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Philly’s 13th Check

Thanks to a Jim Kenney bill, we’re paying out bonuses we can’t afford. Let the pandering begin.

Philly’s 13th Check

Thanks to a Jim Kenney bill, we’re paying out bonuses we can’t afford. Let the pandering begin.

 

Nowak
Nowak

Much of the debate about Philadelphia’s looming pension fund crisis centers on the municipal funds for city employees, including police and firefighters. But the same problems exist for the state school pension fund.

The big difference, of course, is that funding issues that plague school pensions bleed directly into the classroom.

As I detailed two weeks ago in a column for The Citizen, if we do not fix municipal pensions there will be less money for public services. Likewise, if we do not fix the state school pension problem, less money will be available for the classroom. That is why we need a good deal around school funding and pension fund reform.

The condition of the pension funds is not a matter for debate; it’s a matter of simple measurement. A higher proportion of the general fund and school district budget goes to pension fund costs today than in previous years.

We can certainly debate how we got here, a story of willful political neglect on both sides of the aisle. But the situation is what it is.

No matter how bad the pension fund’s financial position, it’s bonus time in Philadelphia. While Jim Kenney is in full pander mode, Detroit offers a cautionary tale.

The trend will continue unless we do something. When something does not work, it eventually breaks down. Therefore we should fix pensions without abrogating the contractual relationships with current workers and retirees. But to do so we have to act and not pretend.

That is why the current pension fund quarrel between Mayor Nutter and Mayoral candidate Jim Kenney is so disturbing. Mayor Nutter is thinking about long term sustainability and candidate Kenney is in full pander mode.

In case you missed the latest, as Chris Hepp detailed in the Inquirer and on philly.com, the city’s pension funds are going to provide bonuses to retirees this year based on a cost of living adjustment rule linked to the fund beating its investment hurdles over a five year period. The bonuses will be around $60 million.

Fair enough. Except the original rule from 1999 sensibly noted that the pension fund could only do so if it had a funded ratio of about 76 percent—and we are at around 48 percent now. That rule was changed by legislation in 2007 through a bill introduced by Councilman Kenney.

So today, no matter how bad the pension fund’s financial position, it is bonus time. Both Mayors Street and Nutter (who did not always see eye to eye) viewed the 2007 legislation as fiscally irresponsible. Street said so at the time and Nutter continues to say so today. When they agree, we should listen carefully.

As is so common with fiscal irresponsibility, it hides behind beneficence for one group (in this case retirees) but always at the expense of many others. Sadly, Kenney is doing what you would expect in this case; having his spokesperson say that they do not want to solve the pension crisis on the backs of seniors.

Huh? Get a grip! If we don’t act responsibly, retirees will not have a sustainable retirement fund. The very least you could do is say it seemed like a good idea at the time and we should follow through, but we need to take another look at it in light of the overall fiscal situation. Is that too hard?

Big city politicians are masters at transforming moral indignation into fiscal road kill. The exceptions, including Mayor Nutter, are intensely disliked by constituencies that are prone to demagoguery. But ultimately those who appreciate the bigger picture respect them.

As for the bonuses, you can make the case that the rule is the rule and there is an obligation to fund. That is right, as far as it goes. But to show no understanding of the implications of these actions is a very bad sign.

In 2013, the Detroit Free Press ran a series of articles that detailed the historical decisions and circumstances that led to the largest municipal bankruptcy in American history. It should be required reading for anyone who cares about cities.

Among the findings in that study was the cost of the so-called 13th check, a pension bonus that was provided when the fund performed well. It turns out that between 1985 and 2008 the bonuses amounted to nearly $1 billion. Had the same money been reinvested in the pension fund it would have resulted in a gain of from $1.5 to $1.9 billion to the fund, depending on whose calculations you use.

As the pension fund was going south, Mayor Kwame Kilpatrick borrowed an additional $1.4 billion to shore up the fund. You see where this is going. Borrowing money against an existing liability (one credit card paying down the next) is a common practice.

In the pension fund world there is a name for this: pension obligation bonds. And sometimes it works. Sometimes it does not, as we found out with several small cities in California that declared bankruptcy.

All of the justifications in Detroit for the 13th check were related to annual investment performance and the very real reality that most pensioners were struggling to get by. But the bonuses were not connected to the overall health of the fund itself, or the level of unfunded liabilities, or the capacity of the city to use other assets to plug the hole. Now that we’re going through a similar bonus mania, the Detroit story should hit home as a cautionary tale.

Philadelphia faces three key financial challenges: school finance, pensions, and tax reform. They are each related to the other and it will take a concerted effort by the next mayor, working with City Council, to tackle all three issues.

We ultimately will need a governing coalition that can get to work on a long-term vision for the city. Otherwise we squander the current growth spurt the city is experiencing.

Next week, let’s talk tax policy.

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