A five-year police contract awarded by an independent arbitration panel yesterday delivers what Mayor Nutter called "unprecedented" long-term reforms on benefits, but comes at a steep price in short-term raises and ends a residency rule aimed at stabilizing the city's middle class.

In a decision that could set the bar for the city's three other major municipal unions without contracts, police officers will receive 7 percent raises over the course of the next three years and can negotiate for further raises in the last two years of the pact. That will cost the city $114 million for the next five years.

The police also won a concession they have sought for years: the option to live outside the city. All officers with at least five years on the force - more than 6,000 of 6,550 officers - will be eligible to move out of the city by 2012.

Those gains will be offset by higher co-pays in the police medical plan, and 20 percent higher pension contributions from new employees. For the first time, employees will be able to choose a 410(k)-type of retirement plan.

"This award represents the kind of change we've been talking about for the last two years," said Nutter, who acknowledged that the already struggling city would "have to be that much more creative" to balance the budget over the next five years.

Nutter called the award fair but did not rule out an appeal.

He had budgeted for $25 million in annual savings from union contracts, including $8.7 million annually from police. This contract does not achieve those savings up front, but Nutter said the actual cost was still being calculated.

John McNesby, president of Fraternal Order of Police Lodge 5, said the union gave and gained with the award. "These are unprecedented times, times like nobody's seen in a long time," McNesby said. "I think what this award does is does some things for both sides."

James Eisenhower, chairman of the board of the Pennsylvania Intergovernmental Cooperation Authority, the state agency that must decide whether to approve the city's five-year plans, said the board would begin analyzing the wage-hike effects at its next meeting. He called the police concessions significant and praised the union for "recognizing the realities of this economic situation."

Nutter also now has the authority to furlough officers for up to 30 days a year, an option he called "a key management tool in a time of budgetary crisis."

Observers said the contract would have a much larger impact if the three other unions - firefighters, white-collar workers, and blue-collar workers - reached similar deals.

Comparable wage terms would further strain the budget over the next few years; similar benefits terms would help stabilize those costs; and, some say, elimination of the residency requirement for all would represent a seismic social shift.

"I think it was a good award and I'm looking to follow suit," said Pete Matthews, president of AFSCME District Council 33, the city's largest municipal union, representing blue-collar workers. "I'm looking to get wage increases and a fair contract like the FOP got."

The next negotiating session is not expected until January.

Bill Gault, president of International Association of Fire Fighters Local 22, said in a statement, "We will continue to seek economic parity with others who put their lives on the line to protect the public. We will continue to seek proper and adequate health and pension benefits for the people who are universally regarded and hailed as heroes except when it is contract time."

City firefighters are now involved in contract arbitration.

A spokesman for AFSCME District Council 47, the white-collar union, declined to comment while the union digests the police award. The city canceled a negotiating session it had scheduled with the union, which would have been the first since July.

City Councilman Brian O'Neill called the police pact a "good deal" for both sides and said, "That's not usually the analysis. "This looks like a good model and one that hopefully they'll follow with the firefighters."

"It looks, on balance, the police won much more than they lost," said City Controller Alan Butkovitz, who questioned whether the requirement for new hires to pay 6 percent of their salary toward pensions - up from 5 percent - would cover pension benefits.

Robert Strauss, a professor of economics and public policy at Carnegie Mellon University, said the award showed "creativity and a civilized solution to a very difficult situation."

He said the optional 401(k)-type option for new employees was "a real step forward."

"At least it's on the table now for people to discuss, and that hasn't happened before," he said.

But the pension changes appear to offer more financial benefits - officials estimate about $190 million in savings over 30 years - than structural alteration, according to Larry Eichel, project director of the Philadelphia Research Initiative at the Pew Charitable Trusts, which authored a report this year on the city's challenges in controlling costs.

McNesby and others predicted that most employees would pay the extra percentage to stay in a defined-benefits plan, which guarantees a payout. "I feel confident that our newly hired officers will be smart enough to join a defined-benefit plan - virtually all officers, particularly since I have the ability to address that group before they sign any paperwork," McNesby said. "I'm not going to steer them wrong."

The raises come in the form of a 4 percent hike in Year Two and a 3 percent hike in Year Three. There is no raise the first year. That gives Nutter some breathing room for the next six months. He had sought no pay increase, and the city's appointed arbitrator on the panel, labor attorney Kenneth M. Jarin, wrote in a dissenting opinion that the raises awarded "are in excess of what the city can afford."

Nutter has asked department heads to cut 7.5 percent from their budget proposals for next year, and City Council members predict that the 2011 budget could be worse than the current budget, which required the closing of many pools and reduction of library and recreation-center hours. "Unless the economy turns around quickly, the city's going to be in for another very tough budget cycle," said Phil Goldsmith, managing director under Mayor John F. Street. "Longer term, it's a beginning of getting some rationality to health and pension costs."

The cost of the police raises is offset by some savings; the contract cuts health-care costs by $200 per officer in the next six months. It then requires the FOP to adopt a pay-as-you-go policy in which the city pays medical bills as they come in. Currently, the city pays a per-employee fee to the union that often exceeded actual costs by millions each year, according to the arbitration award. That has allowed the union to build up a $48 million trust fund, which the panel called unnecessary.

The health-care changes will save the city $10 million by June, observers say.

City Councilman W. Wilson Goode Jr. said the agreement allows City Council and the mayor to work with hard figures as they look toward the next budget.

"We have a clearer picture of what our labor costs are," Goode said, "so we are better prepared to make hard decisions."

City, Police Have New Contract

A panel of arbitrators awarded Philadelphia police officers a new five-year contract yesterday. The contract covers July 1, 2009, to June 30, 2014. Deals for the city's other unionized workers have not yet been reached.

Wages

A 4 percent raise in 2010 and a 3 percent raise in 2011, with the possibility of further increases in 2012 and 2013.

The total cost of those raises to the city is $114 million over the life of the contract.

Health care

Although benefits remain the same, the city will now pay health-care claims directly instead of a per-employee annual lump sum, saving an estimated $10 million in the first year of the contract.

Police co-pays will rise to $5 for generic prescriptions and $10 for most other medicines. Co-pays for doctor visits will be $10.

As before, officers will make no direct payroll contribution to their health-care benefits.

Pensions

New hires will pay 6 percent of their salaries, up from 5 percent, for a traditional pension. Alternatively, new hires can voluntarily enroll in a hybrid plan that includes a 401(k)-type defined-contribution plan.

The savings from those changes will take decades to realize, but city officials estimate a 30-year saving of about $190 million.

Pension benefits for officers already on the force will remain unchanged.

Residency

As of July 1, veteran officers will no longer be required to live in the city to remain on the force.

Effective Jan. 1, 2012, all officers with five or more years of experience will be free to live outside the city.

Newly hired officers will have to live in Philadelphia for five years before moving elsewhere.

All officers must live in Pennsylvania.

Other provisions

The city has the authority to furlough officers for up to 30 days each calendar year.

Some work rules have been relaxed, which should result in less overtime pay.

Problems with staffiing and overtime in the summer will be addressed by limiting officers with five years or less experience to one week of vacation in summer months, saving an estimated 1,000 weeks of summer vacation over five years and saving on overtime costs associated with having too many officers on vacation at the same time.

Other vacation time and holidays are unaffected by the new contract.

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Contact staff writer Jeff Shields at 215-854-4565 or jshields@phillynews.com.

Inquirer staff writers Miriam Hill and Patrick Kerkstra contributed to this article.