City pension fund in trouble; Nutter, unions at odds over a solution
January 15, 2013By Dave Davies
A new study of public employee retirement costs by the Pew Charitable Trusts finds that Philadelphia's pension fund is among the nation's most troubled. This is hardly news to anybody at City Hall.
What's more interesting is what -- if anything -- is being done about it. It's clear the administration of Mayor Michael Nutter is moving to make changes, and not getting very far yet.
The city pension fund's history is littered with relatively generous promises to retirees and sad failures to fund those benefits. Thus, the plan has a mammoth unfunded liability -- a huge, ugly boil on the city's fiscal image and a real threat to current and future citizens.
I asked city finance director Rob Dubow, one of the most unflappable officials you'll ever meet, to paint a nightmare scenario of what the pension problem could do.
"In some ways," he said, "we're partly already into nightmare already, because the increasing pension costs squeeze more and more out of our budget."
The numbers bear this out. In 2000, the city was putting a little over $150 million a year into the pension fund. Now we're looking at years of required payments of $500 million or more.
The Nutter administration's proposal to take things in a new direction is Plan 10, a completely different kind of retirement program it hopes to steer new employees into.
Brave New World
The traditional city plans promised a defined benefit for retiring city workers based on their length of service and final pay. The city guarantees those payments for the life of the retiree, whatever the cost.
Plan 10 instead offers workers a city match for individual retirement savings in a 401(k)-type plan, and a much more modest defined benefit plan.
How much more modest? One difference is how much of a pension a long-serving employee could accumulate. Under the old plans, depending on the union, an employee could qualify for 100 percent of final pay. That's unusual, but many would retire with more than 50 percent of what they were making. (It's important to remember that those payments, once established are fixed -- they don't adjust for inflation.)
Under the Nutter plan, those days are over.
Police and firefighters could accumulate no more than 35 percent of their final pay. Civilian employees would be capped at 25 percent.
They'd have to contribute more from their paychecks to get those benefits, and to have any kind of reasonable nest egg, they'd have to be disciplined about participating in the voluntary savings plan. It clearly gives long-term employees less, and costs future taxpayers less.
Plan 10 is already available as an option to newly hired police and firefighters, but so far not a single recruit has enrolled. They've chosen instead to pay more for the traditional defined benefit plan.
The plan applies to limited numbers of other city employees. A total of three are enrolled.
The move in City Council
Nutter has sent a bill to City Council, which would make the new, leaner plan mandatory for several thousand city employees, including those not represented by unions. But in an unusual move, Council President Darrell Clarke has declined to even introduce the measure
Clarke told reporters last fall Council members had concerns about imposing the new retirement plan on so many employees.
"Traditionally, those particular issues are resolved at the bargaining table," Clarke said. "We have to analyze it thoroughly. We're not normally in the process of negotiating contracts with workers."
Council engaged its own consultant, Bolton Partners, to examine Plan 10, which the administration envisions applying to elected officials also. Bolton's report has just been completed, but isn't yet public.
The city's two largest civilian unions have been working without a new contract for nearly four years. They oppose any pension changes and, while Nutter's bill wouldn't affect them directly, they fear it would set a troubling precedent.
Council members appear reluctant to even consider Nutter's bill until the civilian unions resolve their contract dispute with the administration. So while the pension fund remains woefully underfunded, there's little prospect of movement on Nutter's plan in the near future.
There is one other big idea city officials can at least dream about. Nutter's offering PGW, the city-owned gas utility, up for sale. If he could clear a billion dollars and pop that into the pension fund, it would take a hefty bite out of the liability. It's not out of the question, but nobody's counting on it.
A closing note: The Pew report on retirement costs said that, in addition to struggling pension funds, many cities including Philadelphia have failed to set aside funds to pay for health benefits promised to retirees.
Dubow noted that unionized Philadelphia workers are entitled to five years of health benefits when they retire, and since the city prepares a five-year financial plan that's reviewed by a state oversight authority every year, those costs are accounted for.
You can read the Pew report on retirement costs here.