Do the words pension reform frighten you? They should.
Economists estimate the nation's unfunded pension liabilities at $3 trillion. In Philadelphia, the number is $5.3 billion. If today the city allocated 100 percent of its current budget to paying off its pension debt, it would still come up $800 million short.
So, what's the next mayor to do?
Certainly not kick the can down the road. City Council already did that this year - twice.
First, in refusing to even discuss Mayor Nutter's proposal to sell PGW, Council sidestepped an opportunity to buy down pension debt by $500 million. Kick.
Second, in awarding bonus payments to 33,000 retired city workers, Council took a $62 million shovel to an already insolvent pension fund. Kick. Kick.
Note to the next mayor: We are at the end of the road. The proverbial can has come to rest between a rock and a hard place. We need you to dislodge it. Save us from the downward spiral of more taxes and fewer services.
Might a newly elected Council be more willing to pay down debt rather than pay back a mayor for perceived slights? One can hope. However, that needn't be the only solution. Across the country, cities and states have turned to voters, unions, and even the courts for help.
Voters. There are few polls measuring voter sentiment on pension reform, but those that exist show overwhelming support for strategies that both protect current retirees and renegotiate terms for future retirees.
San Jose and San Diego offer proof. In 2012, both California cities put the question of pension reform to voters. Though the details of Measure B and Proposition B were different, the themes were the same: increase employee contributions, change formulas for calculating benefits, transition employees to defined contribution plans or 401(k)s. Measure B and Proposition B passed by 39- and 31-point margins, respectively.
Taking the matter to voters won't guarantee support for change. But an appeal to voters that has strong mayoral backing increases the chance of success. Consider Phoenix. In November, by a six-point margin, voters rejected pension reform. Why? Well, unlike the mayors in San Jose and San Diego, Phoenix Mayor Greg Stanton opposed the measure.
If Council members remain wary of enacting pension reforms on their own, the next mayor might encourage them to at least support legislation that would put the question to Philadelphia voters.
Unions. The next mayor should also put the question of pension reform to municipal unions.
If ever there was a time when the interests of the city and its unions were aligned, it is now. A pension fund collapse would affect all taxpayers, but city retirees would be hurt the most. They aren't to blame, but their union is not blameless. Powerful in advocating for the retirement benefits their members now enjoy, where was that powerful advocacy in protecting longtime retirement security?
The Pew Charitable Trusts and the Economy League of Greater Philadelphia warned of a "quiet crisis" in their 2008 report on pensions. The report noted all four municipal unions declined to participate in the study. Statewide, the union-supported Keystone Research Center produces well-researched arguments against various recommendations for pension reform. Its only preferred reform? None.
Nationally, the United Food and Commercial Workers International Union is demonstrating how unions can lead on this issue. In 2007, David Blitzstein, a Philadelphia native affiliated with the UFCW, designed a compromise reform. The variable, or adjustable, proposal offers a middle ground between the union-preferred defined-benefit plan and employer-preferred defined contribution or 401(k)-style plan.
Unions argue that defined-benefit plans provide retirement security to members while insulating them from the market risks they'd assume under a defined contribution plan. Public employers argue that a defined-contribution plan offers its workforce greater autonomy over investment decisions while protecting jobs. In Philadelphia, which has more former city employees collecting a pension than current employees working, rising costs have forced service reductions, which amount to hiring freezes and layoffs.
The variable benefit plan shows it is possible to split the baby in half. It offers union members security through a floor-level benefit guaranteed to all retirees. For employers, it establishes more manageable benefit levels and shares market risk with workers.
In such a plan, if the market does well, retirees enjoy the upside. If the market does poorly, retirees are protected from the downside. This could be viewed as a win-win. What it is not is a win-lose - one in which all the risks sit with one side and all the gain with another. That's the very definition of compromise. And, as such, it makes it a proposal worth the next mayor's careful consideration.
Courts. Finally, though I don't recommend it, the next mayor could, in a sense, leave reform to the courts. This is not a proactive approach, but an option for the most cynical of mayors or the most skilled at can-kicking.
The requirements of this approach are to test the limits of irresponsibility. Ignore what other cities have done. Don't suspend cost-of-living adjustments. Don't delay vesting. Don't raise the age to collect. Don't discount overtime from benefits calculations. Don't work with Council, the voters, or the unions.
It's the surest way to ensure courts get involved. Ask Detroit or Prichard, Ala. Do nothing long enough, and then you just have to do one thing to turn the whole mess over to the courts: file for bankruptcy.
Pension reform. Now are you frightened?