Several years ago certain leaders in state government began to complain that there were too many state employees.

These leaders reasoned that the state could save money if it would reduce its workforce. They came up with the idea that the workforce could be reduced if incentives to retire early were made available.

The Alabama Legislature responded by passing a package of bills designed to do just that. Employees were offered cash bonuses and increased retirement benefits if they retired by a certain date. The early retirement program was indeed a success in that it did reduce the number of state employees.

When the dust finally settled, however, state government found that it had suddenly lost many of its best employees.

Several departments in state government, in particular the Department of Transportation, woke up to find that some of its brightest minds were suddenly gone. The state probably did not save much money when measured against the losses in efficiency and productivity experienced by many important departments.

It did not take long for state leaders to realize that a serious mistake had been made. They went back to the legislature and urged it to pass legislation that would encourage governmental employees to postpone retirement.

The legislature wasted little time in responding.

One of the first new laws enacted during the 2002 regular session of the Alabama Legislature was Act 2002-23. This new law established what is known as the Deferred Retirement Option Plan or DROP.

The DROP plan is available to all employees participating in the Employees Retirement System and the Teachers Retirement System. The option is also available to employees of local governments that participate in the Employees Retirement System if the employer elects to participate in DROP. A summary of the DROP plan is provided below.

Participation in DROP is an option available to any member of the retirement system employees who meet all of the following requirements: must have at least 25 years of creditable service exclusive of sick leave; must be at least 55 years of age; must be eligible for service retirement.

An election to participate in DROP may be made in one-year increments not to exceed five years, nor to be less than three years. Upon the effective date of the commencement in DROP, the member's service credit will remain as it existed on that date for the duration of DROP participation.

The person participating in DROP will continue to receive his or her compensation during the period of participation. Both the employer and employee member contribution will continue to be made. The monthly retirement allowance that would have been payable had the person elected to retire and receive a retirement allowance will be paid into a DROP account and managed by the retirement system. The DROP account will earn interest.

When the DROP participation period is concluded, the participant will receive a lump-sum payment from his or her DROP account equal to the payments made to the account plus interest. The participant shall also receive his or her accumulated contribution made during participation plus interest earned on those contributions.

In lieu of a lump-sum payment the participant may elect to have the money "rolled over" into a qualified retirement plan and therefore avoid some adverse tax consequences.

The following is an example of how the DROP program could affect an employee who chooses to participate.

Assumptions:
1. The employee was qualified to participate.
2. His or her final average compensation was $50,000.
3. He or she had 25 years of service.
4. He or she selected the highest benefit option.
5. He or she agreed to participate for five years.

$50,000 final average compensation
$25,000 benefit (50% at 25 years)
x 5 years
= $125,000 deposited into DROP account
+$5,000 interest earned (estimated)
+$12,500 member contribution during five-year period
+$400 interest earned on contributions (estimated)
= $142,900 Lump-sum payment

The example above should not be considered as an exact indication of what a person similarly situated would receive under the DROP option. A careful reading of the act reveals that there are numerous conditions and circumstances that would affect the outcome of participation. But the example is at least a good indication.

In short, the individual in this example continued to receive his or her compensation during the DROP period and set up a considerable retirement nest egg in the amount of about $143,000.00.

Only time will reveal whether or not the DROP option produces the desired results. If it does not, the legislature will no doubt be lead to try something else.