Philadelphia’s $1 billion pension gamble could torpedo the city’s tax cuts

Philadelphia recently passed a business tax cut package based on one critical assumption: The city’s pension fund will reach full funding by 2033. Some observers, including we the authors, believe these tax cuts wrongly benefit large corporations instead of ordinary citizens.

But regardless of how tax cuts are structured in the coming decade, any revenue-cutting initiative faces a huge hurdle. The challenge is this: More than $1 billion of the pension fund sits in private equity — an investment industry that is experiencing a meltdown.

Private equity firms promise superior returns by buying companies, with money borrowed from banks and institutional investors, then often selling off the company’s own assets to pay themselves dividends while charging hefty fees. But the industry is facing what analysts call “a breakdown in the private equity machine, not a temporary dislocation.” Payouts to pension funds are running 50% below typical levels. Private equity funds launched in 2021 are the worst performers in 20 years, with payouts 80% below typical levels. Even funds from 2019 and 2020 are struggling, with payouts 40% and 30% below normal levels.

The root problem? Private equity firms are sitting on companies they can’t sell — nearly eight years’ worth at current rates. As one industry expert puts it, “If you’re trying to sell a house and nobody’s buying, the problem isn’t the ‘exit environment’— it’s that your price is far above market level.” Rising stock prices are pushing up claimed valuations of private companies, too, making them even harder to sell at realistic prices.

The controller must immediately audit the pension fund’s private equity exposure.

Given this bleak assessment, the pension board may well decide to continue to hold its private equity investments at overstated values rather than recognizing losses. But the piper may eventually have to be paid, which means confronting even greater loss if real values continue spiraling down.

What we know about this situation is bad, but what we don’t know may be worse. Private equity investments lack transparency, making it impossible to assess the pension fund’s true financial position. Despite the city controller’s 2019 call for better disclosure of fees and investment performance, financial reports still show only returns “net of fees” with no breakdown of individual investment performance. When billion-dollar pension obligations hang in the balance, this opacity isn’t just inconvenient — it’s dangerous.

If these risky bets fail, the city’s tax cut timeline crumbles. Worse, city workers could face higher payroll deductions to cover the shortfall, just as they have before when pension investments underperformed. If that’s not enough, taxpayers will be left holding the bag.

It should be noted that private equity doesn’t just threaten retirement security and tax reform through poor returns. These firms systematically harm the workers whose pension dollars finance them. Harvard Business School research shows private equity ownership cuts employment by 4.4% and reduces wages by 1.7% for remaining workers. Philadelphians saw this firsthand when private equity-backed investors shuttered Hahnemann University Hospital after just 18 months, eliminating 2,500 jobs and displacing 500 medical residents.

Philadelphia’s leadership faces a critical crossroads: continue funneling pension assets into a failing industry or redirect investments toward transparent, lower-cost alternatives with measurable performance. Better yet, follow New York City’s lead by investing pension funds locally in affordable housing preservation and development. Such investments could generate reliable returns while addressing Philadelphia’s housing crisis — a true win-win for workers and residents.

Given what’s at stake — tax reform, worker retirement security, and fiscal stability — the controller must immediately audit the pension fund’s private equity exposure. City workers and taxpayers deserve to know exactly how much this billion-dollar gamble may have already cost them, and what it threatens to cost them in the future.

At the end of the day, Philadelphia’s fiscal health shouldn’t depend on the broken promises of Wall Street’s most opaque industry. It’s time to invest pension dollars where they’ll actually work for us — in financially sound and productive Philadelphia businesses and affordable housing developments that benefit the people and workers whose earned wealth is what makes up this fund.

Stan Shapiro is a former City Council chief staff attorney and the vice chair and cofounder of Philly Neighborhood Networks. Peter Winslow is the vice president of the Public Banking Institute and a member of the Philadelphia Public Banking Coalition.