A report released today by The Pew Charitable Trusts and the Economy League of Greater Philadelphia finds Philadelphia's pension and health care costs for city employees increasing at a much faster rate than the city's revenue. The amount of money the city pays to cover pension obligations and health care benefits for current and retired city employees is projected to rise to more than $1 billion or roughly 28 percent of the city's budget by 2012. This is an increase from 16 percent ($403 million) in 1998. “Philadelphia's Quiet Crisis: The Rising Cost of Employee Benefits,” by consultants Katherine Barrett and Richard Greene, examines these budget items in detail and describes how Philadelphia's situation compares with other cities. The report also offers policy options that could help moderate future costs, as well as increase transparency and accountability in how these benefits are managed.
“The ‘quiet crisis' of Philadelphia's mounting employee pension and health care costs threatens to drain the resources needed to tackle other problems facing the city,” said Donald Kimelman, managing director of Pew's Information and Civic Initiatives. “While there are no quick and easy solutions, there are fiscally responsible steps the city can take today to ameliorate the problem while remaining fair to municipal workers.”
According to the study, Philadelphia's pension obligations are only 52 percent funded, one of the lowest levels in the country, and much lower than the 80 percent level that is considered healthy by most experts. Lapses in contributions to the pension fund in the 1970s and 1980s, combined with lower-than-expected returns on investments, have caused the city's unfunded pension liability to increase to $3.9 billion, or nearly half of its $8 billion future pension obligation. With repayment on bonds issued in 1999 and other expenses factored in, total annual pension obligation costs are projected to rise from $252 million in 1998 to $613 million in 2012.
The city's health insurance expenses are also significant. Total costs rose 80 percent from fiscal year 2002 to fiscal year 2007, and another increase this fiscal year brings this expense to $374 million or nearly 10 percent of the city's total budget. Philadelphia pays more per capita than nearly any other city in the nation, and that amount has increased by 33 percent in the past two years alone—to an average of $13,030 per person this year. By comparison, the Bureau of Labor Statistics reports that the average cost for state and local government health care coverage is currently $9,082 per capita while for private sector in the mid-Atlantic region it is $4,292. Philadelphia's health care benefits are costing the city approximately $113 million more than if the expenses were in line with state/local government averages.
“Addressing the challenges of pension and healthcare costs is essential to being able to provide world-class municipal services at an affordable price to taxpayers,” said Steven Wray, executive director of the Economy League of Greater Philadelphia. “‘Philadelphia's Quiet Crisis' presents the facts and policy options that the city management and workforce need to consider in order to work collaboratively to provide the best possible outcome for Philadelphia and its citizens.”
The report enumerates a number of other key findings that impact costs and make Philadelphia stand apart from other cities:
Health Care Benefits
“Philadelphia's Quiet Crisis” suggests a number of actions the city could take to confront the rising costs of municipal benefits and increase accountability and transparency in the systems. According to the authors, Philadelphia should consider the following ideas:
How the Study was Conducted
As a starting point for “Philadelphia's Quiet Crisis,” Barrett and Greene used information from their recent research for the Pew Center on the State's report “Promises with a Price: Public Sector Retirement Benefits,” which explored pension and other post-employment benefit costs in the 50 states. They also drew on comparative databases of information on city and county pension funds and summaries of Pennsylvania's local pensions from the Pennsylvania Public Employee Retirement Study Commission. A team of researchers at Philadelphia-based Econsult analyzed the numbers to evaluate Philadelphia's health benefits and pension systems relative to nine comparison cities: Atlanta, Baltimore, Boston, Chicago, Denver, Detroit, Phoenix, Pittsburgh and San Francisco. Econsult obtained data from each city's comprehensive annual financial reports, as well as information from Philadelphia's recent Five-Year Financial Plans.
The team also interviewed a number of local and national employee benefits and municipal finance experts. An effort was made to reach out to the presidents of Philadelphia's four municipal unions, as well as the executive director of the city's pension system, but all declined to be interviewed for this study.
The Pew Charitable Trusts is driven by the power of knowledge to solve today's most challenging problems. Pew applies a rigorous, analytical approach to improve public policy, inform the public and stimulate civic life. We partner with a diverse range of donors, public and private organizations and concerned citizens who share our commitment to fact-based solutions and goal-driven investments to improve society.
About the Economy League
The Economy League of Greater Philadelphia is an independent, nonpartisan, nonprofit organization dedicated to research and analysis of the region's resources and challenges with the goal of promoting sound public policy and increasing the region's prosperity. The Economy League of Greater Philadelphia is an affiliate of the Pennsylvania Economy League headquartered in Harrisburg, PA.
To request a hard copy of the report, available in early February, please e-mail email@example.com.