Philly Benefit Obligations Increasing Faster than Revenue

January 23, 2008 ( - A report released by The Pew Charitable Trusts and the Economy League of Greater Philadelphia finds Philadelphia's pension and health care costs for city employees increasing at a much faster rate than the city's revenue.

According to a press release on the report, the amount of money the city pays to cover pension obligations and health care benefits for current and retired city employees is projected to rise to more than $1 billion or roughly 28% of the city’s budget by 2012. This is an increase from 16% ($403 million) in 1998.

The report also points out Philadelphia’s pension obligations are only 52% funded, one of the lowest levels in the country, and much lower than the 80% level that is considered healthy by most experts. The report attributes this funding level to lapses in contributions to the pension fund in the 1970s and 1980s, combined with lower-than-expected returns on investments.

The city’s unfunded pension liability is $3.9 billion, or nearly half of its $8 billion future pension obligation. With repayment on bonds issued in 1999 and other expenses factored in, total annual pension obligation costs are projected to rise from $252 million in 1998 to $613 million in 2012, the press release said.

The report shows Philadelphia’s health insurance expenses are also significant. Total costs rose 80% from fiscal year 2002 to fiscal year 2007, and another increase this fiscal year brings this expense to $374 million or nearly 10% of the city’s total budget.

Philadelphia pays more per capita than nearly any other city in the nation, and that amount has increased by 33% in the past two years alone – to an average of $13,030 per person this year, Pew said in the release. Philadelphia’s health care benefits are costing the city approximately $113 million more than if the expenses were in line with state/local government averages.

“Philadelphia’s Quiet Crisis: The Rising Cost of Employee Benefits,” suggests a number of actions the city could take to confront the rising costs of benefits and increase accountability and transparency in the systems, including:

  • To reduce future pension costs, adopt a hybrid of defined-benefit and defined-contribution plans for new employees. These would have the added benefit of portability, which would be viewed favorably by younger workers.
  • Raise the retirement age for new employees and increase employee contributions.
  • Examine current investment practices and determine whether policies are providing optimal returns with appropriate risk. Benchmark annual performance results for each individual investment vehicle against national averages. Make the results available on the pension board’s Web site.
  • Negotiate a change in compensation practices that would give the city more control over health spending rather than simply providing a per capita payment for each employee to his or her union. With greater control, the city (and its taxpayers) can bring about and benefit from management reforms that have worked to bring down costs in other cities while remaining fair to workers.
  • Undertake regular compensation surveys to benchmark its salaries and benefits against those enjoyed by other regional public and private employers, and consider any proposed change in any element of compensation as part of a total package and not in isolation.

The report is here .