DROP Plan Does Not Violate State Pension Law

The Borough of Ellwood City, Pennsylvania and the Ellwood City Police Department Wage and Policy Committee (Union) are parties to a collective bargaining agreement. The agreement gave the parties 180 days to negotiate a Deferred Retirement Option Plan, or DROP. When no agreement on the terms of a DROP was reached, the Union referred the matter to arbitration.

An arbitration board issued an award directing the Borough to modify the police pension plan to provide for a DROP. The Board included in its award a definition of “DROP” and 16 separate provisions that the Borough should include in its ordinance adopting a DROP. Under the terms of the DROP, an officer would be allowed to set an official retirement date, and to return to work post-retirement in what is called the “DROP participation period.” The pension benefit is based on the DROP participant’s salary in the months preceding his official retirement date, and the salary the participant receives during the DROP participation period post-retirement, during which the participant is employed, is ignored.

The Borough challenged the arbitration decision in court, arguing that the DROP conflicted with state pension law. The essence of the Borough’s appeal was that under state law, a police officer cannot be both retired, and thus receive pension benefits, and employed.

The Pennsylvania Commonwealth Court rejected the Borough’s appeal. The Court found that “though the argument that one cannot be both retired and employed has some facial appeal, in the context of the state pension law, retirement is a status that serves one particular purpose – i.e., fixing a municipality’s pension liability for the electing police officer. Once a pension plan member reaches legal eligibility for retirement, the member can elect to retire and thereby trigger a determination of benefits based upon the member’s formal notification to his employer of his intent to retire. This is, in essence, what happens under the DROP.

“A member of the plan eligible for retirement gives notice to his or her employer of the member’s intent to retire. Under the DROP, as with a conventional retiree, both the member and the Borough are bound by the fixed retirement date for purposes of pension benefit calculations. At that point, under the state pension system, the member is retired and benefits are calculable. The employment status of a DROP participant after his retirement status is fixed is irrelevant. We thus do not see how the Borough’s compliance with the arbitration award would force the Borough to violate the state pension law.”

Borough of Ellwood City v. Ellwood City Police Dept., 2010 WL 2607134 (Pa. Cmwlth. 2010).

This article appears in the October 2010 issue