Move to a Defined Contribution Plan
Obviously (seemingly to everyone but members of the current City Council) our underfunded pension funds threaten long-term economic growth. While this is a problem for the state pension funds in Pennsylvania and other states, as well as with municipal governments across the country, Philadelphia’s problems are particularly acute.
We have a responsibility to meet our obligations to our employees. We do not want to get into a bankruptcy situation like in Detroit where the pensions were forced to be cut by bankruptcy court.
The PICA board recently released a report with a concrete set of recommendations. The report can be found at: http://www.picapa.org/docs/OW/Philadelphia_Pension_System_012015.pdf
The report’s recommendations can be summarized as follows:
- Require all new employees to join the city’s hybrid pension plan, which is similar to a 401(k) plan.
- Exclude overtime from the final average compensation for determining benefits.
- Eliminate DROP.
- Change the Pension Adjustment Fund so that bonuses are only paid out if the funded ratio of the funds exceed a threshold level. Right now, they are paid no matter how poorly the plans are funded.
- Increase employee contributions to the pension fund.
- Seek additional dedicated funding sources for the pension system, such as the sale of the PGW assets and using the proceeds to support the pension funds.
- Continue to incrementally reduce the assumed rate of return on investments and make other actuarial supported assumptions.
- Conduct an actuarial audit every five years.
- Produce an annual report meeting standards recommended by the Government Finance Officers Association.
- Broaden the membership of the Board of Pensions and Retirement.
- Establish an independent commission to review the pension system and recommend reforms.
While this may not be a perfect agenda for reform, the report seems well researched and thought out. I would support moving towards implementation of all recommendations.