"This is a first-of-its kind plan that has the ability to substantially reform Philadelphia's public pension," says Philadelphia City Controller Alan Butkovitz.

Philadelphia's chief fiscal watchdog is pitching a proposal to union leaders aimed at trimming the city's massive pension shortfall.

City Controller Alan Butkovitz would like to offer many pensioners a one-time payout in exchange for lowering their annual pension payments.

The buyout plan is directed at 33,000 "Plan 67" pension system members.

It would offer them a chance to transfer to "Plan 87," a less generous retirement formula that was established for employees hired beginning in 1988.

If all of the Plan 67 members agree, the city would reduce its $5.9 billion in unfunded pension liabilities by $1 billion, according to Butkovitz.

"Several key groups continue to show an interest in the pension conversion plan, as evident by their willingness to conduct due diligence," said Butkovitz in a statement. "The next steps will include meeting with union presidents to review the overall benefit and impact for their members."

Switching employees through the cash incentive would cost the city $514 million, according to Butkovitz. An example of the conversion plan he cited would be a police officer making a salary of $75,000 with 30 years of service getting a $41,265 cash payment in exchange for cutting his annual pension from $56,250 to $48,000.

Butkovitz has stressed the need for reforms due to Philadelphia's $10.8 billion in pension liabilities being only 45% funded. The plan would immediately increase the funding level of the pension system to 50% and save $136 million annually for the city's minimum municipal obligation.

"This is a first-of-its kind plan that has the ability to substantially reform Philadelphia's public pension," said Butkovitz, who was first elected city controller in 2005 after a 15-year stint in the Pennsylvania House of Representatives.  "Everyone wants to get it right the first time."

Brian Dries, a spokesman for the city controller's office, said Butkovitz is planning to meet with various union presidents to gain additional feedback on the pension conversion plan.

Mike Dunn, a spokesman for Mayor Jim Kenney, said that he will respect whatever decision is reached by the Philadelphia Board of Pensions. The new mayor, who took office in January, has made ramping up payments to the pension fund a priority.

His initiatives include directing $26 million over five years toward the retirement system from the city's new tax on sugary drinks.

"He trusts that the Board will make a decision on whether to go forward that is in the best interests of the Fund as well as current and retired City workers," said Dunn.

Brian Coughlin, a representative on the Philadelphia Board of Pensions for Philadelphia Firefighters Union, Local 22, said surveys about the proposal are being sent out to members in order to get a pulse on where they stand.

Coughlin said the idea should be seriously considered because it offers beneficial payments on the front-end while also combatting the city's liability burden. The proposal would give individual union members the option to accept or reject the offer and he hopes Local 22 and the city's three other municipal unions on the board will form a consensus by February after getting constructive feedback.

"It's the unfunded liabilities that are crushing the system," said Coughlin. "I give our controller credit for recognizing the real problem."

Francis Ryan, a labor studies professor at Rutgers University, said the proposal could be a positive for Philadelphia in terms of reducing liabilities and for unions in assuring that employees are protected.

"It's hard to be creative in coming up with solutions for this problem, but it would certainly put the city in position to continue the pensions," said Ryan, who authored a 2011 book on the history of Philadelphia's American Federation of State, County and Municipal Employees union. "If you don't have pensions guaranteed 10 years down the line it might make sense to consider this offer."

S&P Global Ratings revised its outlook on Philadelphia's A-plus rating to negative from stable ahead of a Nov. 16 $282.9 million general obligation refunding sale.

S&P emphasized concerns about the city's reserve levels and rising retirement costs as drivers behind the revision. The Nov. 7 report noted that the city is at risk of seeing its reserves fall to less than 1% of expenditures over the next one to two years because of pressures on pensions and other post-employment benefit expenses.

"Philadelphia certainly faces a substantial challenge in its underfunded pension plans, although plans are not as poorly funded as those of cities such as Chicago and Dallas," said Janney Capital Markets municipal analyst Alan Schankel. "If Controller Butkovitz's plan were implemented, it would improve funding, but I question whether retirees would sign up."

Philadelphia received four bond upgrades under previous Mayor Michael Nutter. The nation's fifth-most populous city is rated A2 by Moody's Investors Service and A-minus by Fitch Ratings. The city has $1.5 billion in outstanding GO debt, according to Moody's.

"It is a substantial burden to them," said Fitch analyst Eric Kim of Philadelphia's high pension liability. "It is something that has to be addressed."

Kim noted in Fitch's Nov. 7 report affirming Philadelphia's A-minus rating that "significant movement" on the city's pension liabilities could spur a positive rating action, which is not currently anticipated. Kim said aspects of the pension conversion proposal look promising, but more specific details are needed before determining how it may impact the city's financial profile.

"[The proposal] recognizes the challenges the city faces with pensions are significant," said Kim. "It might require some creative thinking and this is certainly an interesting proposal."

Professor Ryan said if the Philadelphia pension conversion plan proves successful it may be a strategy other municipalities consider. He said the proposal strikes the proper balance in offering upfront payments to the unions while also creating a long-term strategy to find savings.

"It could be the kind of program implemented in other areas of the country," said Ryan. "It could become an innovative way to look at the problem."

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