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Savings in police contract, someday

Salaries will rise under the deal announced Friday, but long-term cuts were seen in pension and health costs.

The five-year contract that arbitrators awarded Philadelphia police officers last week stands to save taxpayers hundreds of millions of dollars - just not any time soon.

Future mayors will owe Michael Nutter big for putting the brakes on long-accelerating pension and health-care costs that have consumed a bigger slice of the city's spending year after year.

But the award is a budget-buster for the current administration because of some hefty salary increases: 4 percent beginning July 1, and 3 percent beginning July 1, 2011, with the possibility for further raises in the final two years of the deal.

Nutter's five-year plan counted on saving $45 million from the police contract. The wage hikes, though, will cost the city at least $114 million, an amount that dwarfs early savings on pension and health-care costs.

Even before the police award was announced Friday, city departments were preparing to cut their budgets yet again, because of weak wage-tax collections. Those reductions were to come on top of last year's record-setting spending cuts, when Nutter was forced to close a $1.2 billion six-year deficit as the nation's economy collapsed.

In light of the police award, still larger spending cuts or increased fees are all but certain, particularly if the other city unions - the International Association of Fire Fighters Local 22, and AFSCME District Councils 33 and 47 - also get raises the Nutter administration has not budgeted.

The police contract often influences the firefighter award, which is also determined by an arbitration panel. And the blue-collar and white-collar city workers represented by DC 33 and DC 47 will now surely seek similar raises at the negotiating table, though they are not at all guaranteed to get them.

Already, the police award will force Nutter's budget team to pare more than $100 million out of its five-year plan. If the other unions get comparable raises, next year's cuts could rival those of 2008-09.

It would be a steep price for the administration to pay for savings that will not be fully realized for decades after Nutter leaves office.

"It will be hard, but the mayor has said over and over again that he wanted to attack the long-term problems of pension and health-care costs," said city Finance Director Rob Dubow. "People have been talking about them for years and years. This award addresses both."

Nutter said: "This award represents the kind of change we've been talking about for the last two years."

But, in an acknowledgment that in the short run money could be tight, Nutter said: "We'll have to be that much more creative" to balance the budget over the next five years.

For all the short-term belt-tightening the police contract requires, the Nutter administration considers the pension and health-care savings in the deal to be a major boon for the city.

"The short-term pain is dramatically offset by the long-term gain for our taxpayers," Nutter said.

Between 2001 and 2008, city spending on health care soared a total of 123 percent. The annual payment to the pension increased more than 100 percent over the same period. The new police contract will not slash those expenses overnight, but it does start the job, administration officials said.

On health care, the city expects to save $10 million in the first year by switching its 6,550 police officers to a "self-insurance" plan, meaning the city will stop paying a set monthly per-employee cost to insurers and will instead directly pay all claims. Police co-pays will also be higher on prescription drugs and doctor visits.

The provisions likely to save taxpayers the most are related to the pension, Dubow said.

New police officers will have to contribute 6 percent of their salaries to the pension fund, up from 5 percent under the old contract. The award also creates a voluntary retirement plan, which combines a traditional but reduced pension benefit with a defined-contribution plan comparable to a private-sector 401(k). It is unclear how many officers would be willing to enter the hybrid program.

Estimating the city's long-term savings from these contractual changes is tricky, Dubow acknowledged, but he pegged the pension cost savings alone at hundreds of millions of dollars over 30 years.

But City Controller Alan Butkovitz, who sits on the city's Board of Pensions and Retirement, said he doubted that increasing police pension payments from 5 to 6 percent of salary would do much to bolster Philadelphia's depleted pension fund.

Other close observers of the city's finances said the fact that the award dealt at all with the long-term challenges of pensions and health-care benefits was notable.

"We are pleased with some of the developments, particularly with regard to pensions and health care," said James Eisenhower, chairman of the Pennsylvania Intergovernmental Cooperation Authority, which oversees the city's long-term fiscal planning.

Eisenhower did sound a cautionary note about the short-term expense of higher raises, however, noting that the city's five-year plan would now have to make room for those unanticipated costs.

"We have had to figure out a way to manage through the economy, and now we have to find a way to manage through this," Dubow said.