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Is There a Pension Crisis?
Submitted by Ben Waxman on Tue, 04/03/2007 - 7:04pm.
Over the past few days, we’ve been hearing a lot about this so-called pension crisis facing Philadelphia. Columnists and politicians alike are sounding the alarm, claiming that the next mayoral will be paralyzed by the city’s financial obligations. I believe there is some merit to these concerns, but it is simply not accurate to say that all future spending needs to be put on hold.
Let’s look at the numbers. According to a report from PICA, employee benefits are going to grow by 25% over the next three years (FY 06=FY 09) and debt service is going to increase by 30% and other spending obligations will increase by 5.7 % whereas is only expected to increase by 7.9 %. So, the city is obviously going to spending a bit more on pensions.
For the rest of “Is there a Pension Crisis?” please click “Read More.”
However, it’s important to contextualize these numbers: pension costs in 2009 will account for 12% of city budget up from 7% in 2001. That means there will still be plenty of money in the budget for a variety of spending goals. The next mayoral will certainly need to deal with this issue, but it’s not a reason to quash every idea.
I worry that some will use the increased cost of pensions to argue against spending money on programs to reduce crimes and poverty. I also worry that the next mayor will use these numbers to demand major (and unjustified) concessions from municipal unions in the next round of contract negotiations. It’s important to remember that the increase is manageable—it shouldn’t be excuse for spending cuts.
I also want to remind everyone that the problem of increased healthcare and pension costs are being faced by municipalities across the country. This is not a problem unique to Philadelphia. The next mayor must work with state, local, and national leaders to solve the healthcare crisis. Personally, I believe that the federal government will eventually need to develop a plan for universal healthcare. This will reduce the costs to municipalities everywhere.
I agree that the pension
I agree that the pension budget is not a boulder crushing us, it is more of a lodestone. I also think it is being used as a distraction. No matter what the pension status is, there are always tough decisions every mayor has to make for the yearly budget.
The real issue isn't that pension costs are growing. The issue is that the pension is apparently not being managed all that well and not being funded appropriately (minimum contributions and 6% average returns over the last 5 years).
Our government just needs to make the hard choices necessary to right the ship. The thing is, it isn't so bad that it is going to be doom in 5 years, but it is bad enough that we can't stick a finger in the dyke and let the next administration in 8 years deal with it.
We also need to keep in mind the other budgetary issues (ie schools and infrastructure).
What does this mean? It means Philly needs to be smart and realistic with its money in the coming years. It means we need to work on solving our problems and may not have the luxury on being cutting edge and fancy and experimental on some of our policies. Philly may just need to be "old school" and just try to be fiscally responsible.
Also, since federal universal healthcare is a long way off and we have no idea if Rendell will even be able to push his plans, Philly needs to realize it needs to solve its problems on its own.
Pension Crisis
I am not a municipal finance expert but a pension fund that is funded at 52% is seriously underfunded. Most multi-employer pension funds are funded at more than 100%. Any private pension fund funded at the City rate would probably be taken over by the Federal government. Harry Gross says that if you pension fund is under 80% funded you should worry. The City is at 51-53%. This is too low.
Second, a raise from 7% to 12% of the City budget is astronomical. This is also probably wishful thinking. This will leave very little left for anything, let alone the infrastructure and investment the city needs. This is a disaster in the making unless fixed by the next mayor.
I agree. Ben, I think you
I agree. Ben, I think you are selling short just how large 5 percent of the budget is. And when you combine that with another 5 percent or so for healthcare costs, we are in serious trouble.
Why? Because only a tiny piece of our budget is for discretionary spending. The vast majority is tied up in salaries that aren't going anywhere, health care, pensions, schools, and public safety. Taking off a ten percent chunk is like cutting the BPT by 70 percent. If you don't make up revenue from that somehow, you are talking about closing rec centers, defunding even more of fairmount park, and the like.
I am not saying it is not a
I am not saying it is not a problem. It's obviously a major portion of the city's overall budget. I just don't think it's the show stopper that some are making it out to be. Also, I want to challenge the notion that dollars spent on pension and healthcare benefits for city employees are not dollars well spent.
As I wrote in my post, the real solution to these problems is twofold: first, the federal government must provide the additional funds required by major municipalities to meet their healthcare needs. As everyone knows, the Republicans have been extremely anti-city for the past eight years. Hopefully a Democratic president will change things. I would include the need for a universal healthcare program among the things that have to happen at the federal level.
Again, I want to emphasize that the problem of pension costs is not unique to Philadelphia. A lot of other major cities are dealing with this issue. Philadelphia's next mayor needs to work with other mayors to craft regional solutions to this problem.
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http://benwaxman.com
Well
The same report says the underfunding of the pension is significantly worse than the median of the pensions they studied. So, I think our crisis is sort of unique, or at least worst than most.
And, The City's five year budget predicts that by 2009, 23.5 percent of the budget will go to health care and pension costs, up from 12 percent in 2002. That is a staggering difference, and totally envelops any chance to expand programs.
So, what do you mean by show stopper? Will Philadelphia go on? Yes. Will services have to be cut, like Fairmount Park, Rec Centers, Libraries, etc? Yeah, I think so. I just don't think there is quite as much magical waste as the Tom Knox types say there is.
So what is the solution? I have no idea. Tom Cronin, who I certainly respect, has basically said the City needs to foot the bill until the feds give us universal healthcare. Considering that universal healthcare is becoming more mainstream, maybe that makes sense. But, I think you are underselling how dramatic that increase is. Basically, from 2002 to 2009, you are talking roughly a chunk of the budget three quarters the size of every dollar we bring in from the BPT. In my opinion, it is not being overhyped, it is being underhyped. I think that is probably because very few people really know what to do.
So, maybe that solves the feds solve the problem for healthcare, and could potentially let us breathe, and actually pay into the pension at the appropriate amount. But, again, I guess I just disagree, and think this is far underhyped.
Pensions
The next mayor also needs to work with the Municipal Unions in figuring out a solution. This means the four unions have to come up with ideas other than raise taxes or cut some other programs. Everyone deserves a good pension and healthcare, but if we do not solve this problem city retirees will get neither.
Finally, universal healthcare and money from Washington will most likely not be forthcoming any time soon. This problem has an urgency that cannot wait.
Where does funding for low-income people come from?
Doesn't a lot of the money that is spent on programs for low-income (i.e. most of DHS's budget) come from state funding that is passed through the city? I don't think money that goes to paying for pensions and employee healthcare will come from those programs as much as it will come from the services that Dan U-A cited: Fairmount Park, Rec Centers, Libraries. Those are the very services for which the candidates have been promising to increase funding without addressing this pension and healthcare issue.
Your point is well taken about money used to fight crime. That seems to fall on the city even in cases, like the court system, where the state should be picking up the bill.
On negotiating with the unions, it seems pretty clear that both sides are going to have to give a little. I'm worried about what could happen if the next mayor goes the politically expedient route and gives away the store like Rizzo did when he was facing a tough primary challenge in 1975. Those concessions led to a huge increase in the wage tax. On the other hand, having a lot of under-insured workers and poverty-stricken retirees is a pretty bad scenario too.
Is it any wonder that the title of PICA's other report, which deals with PGW and infrastructure service as well as pensions and healthcare, is "Look Before You Leap - The Fiscal Situation Facing the Next Mayor" and the first line is "What have I gotten myself into?"
I disagree entirely.
The pension costs are a huge problem. This is true, not just for Philadelphia, but for every major municipality and the country as a whole.
Dan is right in saying that there is very little discretionary spending in the budget. Everyone is talking about the sub-prime mortgage crisis and how negatively the ARM's affect the borrowers. This is similar...its like if i said, well, yes the mortgage payments have gone up from 12% to 25% of their income, but they still have 75% of their income so what's the problem? The city certainly does not have a 10% budget surplus every year that can go to pay the increase in pension costs. In fact, I am little confused as to why Ben doesn't think this is a bigger deal. This money has to come from somewhere and it most likely will be from cuts from "non-essential" programs which adds to what i think we all consider the critical "quality of life", or comes from increased taxes.
I also am not that impressed with the reports recommendations. We should pay more now so we don't pay more later...a teenager with a credit card could tell me that, the problem is that money is tight. Don't pay new employees as much...great...thanks for that. Lower our expectations on our investments' growth...oh and this will cost more short term. Lastly, and my favorite, if we are going to increase benefits, we should do a study to fully explore the long term effects...i did a quick study and found out that paying out more will increase our already spiraling pension costs...there I just saved the city some money that can go towards paying the pension.
In my opinion, the only way there will be significant savings for city is the retirement age is raised for both uniformed and non-uniformed to 55 and 65, respectively. Obviously, there will be no lowering of benefits for existing workers, nor should there be...that would essentially be a tax on the city's workers only. I don't know the numbers for Philadelphia specifically, but I would say anyone under the age 40 and 50 should have the retirement age bumped up. If they want to retire before the new age, then it needs to be because they have saved the necessary funds to enable them to do so.
Let me be clear on one thing...no worker who faithfully toiled for the city their entire lives should ever live in poverty or financial hardship. However, I think if someone is able to work, 55 and 65 are not unreasonable. No one wants to see a retired firefighter who can't afford heat or a police officer who needs to choose between medication and food. I think however that this isn't insanely extreme. I could be wrong as I 'm not a municipal employee.