Moral Hazards: Philadelphia’s Ongoing Pension Crisis

How did Philadelphia end up as one of the poorest, least-educated, highest-taxed and most violent cities in the country? Blame 40 years of political cowardice—and 34,966 ex-city workers who are still collecting fat government pensions.

PHILADELPHIANS HAVE LEARNED through bitter experience to expect less and less of their city government. Year after year, more services are cut than expanded. Libraries are subjected to commonplace “emergency closings” due to staff shortages. Mechanical leaf collection is gone; street repaving and pothole repairs are completed on slower schedules. Even for that much, we pay more. Three years running, planned tax cuts have been scotched, and rates were raised on other levies, like property, parking and sales taxes. Increasingly, Philadelphia has a government that demands more from its citizens even as it gives them less.

What’s to blame? The causes are complex, and include everything from generational poverty and white flight to the Great Recession. But more than anything else, it’s Philadelphia’s dull, maddeningly complex and immutable pension system that has sapped the strength of city government. There is no single greater drain on the city’s capacity—to fight crime, to fund education, to clean the streets or to cut taxes—than pensions.

Philadelphia’s pension fund—the $4.7 billion pot that writes pension checks for retirees—has only half as much money as it needs to be self-sustaining. That’s a dangerously low funding level, one of the worst in the nation. Left on its own, the fund would be insolvent by 2015. But the city won’t—and legally can’t—let that happen, so it writes massive checks each year to cover the pension benefits the fund can’t.

This year and next, Philadelphia will spend 18 percent of its total budget paying for pensions. Those payments—$630 million­ this year, $660 million next year—are non-negotiable. (The state constitution forbids cities from shorting pensioners.) And they are devastating for a city with so many other needs.

Let’s start with tax relief. With $630 million, the onerous city wage and net profits tax could be cut in half. Or you could eliminate the business privilege and city sales taxes altogether. Either option would, overnight, make Philadelphia—long regarded as one of the most hostile business locales in the nation—financially competitive with any city in America. That means jobs, and in the long run, the sort of prosperity that has eluded Philadelphia for more than 50 years.

Perhaps you think it would be wiser to invest the money in city services. With $630 million, the city could just about double the departmental budgets for the police, the Free Library and Parks and Recreation. Imagine: more cops per capita than any big city in the nation; a library system to rival those of ultra-educated cities like Seattle and San Francisco; a Fairmount Park to be proud of, every bit the equal of Golden Gate or Central Park.

Another option: Increase spending on capital projects by a factor of five. Stop babbling about redeveloping the Delaware waterfront and just do it. Those comparisons likening the Ben Franklin Parkway to the Champs-Élysées are embarrassing, but $630 million (in one year alone) sure would narrow the gap.

But because of the pension problem, such investments are utterly out of reach. “We can’t do any of it as long as we have these obligations that essentially strangle us,” says City Councilman and mayoral aspirant Bill Green.

If the failures of the past are any indication, Philadelphia won’t be able to escape its fate. Not because there aren’t solutions, but because to date, the system has proved unable to enact them. Union workers could start contributing more to the fund. New city employees could be steered into 401(k)-type plans. Limits could be placed on the egregiously generous pension benefits for elected officials. City Council could kill DROP, the costly pension perk that so outraged the public last year. Bigger fixes, which would have a more immediate impact, include selling off core city infrastructure—like the Gas Works and the Water Department—and putting the proceeds into the pension fund.

None of the solutions are easy. Each is fraught with political risk and loaded with very real consequences. The alternative, though, is to limp along indefinitely, a diminished city, in hock to the past.

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  • http://n/a Steve K.

    This article was very informative & scary as hell. I knew most of this but as a Philly resident it scares me to death to think of the future. We all think the world of our police & Fireman but really 1.5 million dollar retirements? How in the world does anybody think that can be sustained? This city needs a money man in charge. That’s why I voted for Sam Katz in 99 & 03 then Tom Knox in 07. You need someone with the business acumen to begin to address these matters, but with the demographics being what they are & the unions enjoying the status quo I cant see it happening. The media needs to make this front page news to educate the citizens & let them know what a dire path we are on. (I think a lot of people just don’t get it – or don’t want to get it)

  • serafin mora

    Ms. Diaz, it is so easy to write nagative articles from no matter who. May I suggest that you compare the
    salaries of our city employees with other big cites. You provably will notice that Phila . has the lowest,
    check out Washington D.C. it is only 120 miles away.
    We are lucky to have one of the must distinguished
    firemen forces,policemen , teachers, inspectors,water
    workers, and many more. These are the ones that maintain Philadelphia as one of the best big city to
    live in. Must of the retairees don’t even get 50% of their wages. Today the cheapest car american made
    is worth mlore than 20 thousand. and low income rent
    on housing is more than one thousand a month.Those
    guys deserve every penny for retirement, they earned very well. I am a retairees from L&I.

    • E smith

      Oh boy……teachers 37 yrs….86% of three highest years pay, 40 yrs 100%

      There are NO. I repeat NO private sector pensions like that

  • EAvila

    Excellent, excellent article.

    We City employees don’t “deserve” anything more than private sector employees…regardless of pay difference. Let’s stop the greed, it benefits no one!

  • Sue K

    City firefighters CAN NOT collect social security benefits. If they do work a second job and qualify for social security through that, the benefit is still decreased. People need to remember that. You want the firefighters to give up their pensions? Then you need to forfit your social security….Fair? I think not.

    • E smith

      If you do not collect ssi then You don’t contribute…….wtf…….paleeese

  • JN

    You missed a main point in the pension calculation. Police and Fire DO NOT get overtime calculated in their pension like other city workers. This overtime calculation also counts towards the DROP program. So if a worker makes $30,000 as a base salary for their career, but the year before they enter the DROP make $40,000, their pension and DROP payout is based on the $40,000.

    The DROP program every where else in the country is only for police and fire as a tool to pre-plan for workforce reductions. The city used it as a cash grab for politicians and other workers.

    Don’t blame city workers for the pension mess, our pension contributions are made every pay automatically. The city politicians used monies marked for the pension fund for their own “get me re-elected” projects and decimated the fund. Now its time to pay back what is owed and they don’t have it.

    I would love to not pay my bills for a while and then when they are actually due, tell the creditors, “no, we have to change the terms so I can afford it”. That is exactly what the city is doing with the pension fund.

  • Dave K

    The failure to not include the fact that Police Officers and Firefighters DO NOT GET Social Security when they retire from City employment in this article is bordering on being unethical. To not mention that even if a retired PO or FF works another job after retirement and retires from that job they get a 60% offset in Social Security even though they make the same contribution as the other employees at that job is also not responsible reporting.

    This “article” borders on being an editorial.

    The average reader of Philadelphia Magazine makes $197,800/year and is worth well over $1M. Belittling and degrading the hard working men and women that put their lives on the line for the citizens of Philadelphia every day in order to advance what is clearly an attempt to appeal to the 1%’ers that make up majority of the readership of this magazine is disgusting and reprehensible.

  • Ron Retlats

    A well written story. If you have eyes, you will see the truth. I guess you can’t blame the unions for trying to kill the host in order to grow bigger, just like any other cancer. Let’s see if ‘We the People’ can put these government unions in check in order to survive. From the ‘comments’ that I’ve seen posted, it’s not hard to see who’s got a government tit in their mouth. Go Flyers !

  • oneadayisfine

    “The state constitution forbids cities from shorting pensioners…”

    It is time to change the state constitution.

  • Nick

    Okay, the retired officers and fire fighters don’t collect social security, but SS is not a pension plan and it does not act as a substitute. The system is in disarray and is crippling the city’s ability to function and stay on par with other big cities. Come on, be realistic.

  • John Keyser

    I was glad for the oppurtunity to be interviewed by Mr Kerkstra for his article, to be able to give a retired Firefighter’s point of view, but was a bit shocked to see that I was listed, along with the rest of the pensioners as “holding the city hostage” by collecting “fat government pensions”. I thought that I provided him with all the facts from a retiree’s point of view – including the city did not live up to it’s funding obligations while the employees always did. Each person collecting a pension contributed the required amount to the fund and worked for the required time in order to be able to retire. I was also disappointed to see that he did not use my full quote when he said that I felt blessed to be able to collect my pension. What I felt blessed about was not the dollar figure, but the fact that I had survived to collect it – something many of my brother Firefighters never did.

  • Patrick Kerkstra

    The very reason I chose to highlight someone like Mr. Keyser was to illustrate the fact that – despite perceptions to the contrary – city pensioners are not parasites, but rather by and large people who have given a lot to the city of Philadelphia. Indeed, that was the entire point in beginning with Mr. Keyser’s harrowing experience in the burning house on Tulip Street. But that doesn’t change the fact that, collectively, the costs of the pension system are dragging the city of Philadelphia down. I agree – and repeatedly argue in the story – that the principal responsibility for this situation lies with political leaders, past and present. But it is silly to suggest union leaders and city workers are not at least partly culpable as well. Mr. Keyser is simply wrong to imply he was quoted out of context. He was not talking about fallen firefighters when he said he was blessed to collect his pension. He was talking about friends in the private sector who have retired without the benefit of a publicly-funded pension.

  • Robert Jordan

    Philadelphia functions with revenue’s. The city pension plan is not the source of its problems. Where did the revenues go? One only has to do research and check out how many people were employed in the city 50 years ago and compare it to today’s workforce. During this time, blue collar and white collar jobs started leaving and went to other counties. Some jobs went down south and many others went overseas. If the writer of the story had done his research, he would conclude that government policys, both City and Federal, Wall Street and unfair trade agreements are the source of our countrys problems. When you lose jobs, you lose revenue’s. Maybe he should have read the book “AMERICA” Who Stole The Dream; which was published in the Philadelphia Inquirer sometime in the 80′s and printed in book form later.

  • Really?

    There’s clearly been a mistake as this thoughtful, level-headed argument was presented in Phillymag.com.

  • Joe Lannutti,

    On page one of your article, Mr. Kerkstra, you state that it would be hard to argue that Capt. Keyser didn’t earn every cent of his pension. You were quite right and should have just left it at that. You,however,went on and proceeded to charge that the Captain and his fellow retirees are holding the city hostage.

    The pension problem that the city is experiencing is not the fault of the pensioners but that of the politicians who run the city (running it into the ground some might say.) Pension benefits through the years were often given in lieu of raises. The city was legally required to make payments to the pension fund but shorted those payments in order that politicians had enough money to fund their pet projects, everything from social programs to sweetheart deals for sports teams. Certainly some of those projects were worthwhile and certainly some were not. Ask any member of city council, past or present, and they’ll tell you that this was just how business was done. All will deny responsibility for the problem when, in fact, they are all responsible to varying degrees. Our current mayor served a good many years in city council and shares a piece of the blame for the mess. I do not remember him ever calling for the full, legally required, funding of the pension fund during his council tenure. While you are willing to lay some of the blame at the feet of the politicians it is the pensioners that you state are holding the city hostage. It is the pensioners, you say, who should be short-changed to fix the problems that were caused by the politicians. The fact is Mr. Kerkstra, that the city is not only legally responsible for honoring the retired worker’s pensions but morally responsible as well. Perhaps the solution is identifying those questionable projects/deals and redirecting the funds to solidify the pension fund and not, as you suggest, penalize those who gave the city a lifetime of service. Of course this solution might mean standing up to powerful individuals while it would be easier to pick on a bunch of retirees.

    Your article, Mr. Kerkstra, it seems to me, panders to the readership of Philadelphia Magazine i.e. non-native Philadelphians, young professionals who look down on city employees and consider them “the help”. The fact is that you failed to mention that many city workers, Fire Department members for example, are not entitled to Social Security benefits. Also statistics show that firefighters have a life expectancy far less than that of the general population. Those who take advantage of the DROP Program in actuality freeze their pensions four years before leaving city employment which translates to a 10% reduction in their monthly pensions, plus they do not get credit for any raises during those last four years which would boost that reduction even higher.

    In short, Mr. Kerkstra, I feel that your article is less than accurate in that it assigns blame to the wrong people and omits pertinent facts.

  • Maureen Aitken

    “You go Joe” I concur!!! Very well said.

  • Robert Jordan

    I did leave a reply and it was added to the comments. But someone did not like it and had it removed. Now who was it?

  • Joe I

    What happened to the previous comments?

  • Tom

    Reform is necessary, that’s a given.

    Patrick, you might want to take a another look at the long-term consequences of your suggestion to sell off municipal assets like PGW and the Water work, etc. Sounds like a good idea on the surface, but it’s a one time payment that will not yield a longer term benefit to the residents of the city, or for the city itself. These sales in other cities, States and local municpalities have actually become liabilities to them several years down the road, and the income stream that comes from the infrastructure sales ends. Despite conventional wisdom that the private sector can do more with less, the truth is that since they usually have shareholders to answer to (profits and dividends) there are additional costs in terms of profits they need to show that ultimately get passed down to the consumer. You’re concerned about urban flight because of higher taxes? Just wait until you see what happens when your residents see their utility bills double. Additionally, most of the cntracts written to sell or lease these assets have clauses in them that guarantee the private entities to make a profit, and when they don’t the governments who sold/leased them have to ante up and make it good, increasing the burden they already have. Do some research on it and you will see; as Catherine Austin Fitts has said, it’s selling the diamonds in your back yard, and hurts the taxpayer and municpailties, drains them of capital (the dollars leave and never, ever return, impoversihing the local communities). It does not help.