Report warns of Phila.'s rising pension, health-care costs

January 23, 2008

Athena D. Merritt, Philadelphia Business Journal

Philadelphia's soaring pension and health-care costs are outpacing revenue, which could threaten the city's ability to tackle its other problems, according to a report released by The Pew Charitable Trusts and the Economy League of Greater Philadelphiaon Wednesday.

The study, "Philadelphia's Quiet Crisis: The Rising Costs of Employee Benefits," projects a rise to more than $1 billion for city pension and health-care costs by 2012. Such an increase would claim 28 percent of the city's budget, up from 16 percent ($403 million) in 1998.

The city's health-insurance expenses alone rose 80 percent from fiscal year 2002 to fiscal year 2007, and another increase this fiscal year will bring costs to $374 million, or 10 percent of the city's budget. Philadelphia, which pays a negotiated or arbitrated amount directly to each individual labor union, paid more per capita -- $13,030 per person this year -- than all but one of the nine cities examined. By comparison, the private sector in the mid-Atlantic region paid $4,292 per capita and state and local government paid $9,082, reported the study, which determined Philadelphia could shave $113 million off of its costs by bringing them in line with state and local government averages.

Philadelphia's pension obligation costs are projected to climb from $252 million in 1998 to $613 million in 2012. The report found the city's pension obligations are 52 percent funded, one of the lowest levels in the country, and far short of the 80 percent considered healthy by most experts. The report also found city employees contributed less of their own money to the city's pension fund than employees in all but one of the cities studied. In addition, it appears the city's Deferred Retirement Option Plan is not reaching its goal of keeping experienced employees on the job longer by cost-neutral means.

"The 'quiet crisis' of Philadelphia's mounting employee pension and health-care costs threatens to drain the resources needed to tackle other problems facing the city," Donald Kimelman, managing director of Pew's Information and Civic Initiatives, said. "While there are no quick and easy solutions, there are fiscally responsible steps the city can take today to ameliorate the problem while remaining fair to municipal workers."

To reduce future pensions costs, the report recommended Philadelphia adopt a hybrid of defined-benefit and defined-contribution plans for new employees, raise the retirement age for new employees and increase employee contributions. The city should also examine its investment practices to determine if policies are providing optimal returns with appropriate risk and negotiate a change in compensation practices that would give the city greater control over health spending, instead of the per capita payments that are made. In addition, regular compensation surveys should be conducted to benchmark city salaries and benefits against those of regional public and private employers, the report stated.

"Addressing the challenges of pension and health-care costs is essential to being able to provide world-class municipal services at an affordable price to taxpayers," Steven Wray, executive director of the Economy League of Greater Philadelphia, said. "Philadelphia's Quiet Crisis' presents the facts and policy options that the city management and work force need to consider in order to work collaboratively to provide the best possible outcome for Philadelphia and its citizens."

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