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.

MORE THAN ANY mayor before him, Nutter has labored to get a grip on the city’s pension disaster. Too bad he has so little to show for it.

For nearly two years, the Nutter administration has tried but failed to get rid of DROP, the perk that pays sizeable lump-sum payments to retiring employees, on top of their annual pension payments, at a cost to the pension fund of somewhere between $9 million and $22 million a year.

For four years, Nutter has tried but failed to negotiate contracts with the city’s blue- and white-collar unions—AFSCME District Councils 33 and 47—that would set the city on a path toward a sane pension system. The one deal he did sign with those unions, a 12-month accord at the beginning of his first term, accomplished nothing on pensions. In retrospect, given Nutter’s enormous popularity his first year in office and seeming political leverage at the time, that looms as a critical mistake. Ever since, DC 33 and DC 47 employees have worked without contracts, under the terms of their old deals.

And for four months, Nutter tried but failed to put together a pension bond offering so vast that it made Rendell’s risky bid look like Little League. That setback turned out to be a propitious one: If the Nutter administration had gotten the bond deal together, the 2008 stock market collapse would have had a truly catastrophic effect on the city’s finances.

Yet for all the shortcomings, pension hawks say Nutter has done better by the pension system than his predecessors. The city’s pension board, comprised of administration and union appointees plus the City Controller, has cleaned house internally, severing questionable deals with politically connected investment advisers and lowering the presumed rate of return on its investments (a prudent measure that makes it less likely the fund will fall short of its investment goals). Nutter—with the firm hand of the state legislature stiffening his spine—managed to get through the 2008-’09 economic crisis without stiffing the pension fund too badly. (The city did defer pension­ payments for two years, but has been paying back those skipped payments, with interest.) And the Mayor has lightened the pension fund’s long-term load somewhat by keeping­ the city’s workforce lean: There are 2,500 fewer pension-eligible workers on the city payroll now than in 2008.

What Nutter is most proud of, though, are contracts with the city’s fire and police unions. Those contracts, reached through arbitration in 2009 and 2010, included a one-point bump in the retirement contributions of all future cops and fire personnel (from five percent to six percent of each paycheck), and a new hybrid retirement plan—part pension,­ part 401(k) equivalent—that will apply only to fresh recruits. “We’re the only city in the United States of America that has a hybrid pension plan for uniformed police officers. And we have the same for firefighters,” Nutter recently boasted to reporters in City Hall, shortly after presenting his budget address to an audience packed with hostile union members in February.

That’s not quite true, actually; Atlanta also has a hybrid plan. But even if it were, Nutter tends to leave out a critical fact: The hybrid plan is optional, not mandatory. And to date, not a single new cop or firefighter has enrolled in it. Not one. “Just because no one is participating yet doesn’t mean no one will in the future,” says Nutter’s finance director, Rob Dubow. But that may be wishful thinking, given that union bosses are actively discouraging new hires from signing on.

In March, though, Nutter scored a real victory, albeit over a very small union: the 2,000-member Local 159, which represents corrections personnel. Unlike the arbitrated police and fire contracts, this deal creates a mandatory hybrid pension plan for new corrections workers. If Nutter successfully makes that deal the blueprint for future contracts with bigger unions, he will have achieved something significant, something that would put Philadelphia on better financial footing for decades to come.

But that’s a big “if.” Given the absence of major pension concessions from the larger unions, Councilman Green says, the past four years have been about “kicking the can down the road,” and enacting pension reforms that sound good but don’t achieve much. The next mayoral race, Green predicts, will turn on one question: “Are we actually going to address our real problems? Are people going to vote for somebody who tells them what has to happen to fix the situation?”

Green’s resolute rhetoric is inspiring, which makes it all the more disappointing that he himself has chickened out when presented with opportunities to make even modest reforms to the pension system. Instead of embracing Nutter’s bid last year to terminate DROP, Green sided with the Council majority that opted to preserve the program (which is beloved by the unions) while tweaking it around the edges. And when Nutter asked Council to approve an ordinance that would have increased pension contributions and created a hybrid plan for the city’s non-union workforce, Green again declined to support the Mayor. Here was a pension reform the city could have enacted on its own; union consent wasn’t necessary. And Council, including Green, balked. “It’s meaningless,” says Green, when pressed on his votes. “I want us to focus on steak, and not claim victories that are sizzle.” As though it would have been simply “sizzle” for the city to lead by example and create a sane pension system for non-union workers.

The point isn’t to harp on Green’s pension hypocrisy, but rather to highlight the fact that even politicians who plainly understand the stakes are prone to wilting on pensions. Indeed, in terms both of policy and perception, City Council—in partnership with the rest of the city’s political elite—has done massive damage to the fund’s stability and overall public support for public-employee pensions.

In recent years, a glut of Council members and other high-level city officials have retired and collected DROP payouts on top of lifetime pension benefits that are astronomically large in a city where the median household income is just $36,251. Mayor Street will get $116,387 a year for life, on top of the $451,626 DROP windfall he collected the day he retired. Recently retired Council president Anna Verna now receives $130,707 a year, in addition to her jaw-dropping $567,000 DROP bonus.

The massive payouts are due in part to the fact that elected officials are paid a lot more than an average trash hauler. But back in 1987, when they were paring back pension benefits for union workers, the city’s elected leaders also created a special, particularly generous pension class just for themselves.

It has been revealing over the past few years to watch City Council debate the fate of DROP. On its own, the program is no mortal threat to the pension fund. But DROP—which was never intended for politicians—was so badly abused by Council members and other elites that it became the symbol of the political class’s sense of entitlement.

Even so—even with public pique maxed out—Council sided with the unions, voting 14-3 to preserve the program, modifying it only slightly. Nutter vetoed the bill. Council overrode him, unanimously: Damn the consequences for the pension fund, and to hell with public opinion.

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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.