Pension proposal a big test

Of Philadelphia's many fiscal challenges, none is larger - or more complicated - than the woeful state of the city's pension fund.

Past mayors and City Councils have for the most part kicked the problem down the road, leaving it to the next guy.

Now, Mayor Nutter is the next guy.

Yesterday, he presented a budget that, if approved, would provide short-term fiscal relief from the city's pension obligations and save hundreds of millions of dollars in the decades ahead.

The problems, he said, cannot be ignored any longer.

The mayhem on Wall Street is expected to drain the $4.6 billion fund of 30 percent of its value by June 30. The depleted pension pot is now so small that it covers less than half of its total future obligations to city retirees, making it one of the most poorly stocked reserves in the nation. By law, the city must make up the difference, an obligation that is taking a $461 million bite out of the general fund this fiscal year alone.

"We must all acknowledge that today's system is the sum of decisions that date back almost 35 years," Nutter said in his address. "But we now have an opportunity to chart a course for fiscal health in the next 20 years."

To do that, Nutter proposes:

Reducing benefits for all new city workers by moving them into a hybrid plan that combines more modest guaranteed benefits with a public-sector version of a 401(k). Workers already vested in the city's pension plan would be exempt.

Requiring all city workers, vested or not, to increase their contributions to the pension plan.

Winning approval from the legislature to stretch the city's payments into the pension fund over a longer period, freeing up about $330 million in the next five years.

"This is the most comprehensive approach we've seen to the problem. He is trying to correct the imbalance between contribution levels and benefit levels," said Uri Monson, executive director of the Pennsylvania Intergovernmental Cooperation Authority, the state agency with veto authority over the city's long-term fiscal planning.

The mayor's plan, though, is as controversial as it is comprehensive. It is far from a sure thing.

"It's a fairy tale. It's predicated on givebacks. None of this is in stone," said Bill Rubin, an elected representative of AFSCME District Council 33 - Philadelphia's largest union - and vice chairman of the city Board of Pensions and Retirement.

Many of Nutter's proposals, Rubin said, were completely unexpected.

One element, in particular, is already raising union hackles: Nutter's plan to have the pension fund officially labeled "distressed" by a state agency called the Public Employee Retirement Commission (PERC).

"It's war," said Brian McBride, president of Local 22 of the International Association of Fire Fighters.

The step is controversial because it would give the administration the authority to devise a new, less expensive retirement plan without negotiating with city unions.

But that goes only so far, said James L. McAneny, executive director of PERC.

"They may be able to put a revised plan into effect and do bargaining afterward, but they have to bargain eventually," he said. "There's nothing in the law about this process that alters the bargaining relationship between employers and municipal employees."

The city tried something similar in 1987, splitting city workers into two categories and giving lesser pension benefits to employees hired after the plan was adopted. But like every other condition of employment, that plan was subject to eventual union negotiations.

For all the attention Nutter's pension proposals are likely to attract, city officials acknowledge they have little bearing on the current deficit.

"It's fair to say the immediate budget impact is modest," said Finance Director Rob Dubow. "But these are very, very important in the long term."

In his address, Nutter said his proposals could save $600 million over 30 years. But Dubow said it was too soon to put a firm figure on potential savings.

More immediate budget relief could come from less controversial pension reforms proposed earlier by Nutter and City Controller Alan Butkovitz. If the legislature acquiesces, actuarial changes to the fund would spread out the impact of market gains and losses, thus freeing up an estimated $330 million over the next five years.

Union leaders have already endorsed that measure.