Philly Pension “Reform”: A Vote to Raise Taxes Now and in the Future

The state budget impasse hinges on the inability of Governor Rendell and the House Democrat Majority to garner enough votes for state tax increases.  Yet for now it seems enough state legislators have agreed to raise taxes on Philadelphia residents, businesses and visitors.

The proposal, HB 1828, would increase the local sales tax by 14 percent, to a rate that is one-third higher than surrounding Pennsylvania counties.  Of course, just across the border in Delaware, city dwellers can buy goods and services tax-free — which they will do increasingly if HB 1828 becomes law.

Included in the bill is a provision touted as “pension reform” for the city.  Faced with unaffordable pension costs today, HB 1828 would defer those costs five years — with 8.25% interest.  But how is an amount considered unaffordable today somehow deemed affordable in the future?  What will be the remedy in 2014 when the plans will most likely be even more underfunded than they are today? 

Furthermore, the so-called reform amortizes Philadelphia’s pension liabilities over 30 years, instead of the current 20 years.  While this certainly reduces the city’s monthly payments — just as refinancing a mortgage does for a homeowner — the “fresh start” simply means that taxpayers will be paying for benefits of deceased retirees.  Instead, the goal should be to properly fund city workers’ benefits prior to their retirement. 

There are no easy solutions to the pension problem.  It is the result of over-promised benefits and under-funded plans, coupled with the economic downturn.  Unfortunately, even a healthy economy would not make these politically manipulated benefits financially feasible.  By deferring costs that have been deemed unaffordable today, policymakers will likely be voting for even higher taxes in 2014 and beyond.

Of course, municipalities present only part of Pennsylvania’s pension woes.  In 2012, state and school property taxpayers will experience significant increases in pension contributions — from less than 5 percent of salary to upward of 30 percent — because of similar politically motivated manipulations for public school teachers and state workers in 2001 and 2003.

HB 1828 unnecessarily complicates — and often provides the wrong solution to — pension liability management.  Given this, why would anyone want to live, work or invest in Philadelphia or Pittsburgh knowing that these bills will eventually have to be paid? 

While pension reform at the state and local levels is absolutely necessary, it must be guided by a responsible set of principles and standards which does not contribute to the “generational theft” inherent in passing today’s unaffordable costs to future taxpayers.  HB 1828 fails this important test.

HB 1828 is a missed opportunity to establish pension costs which are current, affordable, and predictable for the taxpayers of Philadelphia and Pennsylvania.  New hires should be placed into defined contributions plans, and existing pension plans should be fully funded over a shorter duration.

Philadelphia officials talk about the failure to enact their manipulative scheme of generational theft as resulting in laying-off city employees.  However, should Philadelphia and Pittsburgh prevail in their agenda of further deferring costs, then fewer government workers will be the least of their looming problems.  Indeed, policymakers need to look no further than near-bankrupt Detroit to catch a glimpse of these cities’ futures.