A unanimous decision by the Pennsylvania Commonwealth Court highlights that precise language and careful attention to detail is necessary whenever a municipality agrees to adopt a Deferred Retirement Option Plan (“DROP”). The decision in Massi v. City of Chester Aggregated Pension Bd, underscores the fact that if a municipality does agree to a DROP, it should do so only after having labor counsel draft language that protects the pension plan from an inflated pension benefit and guaranteeing the DROP pension amount cannot be increased by a later converting the benefit into a service connected disability benefit.
To say that this decision was a significant victory for the taxpayers of the City of Chester and the City of Chester Police Pension Plan is an understatement. The City’s police pension plan is less than 20% funded and the trial court’s ruling, which the Commonwealth Court reversed, would have required that the City convert a retired officer’s normal 50% pension benefit—which totaled a little more than $66,000 per year -- into a 100% tax free disability benefit, totaling more than $132,000 a year. The Commonwealth Court’s decision saved the City approximately $264,000 in retroactive disability benefit payments and potentially millions going forward. Although the case dealt with a retired police officer who attempted to claim a disability benefit after his DROP participation period ended, lessons from the case can be applied to all DROPs which must be carefully drafted by labor counsel.
The Plaintiff, a police officer, entered into the City’s DROP Program on July 1, 2009. The maximum participation period in the DROP was five (5) years, meaning Plaintiff committed to separate from service no later than June 30, 2014 and agreed to his age and service yearly pension benefit at the time he entered the DROP. While in the DROP, the Plaintiff suffered two work injuries, and received workers’ compensation and heart and lung benefits for both injuries. After serving his full DROP participation period, the Plaintiff separated from employment on June 30, 2014. Upon separation, the Plaintiff received his DROP distribution payments and began receiving his $66,000 normal age and service retirement pension benefit. At no time prior to, or at the time of separation, did the Plaintiff apply for a service-connected disability benefit.
Ten months after leaving City service however, the Plaintiff requested a service-connected disability benefit from the City’s Police Pension Plan, but provided no supporting medical evidence. In June 2016, two (2) years after his DROP participation period ended, the Plaintiff eventually submitted medical opinions in an attempt to purportedly confirm his disabled status.
After the Pension Board denied the disability benefit application, due to the Plaintiff’s failure to apply for benefits during his employment, the Plaintiff appealed the decision. The Delaware County Court of Common Pleas found that the Plaintiff had proven that he suffered a permanent disability as a result of his work duties and doubled his pension benefits from $66,000 to $132,000 per year, by converting his age and service pension into a service-connected disability benefit. Of course, the disability benefit also would have been tax free.
In reversing the trial court’s decision, the Commonwealth Court relied on the language of the pension ordinance and the CBA. The court found that while the ordinance provides that a DROP Participant may apply for and obtain a service-connected disability pension, it does not provide that a retiree may make such an application after the DROP participation period. The Plaintiff argued that the City had no basis to deny his request because there was no explicit time limitation as to when an officer can apply for disability benefits. The Court stated that if it “were to accept Massi’s and the trial court’s interpretation of the Ordinance and the CBA, there would be no time limitation upon an officer applying for disability benefits.”
While DROPs have become more common in Pennsylvania since the passage of Act 44 of 2009, some municipalities and unions take a relatively cavalier approach to drafting DROP language and developing the terms of a DROP. The Massi case, which was handled by Campbell Durrant attorneys, shows that municipalities should utilize labor counsel to carefully draft and analyze all DROP language to avoid risk and the potential abuse of DROPs. Under no circumstance should a municipality agree to adopt a generic DROP, or an “Act 44 Retirement Plan”, as some FOP attorneys cleverly refer to a DROP, without labor counsel carefully drafting and reviewing all DROP language to make sure the language protects the municipality and does not lend itself to abuse such as attempts to double pension amounts during or after DROP participation. All DROP language should be drafted and agreed upon before a final agreement is executed.
All DROPs should include language stating that an officer expressly agrees to his or her age and service pension amount upon entrance into the DROP and if subsequently disabled the officer is only entitled to that age and service pension amount and will be discharged from service if unable to return to work during the DROP period. In addition, if a municipality considers adopting a DROP, it should do so only after working with labor counsel to draft and insist upon in bargaining a variety of cost saving provisions to help defray the loss of state aid and the loss of pension contributions for DROP participants, the continued increased employment costs of DROP participants, and a variety of other increased costs related to DROPs. Campbell Durrant attorneys remain available to assist you in crafting appropriate DROP language which limits the cost of any DROP and prohibits legal challenges to the DROP terms.