What is DROP?
The Deferred Retirement Option Program (DROP) lets you retire on paper while still working. Your pension is "frozen" the day you enter DROP — you stop accruing additional service credit, and your AFC is locked in. Each month, your pension benefit is deposited into a DROP account that earns interest. When you terminate employment (up to 96 months later), you receive the accumulated lump sum and begin collecting your monthly pension.
Who can enter DROP?
Special Risk Class members can enter DROP once they meet normal retirement criteria — age 55 with sufficient service, or 25/30 years of service regardless of age. As of 2023 legislation, the prior 12-month entry window has been eliminated, giving members more flexibility on when to enter.
How does the lump sum grow?
Your monthly pension is deposited into the DROP account each month and earns interest at an effective annual rate. For pre-2011 enrollees, the rate is 6.5%. For post-2011 enrollees, the rate was raised from 1.3% to 4.0% effective 7/1/2023. Interest is compounded monthly, so a 60-month DROP at $5,000/month with a 4% annual rate accumulates to roughly $331,000.
Does COLA apply during DROP?
Yes — but only on the portion of service earned before July 1, 2011. The COLA formula prorates: (pre-2011 years / total years) × 3%. A member with all pre-2011 service receives a full 3% COLA each July 1 during DROP. A member with no pre-2011 service receives no COLA during DROP. Effective 7/1/2026, SB 7028 establishes a 1.5% minimum COLA for eligible Special Risk retirees.
What are the trade-offs?
Entering DROP locks in your pension at the entry date — you stop earning the 3% multiplier on additional years of service and your AFC stops growing with future raises. The "value" of DROP comes from the lump sum and from continuing to receive a salary while your pension accumulates. Whether DROP makes sense for any individual depends on factors only that person and their financial advisor can weigh: career plans, retirement timing, lump-sum tax treatment, expected investment returns, and family circumstances.
What happens to the lump sum at termination?
At DROP termination, you can take the lump sum as cash (subject to federal income tax) or roll it into a qualified retirement account such as a 457(b), traditional IRA, or other eligible plan. Rolling over defers the tax until withdrawal. Receiving it as cash adds the entire amount to your taxable income for that year, potentially pushing you into higher federal tax brackets.