Pension fund can't get a break

Posted: February 28, 2014

DESPITE HIGHER-than-expected investment returns, the city's pension fund remains less than half-funded, an actuary told the city yesterday.

At the end of the last fiscal year, in July, the pension system had enough money to cover only 48.1 percent of its future liabilities - the same ratio as last year - Kenneth Kent, of the actuarial firm Cheiron, said at a meeting of the city Board of Pensions.

Later in the meeting, the board voted to lower its expected rate of return on investments, which will have the effect of further increasing the unfunded liability. City Finance Director Rob Dubow said the new liability ratio hasn't been calculated yet.

With about $4.5 billion in assets, the pension fund grew 10.9 percent in the last fiscal year, exceeding an expectation of 7.95 percent, the actuary said.

A big reason those good returns didn't alter the funding ratio is that the city is still making up for major losses during the recession. The fund lost $1.2 billion in 2008 alone, and the city got state approval to put off what would have been enormous obligations at that time.

"It's like going to the plate with an 0-2 count already," pension board executive director Fran Bielli said of the city's efforts to reduce the unfunded liability.

Dubow noted that, despite the stagnant unfunded ratio, the investments are now healthier from an actuarial perspective and the fund is now closer to a position where future gains will cut the unfunded liability.

"It's obviously not where it needs to be, but that was a little bit of positive movement," Dubow said.

The move to lower the investment assumption rates (from 7.95 percent to 7.85 percent for most investments) will also increase the city's required payment into the pension fund.

Next year, the city will have to pay $556 million across all budgets (up from $523 million). That's about 37 percent of expected payroll costs, similar to the share in this year's budget.

Philadelphia's 7.85 percent rate is in line with retirement funds for most cities and states. But some economists believe that assumption rates should be as low as 4 to 5 percent.

A rate that low would be politically difficult for the city, because a 1 percentage point decrease roughly equates to a $100 million contribution from the city's operating budget.

Yesterday's 0.1 percent reduction was the latest in a series of incremental cuts that began under Mayor John Street's administration and continued under Mayor Nutter.

On Twitter: @SeanWalshDN

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