Philadelphia Pension Faces Most Severe Underfunding in over a Decade

June 30, 2009 (PLANSPONSOR.com) - A new report indicates Philadelphia's city pension fund now has less than half the money it needs to make good on its obligation to past and current city workers - the most severe underfunding since 1996.

The report by The Pew Charitable Trusts’ Philadelphia Research Initiative, Quiet No More: Philadelphia Confronts the Cost of Employee Benefits , is a follow-up to Philadelphia’s Quiet Crisis: The Rising Cost of Employee Benefits , a study published in January 2008 by Pew and the Economy League of Greater Philadelphia (see Philly Benefit Obligations Increasing Faster than Revenue ). The new report says the pension situation has grown worse since Pew’s previous study, the result primarily of the fall in the stock market.

Exactly how far below 50% the funding level has slipped — it stood at 55% a year ago — will become apparent in the coming months, when the city is required to make its annual report on the status of the fund, according to a press release.

As of March 31, the market value of the fund’s holdings had shrunk by 30% — from $4.66 billion to $3.26 billion — over 12 months.

In addition, the city’s annual health care costs have declined on a year-to-year basis. The report contends that is because costs for firefighters and police officers fell in fiscal year 2009 after having been abnormally high in 2008 — the result of one-time payments to settle arbitration disputes — and costs for other unionized workers stayed the same. Even so, health care costs paid by the city were 11% higher in the year ending June 30 than they were two years ago, and 45% higher than five years ago, the press release said.

Delayed Contributions

In the state legislature, the city is seeking approval of a plan that would help balance its budget over the next several years by delaying some contributions to the pension fund. Contracts expire June 30 for the four unions representing city workers, and both pensions and health care are key issues in the renewal talks.

“The outcome of these proposals and negotiations will be pivotal for the city’s fiscal future, for the workers and retirees who rely on these benefits and for the taxpayers who foot the bill,” said Larry Eichel, director of Pew’s Philadelphia Research Initiative, in the press release. If the city gets approval from the legislature, Philadelphia’s total general-fund spending on pensions and health care, now at $830 million, is set to decline over the next two years before rising dramatically.

By 2013, costs for the two items will approach $1.1 billion, including over $700 million in pension-related payments alone. At that point, all payments related to pensions and health care would represent more than one-quarter of the city’s $4 billion, general fund budget.

The $1.1 billion figure, noted in city budget documents, is based on the assumption by budget officials that the city’s health care costs will remain virtually unchanged for the next five years. If that assumption turns out to be wrong, the number could go higher.

The new Pew report is here .

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