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.

SITTING IN HIS usual booth at the Palm Restaurant in Center City, former labor consultant and City Council candidate Bill Rubin munches a lobster salad and explains the abiding appeal of pensions for a unionized workforce. “The last thing our people want is to be involved in anything where the market dictates to them what their retirement earnings are,” Rubin says. For public employees, a pension is the ultimate security blanket, and they have no intention of letting go, not now and not in the future: “They know if they work for a certain number of years, they’ll get a set dollar figure for the rest of their lives and not have to worry about whether IBM is up or down.”

Outside the comfy embrace of government employment, of course, that type of security is an anachronism. In the private sector, people change jobs and even careers so frequently that a retirement funded by a single employer has become an alien concept, particularly in white-collar settings. (Today, fewer than 20 percent of private-sector workers have pensions.) For earlier generations, though, a pension plan was a standard perk, in government and out. Six out of every 10 Americans were covered by a pension plan in the 1960s, and the social consensus was that pensions were a clear good.

And indeed, when run responsibly, pension systems can provide comfortable retirements without sinking the companies or governments that manage them. Pensions are funded through a combination of employee and employer contributions, which are pooled into one big fund and invested in the markets. Investment profits are plowed back into the fund, and pensioners generally get a fixed benefit—usually a percentage of their former salary—from the day they retire until the day they die.

Public-employee pension plans started out simply enough, first covering only retired police officers and firefighters. By 1916, most big cities offered pensions for all their workers. In those days, the Philadelphia benefit was capped at half an employee’s final salary. Given the modest salaries of the time, a city’s liabilities were relatively contained.

All that changed when municipal workers won the legal right to form bargaining units in the late 1950s and early ’60s. Here in Philadelphia, unions and politicians alike immediately recognized the clout that organizations comprising thousands of city workers could wield at the polls, and that power inevitably spread to the negotiating table.

Public-sector unions have a special kind of leverage. Unions in the private sector—the Auto Workers or United Steelworkers, say—can’t win better wages and pension benefits simply by putting political pressure on the local mayor. Nor could those unions vote out their boss, the company CEO. Municipal unions, on the other hand, can do both. In their heyday, the leaders of public-sector unions could walk into the mayor’s office and give its occupant a stark choice: Accede to our contract demands, or our members will punish you and your allies at the polls. If that didn’t work, strikes were threatened. “One word from me and the traffic lights don’t work, the bridges don’t open, the trash isn’t collected and the heat in all the city buildings is cut off,” legendary Philadelphia labor leader Earl Stout said in 1975, amid contract talks with Mayor Frank Rizzo.

Rizzo caved, just as James Tate had before him. Under those two mayors, the city’s newly formed municipal unions won full control over city-funded health insurance plans, beefy salary hikes and, of course, major concessions on pensions. For the politicians, pension give-ins represented the ultimate Wimpy option, as in “I’ll gladly pay you Tuesday for a hamburger today.” The promises Tate and Rizzo made had almost no impact on their administrations. The deals made sense for the unions as well, who knew that once pension benefits are granted, they can’t be revoked.

Consider the example of John Keyser. Barely 20 years old when he was hired in 1974, Keyser was actually eligible to retire, with full pension benefits, the year he turned 45. (Plenty of cops and firefighters have done exactly that: worked for 25 years, got a lifelong pension, and then began a second career, with a second income.) By staying on the payroll until he was 55, Keyser was able to retire with a bigger pension, one roughly equal to 88 percent of his average salary during his years on the city payroll.

Keyser was also enrolled in DROP, the pension program that pays retirees large lump-sum amounts the day they leave city service. As a well-paid firefighter, Keyser had a hefty DROP payout: about $200,000. “I feel blessed and lucky that I’m able to collect this,” Keyser says. “I know lots of guys who don’t have any pensions.” He should feel lucky. If Keyser lives to 75.3 years old—the average for an American male—the City of Philadelphia will have paid him a minimum of $1.2 million in retirement. If Keyser, who’s a healthy man, makes it to 85, that figure swells to $1.7 million.

Now consider the fact that there are more than 12,000 former firefighters and police personnel and their beneficiaries receiving city pension payments under the Tate/Rizzo plan, and it becomes easier to understand why the city can’t afford to keep its libraries open on a dependable schedule.

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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.