ECONOMISTS HAVE A term for situations in which people and institutions throw caution to the wind because they won’t be held responsible for the consequences: moral hazards. For Tate and Rizzo, guaranteeing Keyser and thousands like him $1.2 million retirements was easy. It didn’t put a meaningful dent in their budgets, after all. Why, the bill wouldn’t come due for years and years. “The four-year life cycle of an elected official and the 30-year life cycle of a municipal employee do create some inherent traps,” says Sam Katz, chairman of the Pennsylvania Intergovernmental Cooperation Authority (PICA), the state agency that oversees the city’s long-term financial planning.
In 1987, the city scaled its pension benefits back a bit, and they’re now largely in line with what’s offered to municipal workers in other cities. But those reforms only applied to workers hired after 1987, so virtually all pensioners currently receiving checks are covered by the Tate/Rizzo plan. And even now, our city workers contribute less to their pensions than those in most other big cities.
Reasonable people can disagree about the salary and health-care concessions made to the unions in the 1960s and ’70s. In a Democratic stronghold like Philadelphia, the majority view is that it’s right and proper to compensate city workers—whom we ask to keep the city safe, clean and functioning—with a solid middle-class salary and a benefits package befitting the importance of their work. The true offense, the sin that hobbled Philadelphia for decades, was making extravagant promises on behalf of future generations without socking away the funds to pay for those commitments down the line. And Tate and Rizzo were hardly the last or only offenders.
Later mayors compounded the sin by short-changing the city’s contributions to the pension fund and experimenting with complex high-stakes financial maneuvers that only set the city back further. On Rendell’s watch, the city sold $1.29 billion in bonds and put the cash into the pension fund, betting that it could make more money in the markets than it would owe in interest on the bond. The bet was a loser. The city has paid more in interest on the bonds than it has earned investing the money.
Then, in 2003, Mayor Street dealt the pension fund a massive blow, reducing the city’s contribution to the already-depleted fund to the lowest level permitted by state law. The economy was going through a bit of a rough patch back then, and Street preferred to use the cash to limit layoffs and fund his priorities. Owing no doubt to the arcane nature of pensions, Street’s decision received scant attention from the press. Which may help explain why even when the city’s budget picture improved, Street continued to pay the lowest amount possible, a practice continued by Mayor Nutter.
This decades-long string of disastrous decisions has been compounded by a few factors outside of political control, most notably the 2008 stock market crash, which cost the city’s pension fund $1.23 billion. Then there are sheer demographics: The city’s workforce is old, so there are a ton of looming retirees about to enter the pension system.
To be sure, the unions own a chunk of the blame. Their intransigence on pension benefits helped create the mess, and their unwillingness to bend since Nutter became mayor is particularly galling, given both the city’s self-evident financial fragility and the recent hardships endured by so many private-sector workers.
But it’s naïve to expect union leaders to do anything other than negotiate the best possible deals for their members. What’s more, even with the generous benefits, City Hall could have avoided the crisis by socking away more money over time. “They stopped putting money in the pot,” says Rubin, the union consultant who is also a former vice chairman and union representative to the city’s pension board. “So the question is, what did they do with the money? If it was spent on great investments, wonderful. But you can’t complain to the unions about the money you have to pay now. It’s not their fault you didn’t pay it before.”