Philadelphia could save $170 million in the next five years if the Pennsylvania legislature approves measures to alter the city's retirement fund and extend paying down its $3.8 billion pension liability over 40 years instead of the current 20-year plan.
Mayor Michael Nutter Friday announced the proposed pension changes and said the $170 million of savings would help close an estimated $1 billion, five-year budget deficit, due in part to rising retirement costs. Without Nutter's pension changes, officials expect Philadelphia's annual pension contribution costs to increase by $358 million from fiscal 2010 to fiscal 2014.
"At a time when the city is facing unprecedented financial challenges, it is critical that we examine every possible option that might help us weather this storm," Nutter said in a prepared statement. "If we are able to work with our partners in Harrisburg to pass the necessary legislation, the positive financial impact on our five-year plan would be significant."
The initiative includes increasing the pension liability's amortization period to 40 years from 20 years, which would keep the obligation on the city's books for a longer period of time but cut pension contribution requirements in the short term.
Philadelphia would also like to spread the pension fund's losses and earnings over a period of 10 years, up from the current five-year plan. The state General Assembly would have to approve both initiatives before the city could move ahead with the proposals.
"There certainly is a short-term gain here in terms of a reduced payment, but it does push out the liability a little bit further," said Christopher Hessenthaler, a Fitch Ratings analyst. "But at the current rating level, the city's pension position is already factored in. It's always been a concern for us and continues to be."
Fitch rates the city BBB-plus. Moody's Investors Service and Standard & Poor's rate Philadelphia Baa1 and BBB, respectively.
In addition, the city's pension board on Friday voted to lower the fund's earnings assumption to 8.25% from 8.75%. That change will increase Philadelphia's annual pension contribution, while Nutter's other proposals would help offset that.
Lowering the fund's earning expectations will also give the city a more realistic perspective on the fund's performance, which saw a 10.5% gain in fiscal 2008 after taking into account the five-year spread, according to city finance director Robert Dubow.
"Changing the assumed rate of return from 8.75% to 8.25% is a move in the right direction in terms of being a little more prudent, more conservative," Hessenthaler said.
Nutter is set to release his fiscal 2010 budget on March 19 and has said he is considering all options for eliminating the $1 billion deficit, including additional spending reductions, tax and fee increases, and changes to employee contracts. Last year, city officials implemented spending cuts and delayed plans to lower business taxes to help close a previous $1 billion, five-year deficit and a $108 million shortfall in the $4 billion fiscal 2009 budget.
In addition to the pressing budget issues, officials are reviewing several liquidity enhancement proposals in relation to $271.4 million of Philadelphia Gas Works variable-rate demand bonds the city sold in 2006. A prior standby purchase agreement with JPMorgan expired on Jan. 26.
The city, which owns PGW, will be forced to pay an acceleration payment of $30 million every six months, beginning in July, unless it finds a new liquidity enhancement for the bonds. Financial Security Assurance Inc. insures the VRDBs. JPMorgan, Wachovia Bank NA, and the Bank of Novia Scotia now hold the bonds.
"In the next several weeks we'll have a firmer plan of how we're going forward on the letter of credit side," city Treasurer Rebecca Rhynhart said.
If the city chooses to refinance the VRDBs into fixed-rate mode, it will need to terminate a floating-to-fixed rate swap on the bonds. The termination fee on that stood at $50.2 million as of Jan. 30, according to Rhynhart.
Other potential bank bonds for the city include $300 million of general obligation debt and $450 million of water and revenue bonds. Rhynhart said officials are reviewing liquidity options for those bonds as well, yet the PGW series has the most immediate acceleration payment date.