Pew Report Documents Challenges Faced by Philadelphia in Paying for City Workers' Pensions and Health Care

A new study by The Pew Charitable Trusts' Philadelphia Research Initiative reports that Philadelphia's city pension fund now has less than half the money it needs to make good on its obligation to past and current city workers. The fund has not been this severely underfunded since 1996, and there is little prospect that the picture will brighten appreciably in the next few years.

The report, Quiet No More: Philadelphia Confronts the Cost of Employee Benefits, looks at the finances of pensions and health care for city workers at a time when the two topics are front and center both in Harrisburg and in City Hall. In the state legislature, the city is seeking approval of a plan that would help balance its budget over the next several years by delaying some contributions to the pension fund. In Philadelphia, contracts expire June 30 for the four unions representing city workers, and both pensions and health care are key issues in the renewal talks.

“Quiet No More paints the background against which the events in Philadelphia and Harrisburg will be played out—and lays out what is at stake,” says Larry Eichel, director of Pew's Philadelphia Research Initiative. “The outcome of these proposals and negotiations will be pivotal for the city's fiscal future, for the workers and retirees who rely on these benefits and for the taxpayers who foot the bill.”

If the city gets approval from the legislature, Philadelphia's total general-fund spending on pensions and health care, now at $830 million, is set to decline over the next two years before rising dramatically. By 2013, costs for the two items will approach $1.1 billion, including over $700 million in pension-related payments alone. At that point, all payments related to pensions and health care would represent more than one-quarter of the city's $4 billion, general-fund budget.

This cost figure of nearly $1.1 billion, drawn from city budget documents, is based on the assumption—made by budget officials—that the city's health care costs will remain virtually unchanged for the next five years. If that assumption turns out to be wrong, the number could go higher.

Mayor Michael Nutter has said that the city needs to save a total of $25 million per year in benefit costs in new contracts with the municipal unions. Without these savings, he has said, there will be layoffs and additional service cuts. Union leaders have said that they are not interested in reductions in pay or benefits.

Quiet No More is a follow-up to Philadelphia's Quiet Crisis: The Rising Cost of Employee Benefits, a study published in January 2008 by Pew and the Economy League of Greater Philadelphia. As in the first study, the new report examines how Philadelphia's situation compares in some ways with other cities, including Atlanta, Baltimore, Boston, Chicago, Denver, Detroit, Phoenix, Pittsburgh and San Francisco. 

Pensions
The pension situation has grown worse since Pew's previous study, the result primarily of the fall in the stock market. Exactly how far below 50 percent the funding level has slipped—it stood at 55 percent a year ago—will become apparent in the coming months, when the city is required to make its annual report on the status of the fund.  As of March 31, the market value of the fund's holdings had shrunk by 30 percent—from $4.66 billion to $3.26 billion—over 12 months.

Although a sustained rally on Wall Street would improve the picture, city officials are projecting that the funding ratio in the pension fund will remain below 50 percent at least through 2013. Over the years, the city has not put enough money into the pension fund to pay for the benefits it has promised its workers. That history of underpayment had put the fund in worse shape than most others even before the market crashed.

Cities across the country have seen similar drops in pension-fund values; Pittsburgh is one of the few major cities whose pension funds are more-severely underfunded than Philadelphia's. And various state and local governments are trying to figure out how to reduce pensions costs moving forward. In New York State, Gov. David Paterson, in exchange for scrapping proposed layoffs, got unions to agree to a new pension plan for future workers, one with higher employee contributions and a later retirement age. The new system will apply to state workers and local-government workers except in New York City.

Quiet No More examines the restructuring ideas being discussed to respond to Philadelphia's rising costs. In Pennsylvania, the state Public Employee Retirement Commission has offered a little-noticed proposal that calls for a partial but permanent state takeover of every distressed municipal pension fund in the commonwealth, including Philadelphia's. There are about 75 of those funds. The takeover would remove pensions from the collective bargaining process and leave the setting of pension benefits to state officials.

Earlier this month, the city administration introduced a bill in City Council to create a new pension plan for future hires that would lower guaranteed benefits and would have some of the characteristics of a 401(k) plan. 

Health Care Benefits
Since the publication of Philadelphia's Quiet Crisis, the city's annual health care costs have declined on a year-to-year basis. That is because costs for firefighters and police officers fell in fiscal year 2009 after having been abnormally high in 2008—the result of one-time payments to settle arbitration disputes—and costs for other unionized workers stayed the same. Even so, health care costs paid by the city were 11 percent higher in the year ending June 30 than they were two years ago, and 45 percent higher than five years ago. Those increases are higher than the rise in city spending as a whole, but comparable to long-term national trends for health care costs.

Quiet No More looks at the significant differences between Philadelphia's health benefits system and those of other cities. One factor in the city's cost structure is that the vast majority of unionized workers do not help pay for insurance premiums through their paychecks; payroll deductions for health care are common in other cities, with the percentages paid by municipal employees in those cases often in the single-digits and teens. At the same time, Philadelphia city workers get less in retirement health care benefits than their counterparts in many other cities.

Representatives of several of the public-employee unions in Philadelphia who were contacted for the report say that their independent health and welfare funds—which manage health care for members—have been able to avoid payroll deductions through cost-containment programs. In addition, they say, the level of benefits should be viewed in the context of total compensation. While comparisons are difficult, total compensation for Philadelphia's city employees appears to be roughly in line with the average of state and local governments nationwide.

A year ago, the city and its four unions—AFSCME District Councils 33 and 47, the Fraternal Order of Police, Lodge 5, and Local 22 of the International Association of Fire Fighters—agreed to create a joint
labor-management committee to study, discuss and release recommendations on best practices to contain health-care costs. The committee has not released any findings to date.

About the Report
To prepare this report, researchers at Pew's Philadelphia Research Initiative spent two months studying city documents, interviewing city officials, communicating with union representatives, and talking to independent analysts. It was written by Thomas Ginsberg, project manager at the Initiative, and research associate Laura Horwitz.

About The Philadelphia Research Initiative
The Philadelphia Research Initiative (www.pewtrusts.org/philaresearch) was created by Pew in fall 2008 to study critical issues facing Philadelphia and provide impartial research and analysis for the benefit of decision makers, the news media and the public. The initiative conducts public opinion polling, produces in-depth reports, and publishes briefs that illuminate front-and-center issues.