directly to the employee thereafter. Aside from these commonly shared
characteristics, DROPS may vary considerably in their terms and conditions.
Since
DROPs postdate applicable pension statutes, they are nowhere specifically
approved. However, based on the common characteristics described above, we are
aware of nothing in those laws that would necessarily preclude a municipality
from offering a DROP to its employees. To repeat, however, DROPs are not
homogeneous. Therefore it is possible that, in the
course of an audit, we may identify provisions in a DROP which are not
compatible with law. We cannot foresee what types of provisions may be
problematic and cannot provide a blueprint
for DROPs. Our best advice to municipal
officials who are considering a DROP is to consult with their
solicitor.
What
we definitely would not condone is a municipality's certification of DROP
participants for
purposes of receiving General Municipal Pension Fund State Aid under
Act 205. We would regard these individuals as retired for all pension-related
purposes and would
expect municipalities to treat them as such when completing form AG 385.
I do
hope this information is useful to you in advising your clients.
Very
truly yours,
Sally Ann Ulrich
Deputy Chief Counsel
SAU/brj
cc: Richard
D. Spiegelman, Chief of Staff/ Chief
Counsel
J. Terry Kostoff, C.P.A., Deputy Auditor General for Audits
Paul H. Alpaugh, III, Assistant to the Deputy Auditor General for Audits
Thomas I. Swider, CPA, Director, Bureau of
Municipal Pension Audits
Martin M. Bergen, CPA, Audit Specialist II, Bureau of Municipal Pension Audits
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Secretary Phone: 1-800-706-9959
Recording Secretary Fax: 814-254-1727
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Harrisburg, PA 17110-1250
State Office Phone: 1-888-551-8125
or 717-236-6981
State Office Fax: 717-236-8902
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