PICA report: Phila. growth threatened by pension woes

Philadelphia's severely underfunded municipal pension fund is "an obstacle" to the city's long-term economic growth, a special report from the city's fiscal oversight board warns.

"Philadelphia cannot continue to grow and prosper unless its public sector costs are affordable to its taxpayers, and unless these costs are predictable," the report from the Pennsylvania Intergovernmental Cooperation Authority (PICA) states.

PICA's 62-page report follows a state auditor general's report on municipal pension funds that also pointed out the high risk that Philadelphia's pension fund faces. The city's pension system is funded at only 47 percent and has a hole of $5 billion.

Both reports list various recommendations. But the question at Tuesday's PICA meeting was whether the political will exists to implement such changes.

Lawrence Tabas, PICA's chairman, said almost everyone agrees that Philadelphia's pension system is in trouble, but he doesn't see enough being done to fix it.

"I hope that five years from now, we're not discussing the same thing," Tabas said. Ignore the problem, he warned, and Philadelphia could wind up like Bethlehem Steel Corp.

"This is an issue that has been going on for many, many years," Tabas said following Tuesday's meeting. "It happened in major industries. ... These big corporations and businesses would sit around and say, 'Oh, it's a problem, but we'll deal with it in the future.' "

The report's recommendations included:

Making all new employees join the city's hybrid pension plan, called Plan 10, which is similar to a 401(k). Mayor Nutter tried doing this in the last round of negotiations with the municipal unions, but lost.

Abolishing the controversial Deferred Retirement Option Plan (DROP), which allows city employees to pick a retirement date up to four years in the future, then accumulate pension payments in an interest-bearing account while still earning their salary. They collect a lump sum upon retirement. Council would need to pass legislation to abolish DROP.

Increasing employee contributions to the pension fund. Civil employees contribute between 3.95 percent and 4.75 percent of their annual wages. The median employee contribution for the 10 largest American cities is 6 percent, according to the report.

Lowering expectations for the rate of future returns on investments from 7.85 percent to near 7 percent.

The Nutter administration made some strides on the pension problem by signing new contracts that require current employees to pay an additional 1 percent into the fund and new employees an additional 2 percent - or join a new hybrid pension program.

City pension reports show that unless contribution levels change, the pension fund is expected to be 80 percent funded by 2031. But that could be optimistic. Not only are retirees living longer, but the city has a shrinking workforce.

According to the report, the number of active city employees in 1985 who were contributing to the pension fund exceeded the number of retirees and beneficiaries by 13,000. By 2013, retirees and beneficiaries exceeded the number of active contributing employees by 3,500.

"It's the exact opposite of the economic model," Tabas said.

Also, the PICA board unanimously approved the reappointment of executive director Harvey Rice, who moved to PICA a year ago after working under City Controller Alan Butkovitz for several years.