04/29/2011 10:13 am ET Updated Jun 29, 2011

Q&A With Philadelphia Mayor Michael Nutter: Pension Crisis 'Should Stop Now' [UPDATE]

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.

But that's not unusual, that you have more retirees.

Unfortunately, it's also not unusual that a lot of pension funds are in serious trouble. Just because we have it doesn't mean that we should continue to do it. It is impractical and unsustainable at this point in time, and we have to make a change.

But switching to a 401(k)-style plan does not at all reduce what the city already owes.

I understand that. But if you make the switch, you have fewer people going into the defined benefit plan and therefore are not driving up your unfunded level. It's a long-term strategy, and it's a long-term process. Making that switch is not going to save us millions and millions of dollars right now. But over the next 20 or 30 years, we will.

Part of the problem in politics is that people only look at the next four to eight years: kick the can down the road and say, hey, it's the next person's problem. I've refused to do that. We're going to deal with this issue head-on and make some tough decisions. Unfortunately some people will be upset, but that's my commitment to public service.

You inherited a difficult situation in 2008. Do you see the pension problem in particular as the result of years of underfunding?

Yes. I'm not going to question motives -- the city has had tough financial times. But that's the one thing I think everyone can agree on. It clearly comes from underfunding over time. And our system, like everyone else's, got hit hard in 2008, and there was a loss of value there. But this is something that has literally built up over 30 or 40 years. It's got to stop somewhere. I think it should stop now.

So, have you been in negotiations with the unions about this new pension plan?

We have been in negotiations. We got that provision, what we wanted, in the police. That's an interest arbitration, unlike a traditional collective bargaining. But we got what we needed there.

We wanted the same thing for fire. We did get that, but there were a bunch of other things in their award that we didn't like, so we appealed that. We are working with district councils 33 and 47, the two AFSCME unions. Pensions, health care, worker rules, overtime and a couple other things -- those are the items of discussion and negotiation. So, we're trying.

What do you see as the timeline for that being instituted -- switching to a hybrid plan?

Well, for police, that's already in place. We haven't had any new officers, but they'll have a choice: they can either go into the traditional plan and pay 20 percent more, or go into this hybrid plan. So we'll see what people want to do. As we negotiate -- and if these get agreed to by the unions -- then we'll create the mechanism for new employees to be able to go into this plan. It's really a function of whenever the negotiations conclude.

In police and fire there haven't been layoffs, but the staff has grown smaller because of attrition. Are there now fewer police and fire than there were when you took office?

Yes. But we've maintained a base level of strength in both. The police commissioner in particular has reassigned some folks to make sure we have good levels on patrol. But we lose anywhere from 15 to 18 police officers a month, to retirement. We definitely have fewer officers today than we had when I came in.

Are you concerned about response times? Or safety?

We're always concerned about that. Again, fortunately, in both police and fire, they've been able to maintain their response times. Fire has stayed within the national standards, and we haven't had any big complaints about police. We just keep putting more officers on patrol.

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UPDATE: Following initial publication of this report, Mayor Nutter's office responded to challenge the conclusion of the study by Novy-Marx and Rauh, emphasizing that the city's pension fund will not run out of money by 2015.