Health-care, pension costs weigh heavily on city

November 24, 2008

Patrick Kerkstra, Philadlephia Inquirer

Closing libraries and draining pools will get Mayor Nutter only so far.

If he hopes to fundamentally improve Philadelphia's financial footing, Nutter likely has no choice but to try to reduce the enormous burden of health care and pension costs, which now represent nearly 25 percent of all city spending.

He said little about those costs during the recent round of budget bloodletting, but behind the scenes there are signs his administration is maneuvering to reduce those expenses.

For instance, before the budget crisis struck, the Nutter administration had set aside $379 million to cover increased wages and health-benefit costs for new union contracts over the next four years. Once the budget crisis struck, that total was slashed to a relatively meager $142 million, some of which has already been committed to wage increases for police and firemen.

The money was cut from the mayor's revised plan so quietly that some union leaders were unaware the reductions had been made.

The administration and union leaders are also meeting regularly to consider reforming health-care coverage. All parties signed nondisclosure agreements and thus cannot say whether progress is being made. But in a phone interview last week, Nutter said he expected that the committee would find a way to save significant money for the city.

"All of us know this is a very serious problem, and it's been a serious problem for a long period of time," Nutter said. "It's an issue that the five of us are going to have to work on very seriously and in a very extraordinary way to bring about a significant reduction in the cost of the health-care benefits for our public employees."

Of course, as Nutter acknowledged, he cannot change pension and health-care costs by fiat. He must negotiate with the unions.

In an interview, Cathy Scott, president of the city's white-collar union, said it was premature to discuss how or whether her union's health-care and pension plans might change during the next round of contract negotiations. But she had some tough words for Nutter's response so far to the city's fiscal challenges.

"The mayor is making choices, like every chief executive, and he has chosen, unfortunately, to cut services in some very critical areas, most of which negatively impact on children," said Scott, president of the American Federation of State County and Municipal Employees District Council 47.

Over the summer, the city and its unions agreed to unusually short one-year deals. Though both sides won concessions, the contracts largely served to put off the confrontation over long-term pension and health-care issues.

Meanwhile, of course, the national economy collapsed. And some observers think that could give Nutter leverage to extract a better deal for taxpayers than he might have managed in more prosperous times.

"Right now it is hard to argue that the city doesn't need to do something dramatic, given the fact we're closing pools and shutting down libraries," said Brett Mandel of Philadelphia Forward, a tax-cutting advocacy organization that would like to see city government cut its costs. "[Nutter] could end up looking like a genius for doing that one-year deal."

Virtually all big cities are struggling to keep up with rising pension and health-care costs. But Philadelphia is having a harder time than most.

Its pension fund, which has been badly punished by tumbling stock markets, is funded at a lower level than that of any big city in the nation except Pittsburgh, according to a January study sponsored by the Pew Charitable Trusts and the Economy League of Greater Philadelphia.

And Philadelphia's health-care costs per employee are staggeringly high: about $12,500 a year, compared to $9,500 for unionized state employees. Detroit is the only big city that spends more per worker on health care, according to the Pew report.

In part, the city's unusually high costs are due to the generosity of its benefits. For instance, most city workers do not pay any health-care premiums, and copays tend to be tiny compared with the private sector.

Retirement benefits are just as good. Philadelphia municipal employees contribute only 1.85 to 5 percent of their salaries to the pension fund, well below the rate in most big cities.

"It boggles my mind. We have the lowest contribution rates of anyone, and among the highest benefits. That can't continue," said Uri Monson, executive director of the Pennsylvania Intergovernmental Cooperation Authority, which has oversight authority over the city's long-term budgeting. "The trouble is, all this stuff is negotiated."

But the problem is not simply that union workers are getting gold-plated benefits.

For instance, Nutter - or any past mayor - could immediately have cut health-care spending for about 6,200 nonunionized and union-exempt city workers. Instead, the city spends almost as much per worker on those employees as it does on most of its union workers.

Plus, Nutter still does not have a benefits administrator, a position that in theory could lead to significant savings for the city.

Further, as union leaders correctly point out, health care in Philadelphia is expensive. Medicare reimbursements in the area run about 26 percent higher than the national average.

Finally, the city's massive pension obligations - $2.47 billion over the next five years - are due more to the tendency of past administrations to mortgage the future than to the low contribution rates of city workers.

For decades, mayors - with exceptions in some years - have put as little into the pension fund as they could get away with. Now the fund is so small that the city has no choice but to pay a huge chunk of retirees' pensions out of its operating budget.

And that, Scott argues, is hardly the fault of organized labor.

"If the city were paying and had paid over the years what it should have been paying for pensions, it wouldn't be in the crisis that it's in today," Scott said. "Eventually it catches up. You have to pay the piper."

Contact staff writer Patrick Kerkstra at 215-854-2827 or [email protected].

http://articles.philly.com/2008-11-24/news/25256601_1_health-care-pension-white-collar-union