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A Small Pension Step

eye on the news

A Small Pension Step

New York’s new law reduces costs, but not enough. March 30, 2012

After a bitter battle, lawmakers in Albany finally reached a deal that would begin to control New York’s dizzying pension costs, though only for new public-sector workers. The deal represented a victory of sorts for Governor Andrew Cuomo and the Senate’s Republican majority over the state’s public-employee unions, which had adamantly opposed making any changes to the system. Under the law, which takes effect on April 1, new public employees will contribute more to their pensions, retire later, and work more years before becoming vested in the pension system. The unions’ resistance, however, forced Cuomo to abandon some of the vital reforms that he had originally proposed, such as offering all new public workers the option of forgoing the traditional defined-benefit plan in favor of a 401(k)-style defined-contribution plan. And the new law allows New York City’s uniformed workers, including police and fire personnel, to continue to retire after 20 years and pad their pensions with significant overtime.

Cuomo and his allies say that the reforms will save state and local governments more than $80 billion over the next 30 years—somewhat short of the $113 billion that the original plan envisioned. Still, it’s better than nothing, because New York’s fiscal burdens have long since become unsustainable. As a Cuomo press release notes, local governments across the state have seen their annual pension costs explode from $1.4 billion in 2002 to $12.2 billion today. New York’s private employers contribute through taxes, on average, 16 percent of their payroll to state and local public-retirement systems, more than double what they were contributing in 2010. Their portion is expected to top 20 percent by 2015.

New York City taxpayers, meanwhile, contribute 15 times as much to the city pension system, through their taxes, as the city’s public employees do. Since 2002, the cost of public-employee benefits (mostly for health care) has swollen 76 percent, while their salaries have grown 35 percent. So it’s no surprise that the city’s costs for such expenses and debt services have jumped 63 percent since 2002. The city’s pension costs have grown by 499 percent over the same period and are projected to increase by at least 20 percent more, or $1.4 billion, in the next three years. In 2002, pension costs were less than 5 percent of the city budget; in 2013, they’re projected to be 15.8 percent. By that year, pensions will account for 28 percent of all New York City’s workforce expenses. According to the comptroller’s analysis, the city’s pension contributions from 2000 to 2010 were $31.6 billion higher than would have been expected under pre-2000 benefit levels and actuarial assumptions. The unfunded liability in the city pension fund stands at an estimated $8.5 billion.

New York’s state and local taxpayers support three public pension funds encompassing eight different retirement systems. Between 2007 and 2009, as the economy cratered, these funds lost more than $109 billion, or 29 percent of their combined assets. Meanwhile, the number of pension-fund retirees and other beneficiaries has risen 20 percent, and total benefit payments have doubled in the past ten years.

Article 5, Section 7 of the New York State Constitution guarantees that pension benefits shall not be “diminished or impaired.” State unions interpreted this to mean that employees cannot be required to pay for the rising costs of their future benefits—even benefits they haven’t yet accrued. Fortunately, this union position didn’t prevail. Because of the fiscal crunch, brought about partly by pension demands, the state deferred $249 million of last year’s $2.1 billion contribution to the pension funds. The Division of the Budget expects to delay payment of another $4.4 billion in pension contributions over the next six years. Public employers stuck with annual pension-contribution increases that are greater than 1 percentage point of payroll will be able to stretch their payments over ten years—thus going into a form of debt to “pay” these pension obligations to the state.

No, New York isn’t unique in facing a fiscal crisis from escalating pension burdens; states all over the country have similar problems. And yes, it’s a good thing that New York has joined 41 other states in enacting some kind of pension reform. But the crisis is so dire that the changes don’t go far enough.

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