A warning on Philadelphia's pension and health costs

January 24, 2008

Marcia Gelbart, Philadelphia Inquirer


Philadelphia's ballooning pension and health-care costs threaten the city's ability to provide services and continue to reduce taxes, according to a report released yesterday by the Pew Charitable Trusts and the Economy League of Greater Philadelphia.


The study found that benefit costs will consume 28 percent of Philadelphia's budget by 2012, up from 16 percent in 1998. That rise will drain "the resources needed to tackle other city problems," according to Donald Kimelman, managing director of Pew's Information and Civic Initiatives.


The study, which compared 10 major cities, also found that Philadelphia:


Paid more in health-care costs per retiree ($9,150) than any city surveyed.


Paid more in health-care costs per employee ($9,841) than any city surveyed but Detroit. That figure is about triple the cost per employee for private industry in the Mid-Atlantic region.


Has funded only 52 percent of its pension obligations, giving it the second-lowest funding level of those surveyed.


Asks its workers to contribute less to their pension plans than any other city save Baltimore. The city's workers contribute about 1.85 percent of their annual salary. San Francisco's workers, in contrast, pay 9 percent, while Boston's pay 7.5 percent.


"With the inauguration of a new mayor and upcoming contract negotiations between Philadelphia's management and workforce, the choices made in the coming year will affect generations of Philadelphians and the economic vitality of the entire region," said Steven T. Wray, executive director of the Economy League of Greater Philadelphia.


Two consultants who have previously worked for Pew, Katherine Barrett and Richard Greene, wrote the 29-page report, titled "Philadelphia's Quiet Crisis: The Rising Cost of Employee Benefits." Some of the research was provided by Econsult, a local consulting firm that briefly employed Mayor Nutter during his campaign.


"These problems are real, they are growing, and they are pushing out funds that would otherwise be available for city services," said Uri Monson, acting executive director of the state agency that monitors city spending, the Pennsylvania Intergovernmental Cooperation Authority (PICA). Many of the Pew reports findings have been echoed by PICA.


Besides Philadelphia, cities surveyed were Atlanta, Baltimore, Boston, Chicago, Denver, Detroit, Phoenix, Pittsburgh and San Francisco.


The report followed a broader study of Philadelphia that Pew conducted last year in which the fast-climbing pension and health benefits costs were labeled as a "sleeper" issue among the city's more obvious challenges - a surge in homicides, high taxes, and a significant public high school dropout rate.


"We will read the report carefully because it is a crucially important topic," city Finance Director Rob Dubow said.

The report was issued as the three-week-old Nutter administration begins labor talks with the city's four municipal unions, whose contracts expire June 30.


The report noted that Philadelphia is the only city that does not directly control its health-care costs, largely because it gives benefit money straight to the unions, based on a flat amount per employee.


While other cities ask employees to contribute to their plans, three of Philadelphia's four unions do not pay anything toward their premiums. (Members of the white-collar union, District Council 47, pay a monthly contribution of $14.47 per individual and $40.97 per family.)


In addition, the report found that almost all co-payments for office visits and pharmaceuticals paid by members of the four unions fall below the national average. Philadelphia firefighters, for instance, had to pay just $1 per prescription last year for generic drugs. Also, Philadelphia firefighters and police had $5 co-pays when they visited their primary care physician.


"We want a fair contract, that's all," said Brian McBride of Local 22 of the International Association of Fire Fighters. His union submitted its initial contract proposal late last month. The Nutter administration has yet to share its own detailed plan. "We are certainly hoping to work with the new administration in a positive way for an outcome that is fair for the union and the city," he said.


John McNesby, the president of Philadelphia's Fraternal Order of Police, said, "For years, we were given less pay for better benefits. . . . We're looking forward to going into the contract talks and being able to present our side."

The report highlighted several other points of concern.


In 2006, for instance, there were more pension recipients (33,907) than active workers (28,701). And annual pension costs that totaled $252 million in 1998 are expected to have risen to $613 million in 2012.

In addition, the report criticized the city Pension Board for not making updated information about its investments readily available to the public.


"That's something I will look into and see what the cause of their concern is and how we can address it," said Dubow, who as finance director chairs the Pension Board.


The report also included several recommendations for lowering benefits costs.


Among 11 ideas specific to pension costs were proposals to negotiate increases in employee contributions to pension plans; require more rigorous education for Pension Board members; launch an audit of the pension system; and reexamine the city's Deferred Retirement Option Plan to ensure it is keeping experienced employees on the job in a cost-neutral way.


As far as health-care costs, suggestions included increasing co-pays; establishing a joint labor-management project to discuss cutting costs; and changing practices to give the city more control over spending.


Cathy Scott, president of District Council 47, cast doubt on some of the recommendations. Referring to health care, she said, "They are taking the same old flawed approach that has been taken in the past - that somehow if management administered this program, it would run it better."