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Short-term pain for long-term gain

The five-year contract awarded to Philadelphia police officers could save taxpayers millions down the road, but the short-term costs will stretch the city's already sagging finances.

Mayor Nutter said the contract provided for "unprecedented" pension and health-care reforms. The city's representative on the arbitration panel endorsed much of the deal but wrote a dissent that said the award "does not go far enough to protect the city's fiscal health."

Indeed, the salary hikes weren't budgeted in the city's five-year plan and will likely require cuts elsewhere.
Those cuts come on top of deep cuts made to balance the budget following the economic meltdown.

Under the award, police officers get a 7 percent raise in the first three years and can negotiate additional pay hikes in the final two years. The raises will cost taxpayers at least an additional $114 million over five years.

Overall, labor costs will likely jump by tens of million of dollars more as the three remaining unions look for similar raises. Given the police contract sets the tone for the rest of the city unions, Nutter has to consider if the long-term reforms are worth the short-term costs.

That's why Nutter may be wise to appeal the ruling. Not doing so signals to the other unions his support for the deal. A provision in the PICA legislation that gave the state oversight of the city's finances says arbitrators must consider Philadelphia's ability to pay for higher wages and benefits without affecting services.

Nutter is in a tough spot. The expected savings in the pension and health-care costs will not have much impact on the budget in the early years. Any savings come down the road.

Pension and health-care benefits for all workers account for 25 percent of the city budget. Those costs have far outpaced inflation, putting a major strain on city finances. Nutter made it a priority to clamp down on those costs.
But under the contract, pension benefits for current officers remain unchanged. New police hires will contribute 6 percent to their pension, while existing officers will pay 5 percent.

That's hardly a major reform.

On health care, police officers continue to not make payroll contributions for their coverage. Co-pays for generic drugs will increase to $5 and $10 for most other medicines. Most workers in the private sector would jump for such health coverage.

The city does expect to save $10 million only in the first year by paying claims directly rather than a lump sum for each employee. An additional savings of $5 million a year is expected as the city moves to self insurance.

The union did agree to changes in work rules that provide scheduling flexibility and the possible furlough of officers. That will provide for savings and efficiency.

But the 6,500 police officers also won a big concession that allows them to live outside the city. Other city employees will likely push for the ability to live outside Philadelphia as well. That could depress property values in the city, but also expand recruiting.

City Controller Alan Butkovitz said the police contract contains some gains and some givebacks, but was "basically business as usual" for now.

Even before the police award, Fitch Ratings downgraded the city's bonds to one notch above junk due to the city's "continued financial deterioration."

The long-term gains for the city come with an immediate cost.