The city's $11.3 billion pension fund is currently funded at 45 percent. The city claims it is on track to close the funding gap — and to have the fund 80 percent funded by 2029.
If only we could believe that this will actually happen.
A report issued last week by Standard & Poor's warned that the city is again overestimating the assumed rate-of-return, which means that the fund is even less funded than we think.
The city insists on calculating the fund's level of funding with a projected rate-of-return of 7.65 percent a year. Both economists and for-profit companies agree the rate is unrealistic.
Just three years ago, State Auditor General Eugene DePasquale urged the city to adjust those projections to below 6 percent; in fact, that is still higher than the maximum assumed rates that corporate pension programs are allowed to use by law — 5 percent. But the city continues to use the higher number.
To get such high returns, the city's strategy is to pursue riskier investments, which are volatile. A look at recent years shows that pattern — the fund gained 12.9 percent in fiscal year 2017, lost 3.17 percent in 2016, and gained only 0.29 percent in 2015. The city's hope is that over time, the rate-of-return will average out to 7.65 percent or higher.
The state of the fund is already taking its toll. In March, S&P downgraded the city's credit rating, citing among other reasons, the pressures on pension obligations. Being overly optimistic is not going to make the problem go away.
But the city makes the pension issue even more challenging by handing out pension bonuses.
In 1999, City Council created a Pension Adjustment Fund to issue bonuses to retirees if the fund is healthy — 76.7 percent funded — and investments are performing well. In 2007, then-Councilmember Jim Kenney sponsored legislation removing the safeguard, forcing the city to pay out bonuses even when funding is low. Exactly that happened in 2016: Even though the pension fund lost $218 million of its value in 2015, and although the fund was funded below 50 percent, the Pension Board approved $7.7 million in bonuses.
At a time of pension shortfalls, retaining these bonuses is irresponsible.
Three out of four city employees will reach retirement age in the next 15 years. Philadelphia will pay out these pensions one way or another, and if there is not enough money in the fund — which seems more likely than not — the city will have to dip into the general fund. The city is already planning to infuse $750 million in sales tax revenue into the fund to close the gap.
City Council and the mayor should end the Pension Adjustment Fund or restore more stringent conditions for issuing bonuses. The Philadelphia Board of Pensions should be more aggressive about lowering the projected returns. It's not an easy task to get the pension fund in better shape, but we shouldn't be making it harder than it needs to be.