Legacy pension costs will loom over Cherelle Parker’s future budget

Retiree pension checks are among the biggest expenses for big cities like Philadelphia, and decisions on how to pay for them rank among the longest-lasting acts by city officials.

Funding the checks that sustain 35,000 retired police and other public workers — and the 30,000 future pensioners still working — depends on financial decisions that can impose costs that last for decades, as the incoming administration of Mayor-elect Cherelle Parker is all too aware.

Take the city’s 1999 gamble under Mayor Ed Rendell. His administration borrowed $1 billion from bond investors to try to juice investments by what was, then as now, an underfunded city pension plan.

But the timing was bad. The dot-com bust deflated share values, leaving little obvious gain from the borrowed money while sticking taxpayers with decades of payments on the bonds — including an $80 million “balloon” payment scheduled for 2029.

It’s a “ghost” legacy from that earlier administration still haunting the city decades later, said Aren Platt, a top adviser to Parker, who knows her administration will have to find the money to cover that debt.

Pension math is outsized: $80 million is enough to fund the city parks and recreation department for a year. (It’s expected to boost total debt repayment that year to $483 million.)

But it’s also just a fraction of yearly pension costs. Philadelphia pumped $1.16 billion into the pension system in the budget year ended June 30 — the last full year of Mayor Jim Kenney’s administration — up from $860 million last year and nearly $800 million in each of the previous five years.

That’s a large chunk of the city’s $6.3 billion budget — more than the city spent on police and prison staff combined.

Philadelphia’s more aggressive pension funding during the administrations of Kenney and Michael A. Nutter has eased pressure on the city’s finances, which now include healthy reserves. Stronger pension funding contributes to Philadelphia’s higher credit rating, which in turn reduces borrowing costs. Pension assets now total nearly 60% of long-term pension liabilities, the highest ratio since the early 2000s, city records show, and far above the 45%-50% ratio the city reported from 2009 to 2019.

Under state law, severely underfunded pension plans are subject to state takeover, transferring control of billions of dollars of pension assets away from the board of city officials and union leaders that oversee the plan.

But maintaining that independence and reputation for careful funding is expensive. Including the $300 million increase this past year, Philadelphia’s direct pension funding by the city costs 57 cents for every dollar paid in wages and salaries. That’s up from 40 to 50 cents on the dollar earlier in the Nutter and Kenney administrations.

By comparison, PSERS, the Pennsylvania’s public schoolteacher pension system, which covers Philadelphia school staff, collects around 34 cents from state and local taxpayers for pensions per $1 of payroll.

The PSERS pension charge, compared to the state’s expanding public-school payroll, has been flat or modestly declining over each of the past two years after rising sharply since the early 2000s. It’s still higher than most states, according to data collected by the Boston College Retirement Center.

Slow-growing states such as Pennsylvania and cities such as Philadelphia, with more retirees than active workers, often pay extra, in part because they have fewer employees paying a portion of their checks to help finance the plan, and more retirees collecting checks.

The funds also try to profit from investments in stocks, bonds, and other assets, which yield variable results from year to year. Over time the major source of income for most public plans is taxpayer-funded “employer contributions.”

The $300 million extra the city sent to the pension system in 2023 was a one-time bump, city Finance Director Rob Dubow said.

“We made that additional, discretionary contribution to improve the health of the fund,” he said, adding that the contribution will likely drop back to previous years’ level in fiscal year 2024.

The bump coincided with the one-time rush of federal pandemic-relief cash that has aided cities hurt by lower tax revenues during and since the COVID shutdowns. Federal rules restrict funds allocated to cities such as Philadelphia under the American Rescue Plan Act from being “deposited” into city pension funds. Dubow says Philadelphia’s federal aid had been committed to other programs.

”All of our pandemic relief money is allocated, and none of it went to or is going to pensions,” he said.

Even if federal funding, along with increased tax revenues, has eased pressure on the city, enabling it to expand its funding for pensions and other programs, city officials are well aware that the increased federal funding is ending, and future tax receipts are uncertain.

So Dubow and other city finance officials, many of whom are being retained by Parker, are working on how to structure and fund that $80 million pension debt payout for the last year of Parker’s first five-year budget plan.

And to clarify that it’s not a problem of her making.

This story includes material clarifying that the increase in city pension spending took place in fiscal year 2023, and adding total projected debt spending for 2029.