Wages/Benefits
Salaries and health benefits account for nearly 48% of the FY10 General Fund budget. Employee health benefits, in particular, comprise a growing proportion of costs of the General Fund. From FY00 to FY08, employee health benefit costs rose by 144%, imposing a significant burden on the City. The outcome of current labor negotiations or arbitration decisions will help determine whether these costs continue to drain the General Fund’s resources.
Pensions
As of July 2008, 54% or 35,405 of the 65,883 individuals in the City of Philadelphia’s Municipal Retirement System, were receiving pension benefits. This number is expected to grow in future years as the number of retirees and beneficiaries is projected to increase at a faster rate than the number of active employees. Costs from yesterday’s personnel represent an ever-growing portion of today’s and tomorrow’s City budget.
The City’s annual contribution to the pension fund more than doubled from $150 million in FY03 to $352 million in FY08. When combined with the payments the City must make each year for its 1999 pension obligation bonds, that increase meant that the City’s total pension costs had jumped by $225 million in five years.
These dramatic increases in contributions have not led to an improvement in the pension fund’s health. In FY01, just before the dramatic run up in costs and the corresponding drop in the markets, the fund’s assets were sufficient to meet about 77% of the fund’s liabilities. By the end of FY08, those assets were only sufficient to support about 55% of the fund’s liabilities. That funding percentage will decline as a result of this year’s market losses and it is clear that the City needs to take a number of steps to ensure the long-term health of the pension fund. One immediate action the City is taking is applying to the Pennsylvania Employee Retirement Commission to have Philadelphia’s pension fund declared “severely distressed” – the highest level of distress. In order to reduce employee costs as required of a severely distressed pension fund, the Administration will be introducing legislation to implement a new pension plan for certain existing exempt employees and for all employees hired after July 1, 2009.
In another step to address pension costs and preventing them from undermining the City’s long-term fiscal health, the Administration together with the City Controller, and with the support of the Philadelphia Pension Board, has proposed changes to the pension fund assumptions to help control costs in the near-term and increase the pension fund’s ability to fund existing liabilities over the long-term. Potential changes in the City’s pensions will be another big component of the City’s later union negotiations.
Prison System
The average daily prison population in FY09 (through March 2009) was 9,622. This represents a 5.5% increase over the FY08 daily average of 9,121 inmates. The growth is due to an increase in the number of arrests, admissions, and increases in incarceration. As of early 2009, over three-quarters of the prison population consisted of pre-trial detainees and the remaining one-quarter comprised sentenced inmates.
Prison System costs have increased almost 70% between 2000 and 2008, and are driven in large part by costly medical and rehabilitative services, housing and maintenance contracts and staff overtime.
The Administration is engaging in efforts to systematically reduce costs and find opportunities for revenue enhancements while keeping residents safe and addressing the root causes of recidivism. As an example, the Prison System is seeking to expand the use of video technology in the court system, when feasible, in order to reduce inmate processing and transportation costs associated with court appearances. In addition, the Prison System is working to transfer approximately 250 inmates from county to State prisons when appropriate, further reducing the expense of operating the Prison System.
Discretionary vs. Nondiscretionary spending
Some parts of the budget could not be reduced to close the budget shortfalls without cooperation of other entities. The majority of the expenses in the City’s budget consists of mandated services and services that the City does not control — referred to as nondiscretionary spending. Nondiscretionary expenditures include fixed costs such as debt service, payments for the City’s unfunded pension liability and its State mandated annual payment to the School District.
The pie chart represents the discretionary and nondiscretionary portions of the expenses of the City’s General Fund budget in FY10.
When the Administration looked to address the severe revenue shortfalls, in both November 2008 and January 2009, it was severely limited in its ability to examine savings and revenue enhancements in the discretionary portion of the budget, severely limiting many options.
The City-County Dilemma: Burden not shared
Philadelphia has additional service responsibilities tied to its status as a City and a county. Like many other urban areas, Philadelphia funds services that are related to its relatively high level of poverty. However, Philadelphia also must bear the burden of costs for services that most cities share with their surrounding county, such as courts and prisons. These costs are significant: the Prison’s annual budget is almost $250 million, while the courts cost the City almost $100 million. These two services alone account for over 9% of the City’s total General Fund budget. Additionally, the City funds many county-level elected offices, such as the County Commissioners, the Register of Wills, the Clerk of Quarter Sessions, and the Sheriff. These costs, along with the Department of Human Services, account for approximately $1.2 billion of the General Fund’s $3.84 billion budget, and costs taxpayers $600 million, after dedicated revenues and State reimbursements are taken into account.
In 1985 the State Supreme Court ordered the Commonwealth to fund the court system. However, the Commonwealth of Pennsylvania has refused to comply with the Supreme Court’s order, leaving counties across Pennsylvania to absorb this cost. A suit on this issue has been filed this fiscal year and is currently in litigation. Without this burden, the City would have more discretionary funds to allocate across City services and programs.
