City's pension 'reform' hits taxpayers, consumers

Pennsylvania Daily Life
City officials claim pension reform in new labor contracts. However, the numbers show most of the so-called reform comes from taxpayers and consumers.

The Kenney administration claimed victory on pension reform when it announced last month that it had signed a $245 million, three-year contract with the Fraternal Order of Police.

With that agreement, and one last year with AFSCME District Council 33, the city said it was in a position to fortify its beleaguered pension fund, which has less than half the $11 billion it has pledged to pay retirees.

But much of the so-called reform to stabilize the fund by 2030 is coming from Philadelphia taxpayers and consumers.

Taxpayers will be kicking upward of $600 million into the fund each year, with tens of millions of dollars more from sales tax revenue. Even with the increased contributions, the only way the city gets to 80 percent funded — a level considered stable — would be with a 7.7 percent annual return on investment, pension experts said.

“The consensus estimate is that stock and bond markets are unlikely to earn the assumed 7.7 percent return, so the funding will be much below what is projected,” said Olivia S. Mitchell, executive director of the Pension Research Council at the University of Pennsylvania.

The contracts with the police and blue collar workers unions affect about 15,000 employees and their families. With 28,000 employees contributing to the pension system and nearly 35,000 retirees and beneficiaries collecting benefits, the pacts and obligations can instantly shape the city’s financial situation.

Even before the new contracts, actuaries predicted two years ago that if the city obtained its assumed rate of return — 7.85 percent at the time — it would not reach its pension funding goal until 2031.

Last year, D.C. 33 agreed to increasing the employee contributions of workers with salaries of $45,000 or more in a group where the median salary is $40,955. The increases mean members pay between 3 percent and 6.14 percent of their pay to the fund, depending on their salaries. The city declined to give a dollar figure for the increased contributions.

D.C. 33 also agreed that all new employees will go into a hybrid pension plan, which would cap a traditional annual pension at $50,000 — with any additional money coming from a 401(k)-style account.

City officials said that if all city employees agreed to those pension changes, the pension fund would be 83 percent funded by 2031.

The FOP balked. New police officers won’t go into a hybrid plan. Instead, an arbitration panel agreed to increase their pension contributions by 2.5 percent for new employees and 1.84 percent for all current FOP city employees from the 5 percent or 6 percent of their pay they invest with the pension fund.

The Kenney administration predicted the FOP increases will generate $160 million more for the fund over 13 years and called it “pension reform.” That amount, however, represents less than 3 percent of its $6 billion deficit.

In addition, the contracts for both contracts included annual raises of about 3 percent for the next three years. Workers may also still receive the controversial DROP early retirement bonus and Pension Adjustment Fund bonuses, which are handed out whenever the fund averages 1 percent higher than the assumed rate of return for a 10-year period, and this year totaled $7.7 million.

Still, the city insists it will reach 80 percent by 2030.

City spokesman Mike Dunn said officials believe the plan is based on “sound actuarial analyses” and call it a “reasonable projection.” They declined to say what the analyses are or provide a copy, citing ongoing negotiations with the firefighter and white-collar labor unions.

The city has made similar projections before. In 2007, the pension fund was 54 percent funded, and the actuaries predicted that by 2019, it would reach 80 percent if it hit the then-assumed annual rate of return, 8.75. The recession hit and wiped out a lot of the fund’s money.

Dunn said the 2007 prediction is not a “very meaningful” example because “any projection from 10 years ago would have been ruined by the market collapse.”

Experts say that’s exactly the point: No one knows what the future will bring.

“The actual funding level will, of course, depend on whether full city contributions are made and how investments actually perform,” said Greg Mennis, director of the Pew Charitable Trusts Public Sector Retirement Systems division.

The Kenney administration has vowed to put the city’s minimum state-required payment into the fund each year — which could reach $800 million by 2026 — and pump sales tax revenue on top of that. The city projects that annual tax-revenue boost to grow from $41.6 million in 2019 to $130.3 million by 2036.

“More money is always better,” said Jean-Pierre Aubry, director of State and Local Research at the Center for Retirement Research at Boston College. “However, it is difficult to estimate how much of an improvement it will be without knowing how many new hires are expected to come in and replace current employees, and estimates for future payroll growth, etc.”

Those are numbers the city has been unwilling to give up  or acknowledge they exist.

A one-page summary sheet of its pension reform plan suggests obligations will rise by only $1.1 billion in the next 13 years, creating a sufficient cushion. But in an identical span through 2016, pension liabilities rose by $4 billion, records show.

The city declined to explain how it plans to stem the growth of liabilities.

Allan Domb, who has taken an interest in the city’s finances since joining City Council last year, said the pension fund’s 1967 plan, which by many accounts was too costly and the reason for the current deficit, “should serve as a wake-up call” to the city. The majority of current city employees are covered by the 1987 plan.

“We can’t continue down the same path with salary and fringe benefits and overhead,” Domb said.