Phila.'s pension-funding crisis

The meltdown on Wall Street has aggravated the Philadelphia pension fund's already precarious situation, threatening to deepen the city's deficit.

This pension crisis could consume an enormous share of the city's revenue and jeopardize its ability to provide essential services.

The city's pension fund has shrunk from a balance of $4.7 billion in early 2008 to $3.6 billion today. After deducting payouts to current retirees, the pension fund lost 23 percent in 2008, and losses are expected to reach as much as 40 percent. The fund has, at best, 45 percent of what it needs to meet future obligations.

For the past seven years, Philadelphia has made either the minimum required contribution to the pension fund or slightly more, never achieving full funding. There is no incentive for the city to contribute more.

Since the city lacks the discipline to make substantial yearly contributions to the fund, even during strong economic times, it should be required to do so by law.

Philadelphia can and should use the pension fund as a sort of "rainy-day" fund. Such a fund is needed because cities and states, unlike the federal government, are required to balance their budgets. By using the pension fund as a rainy-day fund, we would be able to reduce the city's need to raise taxes during recessions.

Furthermore, because Philadelphia is not realizing its annual investment goals, we must now contribute an extra $35 million annually for the next 30 years. And, like other cities, we must also question whether we will earn target returns for the next 30 years.

By expecting a more realistic rate of return, we could put more money in safe investments, lowering the risk of losing principal. Most other municipal pension plans assumed a lower rate of return before the financial meltdown - and many are now looking at lowering their expectations further. Pittsburgh officials just voted to do so.

Lowering Philadelphia's rate of return would increase the city's five-year deficit. But that could be offset by state legislation allowing the city to amortize the unfunded liability over 40 years instead of the current 30. Pennsylvania has historically used this technique to manage contribution spikes caused by unexpectedly poor pension-fund performance.

There is no easy way out of this dilemma, such as borrowing. There are virtually no buyers for municipal bonds, and it's unlikely the city could issue bonds at a low enough interest rate to make borrowing worthwhile.

If the city had moved forward with a planned $3.5 billion bond issue to shore up the pension fund last summer, it would have lost $1.4 billion by now, triggering even higher contributions to the pension fund, on top of bond interest payments.

Should the city move forward on such a deal in the near future, as is expected, it's not clear whether it would yield gains in 2010 or 2011. That could add $100 million to the five-year deficit.

While some are calling for new city employees to be enrolled in 401(k) plans instead of the traditional pension system, that would not yield savings for at least 10 years due to existing obligations.

The city should consider structural changes to its pension system, including contributions by city employees. But as the recent Wall Street meltdown has demonstrated, we cannot and should not eliminate pension protection for workers.