Philadelphia’s Quiet Crisis: The Rising Cost of Employee Benefits

Jan 23, 2008

When Philadelphia’s then mayor Ed Rendell took office in January, 1992, the city was nearly bankrupt: in September 1990, a proposed $375 million municipal bond market financing was rejected by investors. In fiscal year 1991, the city’s cumulative deficit had reached more than $150 million, approximately 8 percent of general fund revenues; and the city had stopped making payments to its pension fund. Over the next year, Rendell eliminated 1,500 jobs, which equates to about one out of 14 city workers, and began to contract out many services. He also took a hard line negotiating with the city’s unions, offering them a contract that would freeze pay for three years and cut benefits, including the number of paid holidays employees received.

Sixteen years later, as a new mayor, Michael A. Nutter, assumes office, Philadelphia has emerged from that crisis and currently enjoys budget surpluses. Revenue growth has held steady, despite decreases in wage and business taxes that were designed to put the city on a path to greater economic competitiveness.

Yet despite these improvements, trouble remains. Philadelphia’s tax burden is still the second highest in the country behind New York City. Its poverty rate is a crippling 25 percent, and only 20 percent of its residents possess a college degree. The city budget tells the story of more and more money each year going into police and prisons as well as services to the city’s most needy residents. Last year, a troubling study revealed that nearly 40 percent of students in Philadelphia’s public high schools drop out. And the number of city jobs dropped by 3.4 percent between 2000 and 2007.

Moreover, even as the city’s revenues have increased over the past eight years from $2.8 billion in 2001 to nearly $4 billion projected in 2009, the amount of money that the city pays into its employee pension fund, towards pension obligation bond debt repayment and for health care benefits has increased at even higher rates. In 1998, these three budget items cost $403 million, or 16 percent, of the city budget. By fiscal year 2005, they increased to $650 million or 19 percent. Unchecked, by 2012, these costs are projected to rise to 28 percent of the city’s budget.

The growth in these costs has been little noticed by members of the general public, who understandably focus more on whether their garbage gets picked up, enough police are patrolling their neighborhoods and whether their recreation centers and libraries are open. Soon, however, the city will need to come to grips with the effect that the costs of these benefits have on its ability to pick up that garbage, pay for those police and buy new books for those libraries. Benefit costs will also make it far more difficult to further reduce the city’s tax burden. This report, commissioned by The Pew Charitable Trusts and the Economy League of Greater Philadelphia, is meant to illuminate this “quiet crisis.” What is the extent of the problem? How does Philadelphia’s situation compare to other cities? And finally, what policy options exist to decrease projected costs, while remaining fair to the city’s employees?

This report was released by Pew prior to the existence of the Philadelphia Research Initiative.

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