It may be a great deal, but can the mayor afford it?

An arbitration panel yesterday awarded a five-year contract to the city police union that provides officers with a 7 percent raise but makes benefit changes that the city says will save major cash in the long haul.

"We face a significant challenge in paying for this contract, but the short-term pain is offset by the long-term gain," Mayor Nutter said.

The contract for the 6,550 sworn officers in the Fraternal Order of Police is the first deal resolved since agreements with the city's four municipal unions ran out June 30. The police union must settle through arbitration because they cannot strike.

Yesterday's contract gives Nutter some - but not all - of what he was looking for. Nutter put no money for raises in his five-year financial plan and announced that he was counting on getting $25 million in annual savings from the four contracts - moves he said were necessary to help mend the city's fiscal woes.

Now he is facing a hefty bill for police raises, but will win long-term savings through the addition of a lower-cost retirement plan for new hires and changes to the way health-care bills are paid. Meanwhile, officers won a major softening of the city-residency requirements.

The contract provides wage increases in July 2010 and July 2011 totaling 7 percent. And the contract may be reopened for further increases in the following two years.

The raises are expected to cost $114 million over the life of the five-year contract, although Nutter said that would be offset by some of the expected benefit savings. Nutter, who could not provide a total net cost of the contract, said he wasn't sure how the city would pay for the raises.

"There is no question that the economics of the award absolutely presents a fiscal challenge in an already fiscally challenged environment," said Nutter, who would not detail whether cuts or layoffs would be required.

FOP President John McNesby praised the contract, in particular the wage hike.

"I think it addressed the FOP concerns in areas and the city's concerns in areas," he said.

For health care, the union will shift in July to a self-insured plan, meaning that the city will pay medical bills directly, instead of a per-member fee each month. Nutter said that the city expects to realize savings through this model but that the union would continue to run its own plan.

And on pensions, new hires would have the option of paying more to stay in the current pension program or going to a hybrid plan that combines a 401(k) with a lower-benefit pension. The details of that plan have not been ironed out.

The city estimates that if all new hires stay on the traditional pension with the higher pay-in, the city will will save $6.4 million over five years. If all new hires shift to the new plan, the savings could be more than $9 million, officials said.

Nutter called the change "historic," saying this contract would finally help the city deal with rapidly inflating benefit costs that are eating up the city budget.

"Weighing the pros and cons of this award, it's clear to me that Philadelphia has a once-in-a-generation opportunity to advance significant reform," Nutter said.

The city won some work-rule changes, including permission to make officers take up to 30 furlough days each year. But Nutter said he was frustrated by the changes that will make it easier for officers to move outside the city.

"I believe there is an immense value to having police officers live in the city in which they work," said Nutter, who added that his city solicitor had advised him that he couldn't appeal that issue.

Calling the residency rules "antiquated," McNesby said he thought the change was fair and that he doubted a "mass exodus" from the city would occur.

The police contract, often awarded first, is frequently viewed as a barometer for the other city contract deals. Nutter said he would like to see some of the same terms in the coming contracts.

The firefighter contract also is settled through arbitration and is not expected for several months. District Council 33, of the American Federation of State, County and Municipal Employees, which represents blue-collar workers, and District Council 47, representing white-collar employees, participate in traditional negotiations with the city. There have been few bargaining sessions since summer.

Pete Matthews, president of DC 33, said he thought the police-union contract was good news.

"I think it should get our negotiations started off good for us," Matthews said. "They have pay increases."

Firefighters union president Bill Gault and DC 47 President Kathy Scott did not respond to calls for comment, instead providing statements through a spokesman that did not address the details of the contract announcement.