In Philadelphia, a 'Quiet Crisis' (Spring 2008 Trust Magazine briefing)

Source Organization: The Pew Charitable Trusts

Author: Sandra Salmans

04/30/2008 - Disturbing as the national pensions picture is, it looks even grimmer for the City of Philadelphia. That is the conclusion of Philadelphia's Quiet Crisis: The Rising Cost of Employee Benefits by Katherine Barrett and Richard Greene, the consultants who also conducted the 50-state study.

The report, supported by the Economy League of Greater Philadelphia and Pew, found that Philadelphia’s pension and health care costs for city employees are rising 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 rose to $650 million in fiscal 2005—19 percent of the city budget—from $403 million in 1998. Unchecked, by 2012 these costs will rise to 28 percent.

The situation “threatens to drain the resources needed to tackle other problems facing the city,” says Donald Kimelman, managing director of Pew’s Information Initiatives and the Philadelphia Program.

Moreover, much of that obligation is unfunded. Partly because the city, encouraged by optimistic earnings assumptions, paid little or nothing into the pension fund in the 1970s and 1980s, the city’s unfunded liability rose to $3.9 billion, or nearly half of its $8-billion future pension obligation—one of the lowest levels in the country.

The report also compared Philadelphia to nine other cities and found that its funding level was the second lowest; only Pittsburgh was lower. Five of the other cities achieved a desirable 85 percent funding level; three were at 90 percent or more.

Other key findings:

  • The number of pension recipients is now higher than the number of active workers—33,907 claimants in 2006 versus 28,701 employees. That gap will increase in the coming years as more city workers reach retirement age.
  • The average annual city pension ranges from $29,000 for municipal employees to $42,000 for firefighters, comparable to that in other cities. However, Philadelphia’s employees contribute less of their own money into the pension fund than those in other cities.
  • On a per-capita basis, Philadelphia pays more for health care benefits 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, or nearly 10 percent of the city’s total budget. That is triple the average in the region’s private sector and well above the average for state and local governments.
The report also featured a number of recommendations for ways the city could lower benefit costs. These included: increasing employee contributions to pension plans; auditing the pension plan; reexamining the city’s Deferred Retirement Option Plan, which allows employees to accumulate retirement benefits while they continue in their jobs; increasing copays for health care; and changing practices to give the city more control over health-care spending.

Shortly after the release of the report, the new mayor of Philadelphia, Michael A. Nutter, proposed floating a $4.5-billion pension-obligation bond to deal with the problem. Under the plan being considered—the largest bond issue in city history—proceeds would be used to shrink the pension fund’s unfunded liability from 49 percent to 5 percent. At the same time, the bond would enable the city to reduce its annual pension costs by taking advantage of current low interest rates. The bond plan would also generate $10 million a year for the city to move new civil-service-exempt employees into a defined-contribution plan.

Bond issues are “tricky, as you’re taking on an additional liability,” warns Alicia H. Munnell, Ph.D., a retirement specialist at Boston College.

Still, “if structured properly, it could dramatically improve the health of the pension fund,” says Uri Monson, acting executive director of the Pennsylvania Intergovernmental Cooperation Authority, the state agency that monitors city spending.

“While there are no quick and easy solutions,” notes Pew’s Kimelman, “there are fiscally responsible steps the city can take today to ameliorate the problem while remaining fair to municipal workers.”

Read the report, Philadelphia’s Quiet Crisis: The Rising Cost of Employee Benefits.

Read a related 50-state report released by the Pew Center on the States, Promises with a Price.

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