Faced with significant budget deficits and the burden of ever-increasing pension contributions, Philadelphia is attempting to finesse itself out of a financial dilemma.
In simple terms, the city cannot afford its long-term pension commitments. Its proposed remedy is to lobby for changes in the state pension code that would allow it to further transfer these costs to future generations.
The euphemism for this manipulative scheme is pension reform. But legalizing such generational theft is neither innovation nor reform; it is immoral.
Such a proposition would merely shift the bad policy decisions of the past onto future generations of taxpayers, many of whom are too young to vote, and some of whom have yet to be born.
Philadelphia’s officials want citizens to believe this is simply a financial crisis, when, in fact, it is an institutional crisis enabled by politics. They would have taxpayers believe that forgoing pension contributions saves taxpayers money.
But this scheme merely frees up cash today while deferring costs to tomorrow. It’s analogous to a homeowner deciding not to make his monthly mortgage payments and declaring it an innovative savings strategy.
It’s a fallacy that the city’s proposal is comparable to refinancing a home mortgage. A homeowner assumes the future costs of a refinancing, but in this case, the 40-year refinancing strategy extends employees’ pension costs to their neighbors, their neighbors’ children, and conceivably their grandchildren.
The city’s three-part proposal begins by assuming future pension assets will earn returns of 8.25 percent, revised downward from 8.75 percent. This increases the need for contributions from taxpayers, making the pension problems even worse.
However, to offset this increased cost, city officials want to redefine asset values according to a 10-year rolling average. This is meant to avoid recognizing the current decline in the market value of the assets, which would necessitate another significant increase in taxpayer contributions. (For similar pension plans in the private sector, federal law requires contributions to be based on the market value of assets, not a rolling average.)
Finally, the city wants to meet its pension obligations over a 40-year period instead of the current 20 years.
Philadelphia, along with many other Pennsylvania municipalities, has been transferring its pension and retiree health-care liabilities to the next generation for many years. But, according to Philadelphia officials, the problem is that this financial transfer is not occurring fast enough, so state law needs to be changed.
The volatility of pension-plan assets and the political manipulation of annual pension contributions should serve as reminders that such arrangements carry too much risk for any generation of taxpayers.
So what is to be done? First, city officials must acknowledge that they are dealing with a systemic problem that cannot be fixed by transferring it to the next generation of taxpayers.
While this certainly would not solve the city’s current financial problem, it would be a first step toward acknowledging that pensions and retiree medical obligations need to be funded during the period when these benefits are earned, not after an employee retires.
Second, if these costs cannot be made current, predictable, and affordable, then a new, defined-contribution retirement benefit – like the 401(k) plans that are standard in the private sector – should be adopted for new hires, accompanied by changes to retiree health-care plans so as to avoid the problems of the past.
This is where the real reform should occur. Philadelphia should forgo further financial manipulations and leave the next generation of taxpayers alone.
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Richard C. Dreyfuss is a senior fellow with the Commonwealth Foundation (www.CommonwealthFoundation.org), a public policy education and research institute located in Harrisburg.