Filed under: Around the Web
By William Alden for The Huffington Post: CHICAGO -- Just months after Michael Nutter became mayor of Philadelphia in January 2008, the national economy plunged into the worst downturn since the Great Depression and the city's budget buckled.
Since then, Nutter, a Democrat, has closed pools during the summer, taken some fire equipment out of service and stopped hiring police officers. These cuts and others, though unpopular, have helped stabilize the city's finances, the mayor said, so that Philadelphia is now "moving in the right direction." But there's one thing that's still on Nutter's agenda: trim the city's pension and health care liabilities.
Philadelphia's pension fund assets cover only 47 percent of what the city government has promised in pension payments, Nutter said. If the city does not address this unfunded liability, its plan will run out of money by 2015, concluded a study released last fall by finance professors Robert Novy-Marx and Joshua Rauh. Of 50 major municipal pension systems, Philadelphia's has the shortest life expectancy, the study said.
Like many public pension funds, Philadelphia's has traditionally featured a defined benefit plan, which means taxpayers owe workers a pre-determined amount of benefits, regardless of market conditions. In contrast, 401(k)-style defined contribution plans, common in the private sector, place more risk on workers and don't necessarily promise a set benefit.
Nutter talked with The Huffington Post on Thursday during a two-day summit in Chicago co-sponsored by the U.S. Conference of Mayors. During the discussion, he spoke about his efforts to incorporate elements of a defined contribution plan into Philadelphia's system. It's a reform that he says would help correct years of political procrastination.
If things are stabilizing, why push for a 401(k)-style pension plan now?
Because defined benefit plans are not sustainable. Because our pension plan is only 47 percent funded. It will take a long time to get it to a more appropriate funding level, which is 70, 80-plus percent funded. Public entities are about the last place where you can find a defined benefit plan. You can't sustain it anymore. We have more retirees now than we have current workers.
Read more at The Huffington Post.