Phila. pension problem is fixable with leadership

Discussing pensions reminds me of a scene in the Woody Allen movie Take the Money and Run. Allen plays the part of an inept bank robber, Virgil Starkwell, who is sent to solitary confinement. When he disobeys the rules, the authorities impose an even worse punishment: Allen is sent back to the "hole" accompanied by a life insurance salesman talking about annuities. What could be worse? Maybe pensions.

So instead of pensions, let's begin with a pet peeve of many city drivers - potholes. "Why does it take so long to fix these things?" was a familiar complaint I received as managing director.

One reason is our woefully underfunded pension system. The city spends 17 percent of its budget on pensions, more than double from a mere 10 years ago. In 1985, we were pouring $136 million annually into pensions; today, it's more than $600 million. And it's still not half funded.

In short, rather than funneling money into fixing potholes, improving public safety, shoring up schools, or funding tax cuts, tax money is being siphoned off into the deepening crater known as our pension system.

Unlike potholes, which are largely the result of Mother Nature, the pension crater is man-made. Like most craters, it didn't happen overnight. We've been digging this hole since the 1970s. There is much blame to go around, but our crisis today is the result of three fundamental causes:

Investment returns have lagged.

Pension benefits are too generous.

Employees don't contribute enough.

Some changes have been made. Employee contributions have increased slightly and so-called hybrid plans have been introduced for a handful of new employees. But far more needs to be done. Unfortunately, time is not on our side. The city's demographics are working against us.

In 1985, there were 13,000 more active workers than retired employees. Today, there are 3,500 more retired employees than active. That means more people are receiving than giving.

Worse, City Council passed the Deferred Retired Option Plan, infamously known as DROP. In most cities with a similar plan - there aren't many - it is limited to police and fire personnel, who aren't covered by Social Security. But Council included all employees, even themselves. It also removed an important qualification for retirees to receive a bonus if investment gains were good enough. No longer does it matter how well the plan is funded. As a result, the city is sending $62 million in bonus checks this year, undoubtedly signed by Santa Claus, to retirees.

Council's benevolence came as the city's pension fund was under water. It's like adding more water to a swimming pool as someone is drowning.

To complete all this bad news, the city made a wrong bet on interest rates in 1999, adding significantly more debt to the fund.

By virtually every measure, Philadelphia's pension system is more generous and more underfunded than those of peer cities. City employees - civilian and uniformed - contribute less than their peers and receive more. Investment performance has lagged that of other cities, and the city's funded ratio of 48 percent is near the bottom. (To be clear, I am not suggesting retirees should lose their pensions. They earned them, count on them, and deserve to keep them.)

In short, today's taxpayers have a significantly higher cost burden than past generations.

This is all detailed in an excellent comprehensive report issued last month by the Pennsylvania Intergovernmental Cooperation Agency (PICA). It should be required reading for all mayoral and Council candidates. Indeed, for all who care about the city's future (www.picapa.org).

So what's to be done? Some basic tinkering can help: adjusting some actuarial numbers, more frequent audits, asset smoothing - and other things Woody Allen's character probably heard about in solitary.

But the real issue, the reason Philadelphia is in this pickle, is this: The people who can fix the problem - mayors, Council members, and union leadership - worry more about themselves than about the city's future.

Drop DROP? No way.

Increase employee contributions? Just an itty, itty bit.

Pay bonuses with money you don't have? No problem.

Consider selling PGW to put a big dent in the problem? Hear no good, see no good, do no good.

The good news is that the solutions are there. Look at what other cities are doing. Or read the PICA report.

The bad news is that implementing the obvious solutions requires leadership. Mayors, Council members, and union bosses must be willing to work together for the good of tomorrow's generation as well as today's. That willingness has been missing in action.

As the primary nears, voters must look at the mayoral candidates and judge whether they have the ability, willingness, and track record of bringing divergent groups together for the common good. Same for Council candidates - incumbents and challengers.

What is at stake, as PICA says, is Philadelphia's long-term financial stability and the "ability of the city to maintain competitive service levels and tax rates."

Philadelphia will not achieve greatness with the visit of a pope or a major political party but by mustering the political will to fix that huge crater in our midst.