New city pension strategy could ease budget

Philadelphia could save $172 million over five years with a strategy to reduce payments into the city pension fund, Mayor Nutter and City Controller Alan Butkovitz said yesterday morning.

The proposal would allow the chronically underfunded pension to spread investment losses over a longer period of time. It would also give the city more time to close the gap between the estimated $3.6 billion value of its pension investments and the projected $8.8 billion pension payments it must make.

"It's like remortgaging your house" and stretching out payments to conserve cash in the short run, though it costs more overall, Butkovitz said.

Butkovitz and Nutter said their proposal would help battle the city's projected $1 billion budget deficit over the next five years.

"We've got to shrink the amount that we're paying in the near term, stabilize the fund, stretch out our payments," Nutter said, "because our pension costs are literally eating our budget alive."

The changes, spreading gains and losses on investments over 10 years instead of the current five and lengthening the payment period for the pension deficit to 40 years from 20 years, require state legislation.

Those are good short-term moves, but they do nothing to address the pension's bigger problem - that too little is paid in relative to what is paid out in benefits, said Uri Monson, executive director of the Pennsylvania Intergovernmental Cooperation Authority, which oversees the city's long-term budgeting.

"All it's doing is buying them time to solve a problem that's been around for a long time," Monson said. "If you use it as an excuse not to solve the structural problems, then it's irrelevant."

Monson said, for example, that city employee-pension contributions of about 2 percent, depending on the union, were lower than in many other cities, while benefits were relatively high.

Nutter declined to discuss how the pension problem would play into coming union negotiations.

"They can't change the current structure of benefits for current employees and current retirees," said Ron Staglione, a retired police officer and pension board member. "They possibly could ask for higher contributions from current employees."

Al Schmidt, who resigned last month as executive director of the Republican City Committee and said yesterday that he planned to run for city controller, criticized the plan to stretch out payments for 40 years.

"There is no one currently working for city government who will be responsible for fulfilling that obligation," he said.

The pension board also said it would reduce the rate of return it assumed the pension's assets would earn. The current assumption is 8.75 percent, which is higher than most public pension funds, Butkovitz said. The higher assumed rate allowed the city to contribute less to the fund.

The new assumed rate is 8.25 percent, though its adoption is contingent on the legislature's approving the other changes. Changing the assumed rate alone, Butkovitz said, would boost the city's already bloated five-year deficit as much as $350 million.