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Pension Strangulation

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111010_sam_katz_400.jpgThe fundamental problem with Philadelphia's pension fund for city employees is that it doesn't have enough money to pay pensions to all today and in the future who will collect them.

The fund has $4.9 billion on hand, not a small sum, but it will end up owing about $10 billion retirees, who numbered about 33,000 as of last year. This problem is not new - it's been underfunded for years - but no one has suggested a way out of the mess.

Now comes Sam Katz with a suggested solution: a city asset sale.  Sell the gas works and the airport to private companies and use the profits to fill the huge hole in the fund.

When Katz speaks, people listen. The former mayoral candidate is now chair of the state board that oversees the city's finances, officially known as the Pennsylvania Intergovernmental Cooperation Authority. PICA, for short.  The five-member PICA board must approve all city budget plans and if it does not, woe betide Philly.  It loses the power to collect certain taxes which it relies on to operate.

Whether Katz's idea will fly is an open question.  But, at least he has laid the card on the table.  And so far, it is the only card.  No one else has suggested any other way to fill the multi-billion dollar void in the fund.

As Katz told the Inquirer:


"There have to be solutions or [the pension-fund deficit] is going to choke the city. When you think that $500 million a year in an operating budget of $3.6 billion goes to pay benefits for services rendered in the past, that's a tough place for a city to be. . . . We're strangling in our own pension juices."

He was referring to the fact that city payments into the pension fund (which are about $500 million a year) place a huge drain on the city budget, and it's likely to get worse over the next couple of years as city payments into the fund increase to meet the minimums required by law.

Most city employees contribute to the fund, but it is small change compared to its needs. The average contribution is equal to 3.6 percent of an employee's salary, though the number differs among different classes of employees.  These contributions totaled $51.5 million last year, an average of about $1,800 per employee per year.

It's the city - excuse me, it is you and me and other taxpayers - that bears most of the burden.  Last year, city payments averaged $16,500 per employee.

If the city were a private corporation and its pension fund was in the same shape, a federal government agency would step in, take it over, and shave the pensions of retirees to set it right.  But, the federal agency that oversees private pensions has no authority over public ones.  So, as Katz noted, we are left to strangle in our own pension juices.

Katz's suggestion is a bold idea, and it's a shame it has to come from someone outside of government, as opposed to the people we elected to run the city. So far, the city - in recent budget documents - has tsk tsked about the pension fund's liabilities, saying the situation is "untenable and unsustainable" and then proposes a series of major reforms. Whoops. That's a slip on my part.  That's what I wish the city would do.  In reality, it has done very little.

(In the recent police contract, for instance, the city got the right to offer new recruits the option of joining either the traditional pension plan or something resembling a 401K, with the city making a large match.  The number of new police who took advantage of that option?  Zero.  The FOP hates the idea and has been urging rookies to go into the traditional plan.

Meanwhile, in New York, Gov. Andrew Cuomo has proposed a series of pension reforms for state and local government employees.  He wants to double employee contributions from 3 percent to 6 percent.  For all new employees he wants to raise the retirement age, end the practice of public employees padding their final pensions by working overtime, and increase the time it takes to vest for a pension.

Meanwhile, in Philadelphia, Mayor Nutter has.....decried the problem. 

Not to state the obvious, but when you have a multi-billion deficit you don't decry it, you do something about it.

Katz has at least offered something.  And it looks like it is the only realistic solution to a terrible problem.  Now, will someone please wake up Mayor Nutter and ask him what he thinks?

 

-- Tom Ferrick

 

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