The Philadelphia Board of Pensions is looking at the possibility of enticing more than 30,000 retirees to switch to a less lucrative and less costly benefits plan.
A conversion plan is the latest idea to surface from the Controller’s Office and Pensions Board as a way to address the pension crisis facing the city. Of its $10.8 billion liability, the city has only $4.9 billion in the bank, making Philadelphia’s one of the worst-funded public pension plans in the country.
Officials have said that the city’s oldest pension program, known as Plan 67, is too costly and one of the reasons the program is in such dire shape. A prior idea to offer a cash buyout to Plan 67 members for a percentage of their total pension value was scrapped after an actuary report showed that the fund would likely be worse off with such a buyout.
If everyone in Plan 67 were to convert to the city’s less costly plan, Plan 87, the city could reduce its unfunded liability by $1 billion, according to an actuary report presented to the Pensions Board on Thursday. If only half of the 33,500 active and nonactive members in Plan 67 were to switch over, the city’s liability would be reduced by $204 million.
Controller Alan Butkovitz is suggesting that a onetime cash incentive be offered to any Plan 67 member who switches to Plan 87.
“In order to move forward with this proposal, I am requesting that the Pension Board conduct a survey of active and inactive members of the Plan 67 to gauge interest of how many would opt for the [Employee Pension Income Conversion] Plan,” Butkovitz said in a letter Wednesday to Fran Bielli, the Pensions Board’s executive director.
The actuary’s report gives numbers for various scenarios depending on percentage of participants and payout percentages ranging from 25 percent to 70 percent. Butkovitz’s office focused on giving retirees an up-front cash payment of 50 percent of the difference between what a retiree would get in Plan 67 and Plan 87.
For example, a city accountant with a final salary of $50,000 and 20 years of service could receive a $20,007 cash payment in exchange for reducing his or her lifetime pension from an annual $25,000 to $21,000.
A police officer with a final salary of $75,000 and 30 years of service could get a $41,265 cash payment in return for reducing his or her annual pension from $56,250 to $48,000.
If everyone were to take the voluntary conversion plan, the city would be on the hook for $514 million. If the onetime payouts were paid from the pension fund, that would further reduce the anticipated $1 billion in savings.
Butkovitz said that to determine where the money would come from for the payouts, the board needs to get an idea of how many people would be converting and taking those payouts.
“If it’s a small number, then we can take it from within the system. If it’s a large number, it will have to be a borrowing,” he said.
At its Thursday meeting, the Pensions Board agreed to create a subcommittee to study the legal and fiscal hurdles of a conversion plan. The committee will also create a survey to ask Plan 67 members whether they would be willing to convert to Plan 87.