Philadelphia’s pension and health care costs for city employees are increasing at a much faster rate than the city’s revenue, according to a report released yesterday by the Pew Charitable Trusts and the Economy League of Greater Philadelphia.

By 2012, the city is expected to pay more than $1 billion, or about 28% of its budget, to cover pension obligations and health care benefits. This is an increase from 16% in 1998, according to the report titled “Philadelphia’s Quiet Crisis: The Rising Cost of Employee Benefits.”

“The ‘quiet crisis’ of Philadelphia’s mounting employee pension and health care costs threatens to drain the resources needed to tackle other problems facing the city,” said Pew’s managing director of information and civics initiatives, Donald Kimelman. “While there are no quick and easy solutions, there are fiscally responsible steps the city can take today to ameliorate the problem while remaining fair to municipal workers.”

Philadelphia’s pension obligations are only 52% funded, which is one of the lowest levels in the country, and much lower than the 80% level that is considered healthy by most experts, according to the study. The city’s unfunded pension liability is $3.9 billion.

The low unfunded level is due to a combination of lapses in contributions to the pension fund in the 1970s and 1980s and lower-than-expected returns on investments. With repayment on bonds issued in 1999 and other expenses factored in, total annual pension obligation costs are projects to rise to $613 million in 2012 from $252 million in 1998, the report said.

Additionally, the cost of health insurance expenses rose 80% from fiscal 2002 to 2007, and another increase this fiscal year brings the 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, averaging $13,030 per person this year, the report said.

“The pension situation has long been an issue for them,” Standard & Poor’s analyst Jeffery Panger said of Philadelphia. “The pressure the city faces from its pension is incorporated within their rating.”

Standard & Poor’s assigns Philadelphia’s general obligation debt a BBB rating, Fitch Ratings gives it a BBB-plus, and Moody’s Investors Service rates the bonds Baa1.

The report offered several options for addressing the rising costs, including adopting a hybrid of defined-benefit and defined-contribution plans for new employees, raising the retirement age for new employees, and increasing employee contributions. It also recommended examining current investment practices and negotiating 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.

Contracts with Philadelphia’s four major unions — police, firefighters, white-collar workers, and blue-collar workers — expire by the end of June. Mayor Michael Nutter and the four labor unions have agreed not to negotiate contracts in public.


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