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:

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.

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