What Pew found when it stress-tested Philly’s pension system

The Pew Charitable Trusts has analyzed what would happen to Philadelphia’s pension system, given recent changes, if investment returns were lower than expected or there was a big market downturn.

Pew partnered with an actuarial firm and found that Philadelphia would be in decent shape if the city sticks with its plan of more contributions from employees, along with increased infusions from the general fund and sales tax revenue. It also must maintain the $65,000 annual benefit cap on the new hybrid pension plan.

The trust also compared Philadelphia’s pension system, which is only 47 percent funded, to those of Baltimore (69 percent), Chicago (25 percent), Houston (71 percent), and Pittsburgh (58 percent).

Here are the highlights of the Pew report.

Finding: Philadelphia’s current funding policy calls for increased contributions from employees as well as taxpayers. That mix, along with the new hybrid pension plan that caps defined benefits at $65,000 a year for new nonuniformed employees, will reduce the risk associated with fluctuating investment returns. In total, the annual contribution to the fund in 2017 was 95 percent of benefits paid, the best by far of the cities compared. Pittsburgh was next with 68 percent.

“Philadelphia’s high contribution ratio helps to insulate its retirement system and budget from adverse scenarios,” the report said.

What it means: If there is a market downturn, the hit to Philadelphia’s pension fund won’t be as bad as it will in cities relying more on investment returns.

If Philadelphia does maintain an average 7.65 percent rate of return, the fund would be 80 percent funded (relative to projected obligations) by 2029. If the fund averages 5 percent returns or if there is a big market drop in one year followed by several years of recovery, it would be 80 percent funded by 2035.

The caveat: Pew’s projections were based on the city’s assumptions of payroll and life expectancy. If those increase, it could raise the fund’s liability.

Finding: Philadelphia taxpayers are paying 17 percent of general fund revenues yearly to the pension fund, the highest level of the cities compared. However, city officials asked that Pew factor in income from the separate airport and water funds. With the three accounts combined, Philadelphia’s portion of revenue paid would be 13 percent. Chicago and Houston pay 16 percent of revenues into pensions.

In 2018, Philadelphia paid $782 million into its pension fund, nearly half of its payroll tab.

What it means: “Contributions to the pension fund will continue to crowd out spending on other budget priorities,” the report said.

The caveat: The sooner the city can pay down the $6 billion pension debt, the better. Once the pension plan is 80 percent funded, the city’s tab goes down to about 3 percent of annual revenue.

Finding: The Kenney administration negotiated a stacked hybrid pension plan in 2016 for new municipal hires, excluding police and firefighters, that caps their defined pension benefits at $65,000 a year. Those employees also can contribute to a 401(k)-type account, with the city matching half of the contributions up to 1.5 percent of annual compensation. Pew said the plan “exposes the city to lower levels of investment risk over time as the stacked hybrid becomes a larger portion of total pension liability.”

What it means: As the city employs more new workers, it gets to 80 percent funding faster.

The caveat: Any future increases in the $65,000 cap will add to the overall cost. The cap could change any time a municipal contract comes up for negotiation — usually every three or four years.

Finding: Despite the gloomy talk of struggling government pension funds, Pew found the city is making the right moves. Philadelphia’s pension plan has not been able to reach the level where it has funded 50 percent of its future obligations in several years, but Pew’s analysis shows that even with lower investment returns, the city is contributing enough to the fund to help make up for prior losses. But it must continue to put the amounts it has promised into the system. “Improved funding of a municipal pension system is attainable if the city strictly adheres to scheduled contributions,” the report said.

What it means: The optimistic projections assume Philadelphia continues to properly fund the plan, and payroll costs and life expectancy don’t rise faster than predicted. (The Inquirer recently reported on the impact the surge in overtime could have on the pension fund.)

Caveat: There are a lot of “ifs” built into the analysis.