The Crisis No One Is Talking About

Hey, next mayor: If we don’t fix the pension system, we betray both retirees and residents

The Crisis No One Is Talking About

Hey, next mayor: If we don’t fix the pension system, we betray both retirees and residents


In Philadelphia we elect mayors for eight years. That has been the case most of the last half-century.  It is true that William Green decided not to run for reelection in 1983, but that was the exception to the rule.

So it is likely that the winner of the Democratic primary in May will be Mayor in 2022.  (Philadelphians don’t elect Republicans for mayor.)

But the city faces a host of structural problems – from school finances to taxes to aging infrastructure – that cannot wait eight years for a solution.  So let’s elect a mayor who can get stuff done now.

Mayor Nutter wanted to act on a few big things, but was unable to get Council to support virtually any of his ideas.

For now, it would help if we had a relatively pander proof primary and general election. This is hard to do because the primary is generally about the arithmetic of turnout and not about ideas.  But it does not have to be this way.

Citizens, editorial boards, newscasters, and civic and business groups have to force the issue by focusing on the fiscal issues that undergird our capacity to pay for government.   There are a lot of components to this: our tax system; our ability to effectively collect taxes; the way we budget; operating efficiencies; union contracts, and Harrisburg.

But let’s start with an unglamorous, but very important one: municipal pension funds.

A short time ago the Pennsylvania Intergovernmental Cooperation Authority (PICA), released a detailed report on the state of the city’s pension funds. It is the finest report on the subject in a very long time.

The report drives home the central issue of our fiscal future, and proves that we are in a quiet crisis. In order to maintain pension funds that have been poorly managed and inadequately funded in the past, we are eating away at the city’s general fund at an alarming rate.

The less money we have for the general fund, the less money we have for schools, parks, libraries, recreation centers and social services.

The PICA report notes several startling facts.

First, the funded ratio of the system (2013 numbers) has declined to about 47% down from 76% in 1999. Investment firms, bond rating agencies, and actuarial analysts generally view funding levels that are under 70% as a sign of distress. If it were not for Chicago, Philadelphia’s funds would rank as the nation’s worst among municipal pensions.

Secondly, the cost of the system to the city budget is escalating dramatically. In 1991 pension fund contributions as a percentage of city payroll were at about 17 percent; today, that number has ballooned to 39 percent. In a few short decades the percentage of general fund spending that goes toward pension fund obligations moved from 6% to 18%, and yet the fund is still losing ground.

Third, the long-term math does not work. Thirty years ago city employees exceeded the number of beneficiaries by 13,000 but today the number of beneficiaries exceeds active workers by about 3,500. That leaves too few workers paying for too many retirees – a ratio that will only get worse.

The report does not blame or shortchange retired public workers. If anything there is a subtext here about how political leaders have avoided the problem by making assumptions that were not sustainable or deferring to short term expediency.

The report suggests changing how we structure retirement options for new employees (defined contribution versus defined benefit plans), eliminating DROP, gradually raising employee contributions through negotiations, changing actuarial assumptions, and identifying new revenue sources. (The Pew Charitable Trusts provides ongoing, comparative data on state and local pension funds and highlights steps that reform-minded governments are taking.)

The new revenue option is the tough political pill City Council just refused to swallow. The sale of PGW could have helped plug a hole in the deficit while we addressed longer-term structural changes. City Council failed to act, showing an unwillingness to address one of the drivers of a sustainable future.

The city’s problems are also exacerbated in the absence of state pension fund action. A 2011 Fordham Institute study on Milwaukee, Cleveland, and Philadelphia school district pensions made it clear that inaction would result in an escalating per pupil pension fund cost. Between 2011 and 2020 their projections have Philadelphia pension fund expenses escalating by about $1,900 per student.

If their projections are right, a state funding increase for schools may largely be eaten up by retirement benefits. Again there are fixes – both short and long term – that have to be debated and acted upon. But the state, too, has to act. The Republican legislature in Harrisburg will make pension reform one of their central bargaining chips with the new Governor.

The issue of underfunded pension funds is a national problem, but it is a ticking time bomb here. In Meredith Whitney’s Fate of the States, she observes that those states that have handled the issue best have a leg up in terms of economic development and job growth.

Yet some states and cities are acting. Who would have predicted that Rhode Island is leading the pack in pension reform? Gina Raimondo, the newly elected governor, has demonstrated real leadership by driving the fight first as state treasurer and now as chief executive.

Governor Raimondo, a Democrat, has exhibited the type of courage that is in short political supply. Rather than pander, she chose to educate and explain. Let’s see if we can find some candidates with the same mettle.

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