Nutter proposes pension changes

Mayor Nutter mounted a three-pronged assault on the city's fast-growing pension costs yesterday, ordering a new study of the controversial DROP program and sending two bills to City Council that would limit some pension benefits for retirees and soon-to-retire workers.

The Deferred Retirement Option Plan - a favorite target of City Hall critics - lets city workers sock away pension payments while still on the job and earn a guaranteed annual return on their nest eggs of 4.5 percent.

One of the bills Nutter introduced yesterday would eliminate that guaranteed return, and instead peg it to the overall performance of the pension fund, which is invested in stocks and other assets that go up and down. Employees in the DROP program would get returns of up to just over 4 percent in good market years and zero in bear markets.

Nutter's other bill would all but eliminate cost-of-living increases for pensioners, abolishing a more generous policy adopted two years ago that has cost the city $65 million.

Although savings are difficult to predict because they depend, in part, on market performance, administration officials hope the measures would help shore up the long-term health of the pension fund. The fund has taken a beating this fiscal year with the stock market's collapse, losing about 30 percent of its value.

That has convinced Councilman Jim Kenney, who two years ago sponsored the legislation that made cost-of-living payments to pensioners possible, that the benefit needs to be rolled back.

"It's a different world now. We're in a situation where we need to preserve and protect the fund for the health of everyone going forward. This will help us do that," he said.

Although cost-of-living increases for pensioners would theoretically still be possible with Nutter's legislation, "for all practical purposes this would abolish cost-of-living increases," said City Controller Alan Butkovitz, who by the City Charter is a member of the Board of Pensions and Retirement, which also includes four administration appointees and four union appointees.

The legislation establishes two hurdles. First, the pension fund's investments would have to get a relatively high annual return of at least 9.75 percent. Second - and this is the big one - the fund would have to be funded at a minimum of 76 percent, a rate not reached since 1999.

Today, the fund is large enough to cover only about 50 percent of its liabilities. The city is obligated to make up the difference each year through huge and rapidly growing payments to the fund.

"It is unreasonable to expect the fund to pay out extra money when it's only 50 percent funded," said Uri Monson, executive director of the Pennsylvania Intergovernmental Cooperation Authority, which oversees the city budget.

Bill Rubin, acting supervisor of elections and the union-appointed vice chairman of the Board of Pensions and Retirement, warned that by moving aggressively on three pension fronts at once, Nutter risked creating a mass exodus of city employees into the DROP program and into retirement before conditions changed. That would leave the city short of workers without the cash to hire and train replacements, Rubin said.

"What you're going to do is create a panic environment by all of their legislation, when any employee who feels like his or her future is unstable or insecure will elect to get out," Rubin said. "And this in an environment where the city has done no succession planning and will be unable to serve the citizens of the city."

Nutter Finance Director Rob Dubow said he thought those fears were overstated.

"What we're talking about is a way of guaranteeing that the fund stays healthy enough to provide benefits for everybody," Dubow said.

He also warned against presuming that the DROP study would conclude that the program should be abolished.

In January, The Inquirer documented the murky fiscal impact and management of DROP. At the time, Nutter promised to hire a consultant to study the program.