PhillyDeals: Philadelphia pension fund gap narrows slightly

President Obama's plan for corporate tax reform got a good review from a think tank.
President Obama's plan for corporate tax reform got a good review from a think tank. (J PAT CARTER / Associated Press)
Posted: February 28, 2012

Philadelphia's pension board last week got what City Controller Alan Butkovitz called "surprise" good news: a small reduction in the very large gap between what the city owes future pensioners and what it has set aside to pay them.

The estimates from pension consultants don't reverse Philadelphia's long-term pension problems: It still has more beneficiaries cashing checks than workers paying into the fund, the fund still suffers from years of over-promising and under-reserving, and well-paid private fund managers have for years produced investment profits far below the city's annual target, now 8.1 percent.

Still, the news was less bad than in earlier reports. Pension assets totaled $4.26 billion at the end of the last fiscal year, up sharply from $3.65 billion a year earlier. And liabilities (future benefits) grew more slowly than expected, to $10.36 billion, from $10.34 billion.

The result: Assets at year-end covered 45 percent of liabilities, up from 39 percent a year earlier. On an actuarial basis, "smoothed" to ease the impact of volatile investment values, the city could claim the plan is 50 percent funded, which moves it into a less dangerous zone, as pension experts count these things.

How did that happen? Besides a welcome recovery in stock market prices early last fiscal year, city employment has fallen faster than pension planners projected, to fewer than 27,000 workers, from 28,000 the year before. Fewer workers means fewer future retirees and lower liabilities.

Despite the momentary easing, Philadelphia's contributions to its retirees' plan will continue to rise - the legally defined "minimum municipal contribution" will top $600 million in fiscal 2013, up from $534 million this year - even as city payrolls fall, to an estimated $1.42 billion next year from $1.47 billion this year.

But the gap isn't quite as big as it threatened to be, before Mayor Nutter's budget cuts and the stock market's partial recovery.

"It's just a preliminary report," warned Fran Bielli, executive director of the Philadelphia Board of Pensions and Retirement. A more detailed account, and budget projections, will be issued in March.

Playing favorites

President Obama's corporate-tax-reform proposals win mostly positive marks from the conservative Manhattan Institute because they promise lower rates for a larger range of businesses - a fairer, flatter tax.

Still, in a report by Josh Barro, the institute questions Obama's preference for some businesses over others.

The plan would cut the base corporate tax rate to 28 percent from 35 percent while collecting from a wider range of firms by limiting use of large companies' small-business tax dodges. It also would limit the tax deductibility of debt. The institute notes that would make borrowing less attractive and investment relatively more attractive.

But the report also faults Obama for playing favorites. His proposal to tax oil and gas profits more than like industries (above the current effective 9 percent rate) makes sense (though it will likely result in higher fuel costs). But his plan to extend subsidies for wind and other renewable power risks sucking investment dollars into projects that may not pay for themselves.

Similarly, the Manhattan Institute questions Obama's continuing preference for "domestic manufacturing over other industries."

Dow Chemical's Andrew Liveris, DuPont's Ellen Kullman, and others have urged Obama to copy European and Asian governments in favoring U.S. factories over other uses of capital.

But Barro argues factory production is already on the rise, and that subsidizing old-line manufacturing means starving emerging industries. The institute's conclusion: "Tax different types of economic activity equally, and let capital be allocated where it can most efficiently be used."

Contact Joseph N. DiStefano at 215-854-5194,, or @PhillyJoeD on Twitter.

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