Faced with significant budget deficits and the burden of ever-increasing pension contributions, Philadelphia is attempting to finesse itself out of a financial dilemma.
Amidst the actuarial jargon, in simple terms, the city cannot afford the emerging pattern of contributions to support its long-term pension commitments. Its remedy is to lobby for changes in the state pension code to legalize the further transference of these costs to the next generation. The euphemism for this manipulative scheme is called "pension reform."
The reality is legalizing generational theft is neither innovative nor reform – it is immoral.
Such a proposition merely shifts the bad policy decisions of the past on to the next generation of taxpayers—many of whom are too young to even vote, and some are 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. The reality is that this scheme merely frees up cash today while deferring costs to tomorrow. It is analogous to an individual not making their regular monthly mortgage payments and declaring this an innovative cost savings strategy.
It is also a fallacy that this is analogous to refinancing a home mortgage. Such logic would hold true only if the homeowner and the mortgage payer were the same. In this case, it is your neighbor funding your pension. The 40-year refinancing strategy would extend your pension costs onto your neighbor and his kids, and conceivably his grandchildren.
This three-part scheme begins by making the costs more realistic by assuming future pension assets will earn 8.25%, down from the 8.75%. This action actually increases taxpayers’ pension contributions—making the pension problems even worse.
However, to offset this increased cost, city officials intend to redefine the asset values according to a 10-year rolling average. This strategy is intended to avoid recognizing the current decline in the market value of the assets, which would necessitate a significant increase in taxpayer contributions. As a reference point, federal law requires contributions for defined benefit plans in the private sector to be based on the market value of assets, not a rolling average.
Finally, the third measure seeks to fund any accumulated deficits (unfunded liabilities) over a new 40-year period. Philadelphia, along with many other Pennsylvania cities and municipalities, has been transferring its pension and retiree healthcare liabilities to the next generation for many years. The problem, according to Philadelphia officials, is this financial transfer is not occurring fast enough—so the law needs to be changed.
The volatility in pension plan assets and the political manipulation of annual pension contributions only serves as a reminder that these arrangements carry too much risk for any generation of taxpayers.
With respect to the legislators in Harrisburg, in prior sessions it is very likely that pension ignorance, politics and the term "actuarially sound" would carry the day.
Fortunately, many state legislators have taken the time to acquire a working knowledge of pension funding and understand the many half-truths from apologists for "defined benefit" plans.
So what is to be done? First, city officials must acknowledge they are dealing with a systemic problem that cannot be fixed by transferring it to the next generation of taxpayers. While this certainly does not solve the city’s current financial problem, it is the first step toward acknowledging that pension and retiree medical obligations need to be funded during the period when these benefits are earned and not after the member retires.
Second, if these costs cannot be made current, predictable and affordable, then a new "defined contribution" system should be adopted for new hires with accompanying modification to retiree healthcare plans so as to avert the same problems of the past.
This is where the real reform should occur. Philadelphia should forgo the continued financial manipulations and leave the next generation of taxpayers alone.
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Richard C. Dreyfuss, an actuary and pension expert, is a Senior Fellow at the Commonwealth Foundation (www.CommonwealthFoundation.org), an independent, non-profit public policy education and research institute in Harrisburg, PA.
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