Report Finds Philadelphia's Pension and Health Care Costs for Public Employees Growing at Unsupportable Rates

A report released today by The Pew Charitable Trusts and the Economy League of Greater Philadelphia finds Philadelphia's pension and health care costs for city employees increasing at a much faster rate than the city's revenue. The amount of money the city pays to cover pension obligations and health care benefits for current and retired city employees is projected to rise to more than $1 billion or roughly 28 percent of the city's budget by 2012.  This is an increase from 16 percent ($403 million) in 1998. “Philadelphia's Quiet Crisis: The Rising Cost of Employee Benefits,” by consultants Katherine Barrett and Richard Greene, examines these budget items in detail and describes how Philadelphia's situation compares with other cities. The report also offers policy options that could help moderate future costs, as well as increase transparency and accountability in how these benefits are managed.

“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,” said Donald Kimelman, managing director of Pew's Information and Civic Initiatives. “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.”

According to the study, Philadelphia's pension obligations are only 52 percent funded, one of the lowest levels in the country, and much lower than the 80 percent level that is considered healthy by most experts.  Lapses in contributions to the pension fund in the 1970s and 1980s, combined with lower-than-expected returns on investments, have caused the city's unfunded pension liability to increase to $3.9 billion, or nearly half of its $8 billion future pension obligation.  With repayment on bonds issued in 1999 and other expenses factored in, total annual pension obligation costs are projected to rise from $252 million in 1998 to $613 million in 2012. 

The city's health insurance expenses are also significant. Total costs rose 80 percent from fiscal year 2002 to fiscal year 2007, and another increase this fiscal year brings this expense to $374 million or nearly 10 percent of the city's total budget. Philadelphia pays more per capita than nearly any other city in the nation, and that amount has increased by 33 percent in the past two years alone—to an average of $13,030 per person this year.  By comparison, the Bureau of Labor Statistics reports that the average cost for state and local government health care coverage is currently $9,082 per capita while for private sector in the mid-Atlantic region it is $4,292.  Philadelphia's health care benefits are costing the city approximately $113 million more than if the expenses were in line with state/local government averages.

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

The report enumerates a number of other key findings that impact costs and make Philadelphia stand apart from other cities:

Pensions

• Philadelphia's benefit formula is on par with other cities and the average annual pension ranges from $29,011 for municipal workers to $42,391 for firefighters in FY 2006. 
• The number of claimants is now higher than the number of active workers—33,907 claimants in 2006 versus 28,701 employees.  Nineteen percent of pension plan members are currently eligible to retire and another 12 percent will become eligible within five years.  
• Philadelphia employees contribute less of their own money into the pension fund than in all but one of the other cities examined.
• The Deferred Retirement Option Plan (DROP) does not appear to be meeting its mission of keeping experienced workers on the job longer in a way that is cost neutral.  
• Information about how pension fund managers are selected and individual investment vehicle performance is not readily available to the public.

Health Care Benefits

• Costs per capita in FY 2008 range from $11,709 for the city's white- and blue-collar workers to $17,328 for firefighters.  The cost is $15,636 for each police department employee.
• Health care benefit costs per capita are higher than every other city studied, with the exception of Detroit.
• The city pays a negotiated (or currently, arbitrated) per capita amount for health care directly to each individual labor union. Researchers could find no other city or state that has such little control over its workers' health care costs. Any cost savings achieved by the unions remain under their control.
• Three of the four union plans do not require any monthly employee contribution, which is unusual when compared with most other state and local government plans.
• The city provides health care coverage to employees for five years following their retirement. In doing so, it keeps its total costs much lower than in most other cities and states. 

Solutions
“Philadelphia's Quiet Crisis” suggests a number of actions the city could take to confront the rising costs of municipal benefits and increase accountability and transparency in the systems. According to the authors, Philadelphia should consider the following ideas: 

• To reduce future pension costs, adopt a hybrid of defined-benefit and defined-contribution plans for new employees.  These would have the added benefit of portability, which would be viewed favorably by younger workers. 
• Raise the retirement age for new employees and increase employee contributions.  
• Examine current investment practices and determine whether policies are providing optimal returns with appropriate risk.  Benchmark annual performance results for each individual investment vehicle against national averages. Make the results available on the pension board's Web site.  
• Negotiate a change in compensation practices that would give the city more control over health spending rather than simply providing a per capita payment for each employee to his or her union.  With greater control, the city (and its taxpayers) can bring about and benefit from management reforms that have worked to bring down costs in other cities while remaining fair to workers. 
• Undertake regular compensation surveys to benchmark its salaries and benefits against those enjoyed by other regional public and private employers, and consider any proposed change in any element of compensation as part of a total package and not in isolation.

How the Study was Conducted
As a starting point for “Philadelphia's Quiet Crisis,” Barrett and Greene used information from their recent research for the Pew Center on the State's report “Promises with a Price: Public Sector Retirement Benefits,” which explored pension and other post-employment benefit costs in the 50 states. They also drew on comparative databases of information on city and county pension funds and summaries of Pennsylvania's local pensions from the Pennsylvania Public Employee Retirement Study Commission. A team of researchers at Philadelphia-based Econsult analyzed the numbers to evaluate Philadelphia's health benefits and pension systems relative to nine comparison cities: Atlanta, Baltimore, Boston, Chicago, Denver, Detroit, Phoenix, Pittsburgh and San Francisco. Econsult obtained data from each city's comprehensive annual financial reports, as well as information from Philadelphia's recent Five-Year Financial Plans.

The team also interviewed a number of local and national employee benefits and municipal finance experts. An effort was made to reach out to the presidents of Philadelphia's four municipal unions, as well as the executive director of the city's pension system, but all declined to be interviewed for this study.

About Pew
The Pew Charitable Trusts is driven by the power of knowledge to solve today's most challenging problems. Pew applies a rigorous, analytical approach to improve public policy, inform the public and stimulate civic life. We partner with a diverse range of donors, public and private organizations and concerned citizens who share our commitment to fact-based solutions and goal-driven investments to improve society.

About the Economy League
The Economy League of Greater Philadelphia is an independent, nonpartisan, nonprofit organization dedicated to research and analysis of the region's resources and challenges with the goal of promoting sound public policy and increasing the region's prosperity. The Economy League of Greater Philadelphia is an affiliate of the Pennsylvania Economy League headquartered in Harrisburg, PA.

To request a hard copy of the report, available in early February, please e-mail info@pewtrusts.org.