Gov. Cuomo's pension-fund relief option

Gov. Andrew M. Cuomo's proposal to let municipalities make flat-rate payments into the state retirement system would likely rely on a provision allowing those rates to go up within a decade, a Division of Budget source said.

Tucked inside Cuomo's proposed budget is a bit of short-term relief to municipalities struggling with rising pension costs: the option for them to make flat-rate payments into the retirement system instead of the variable payments they now make. The proposal offers municipalities the chance to make lower payments now than they would otherwise have to make.

Municipal employers, like Nassau and Suffolk counties, have been stuck with high pension costs since the financial crisis of 2008 wiped out tens of billions of dollars from the state pension fund. The pension fund is really a large investment pool from which benefits are paid to retirees. When its value falls, taxpayers make up for the losses by paying more into the system.

Cuomo's plan, proposed in his January budget, would give municipalities the option of paying a flat rate of 12 percent of regular employees' salaries for up to 25 years. One alternative funding method would require payments of 20.9 percent in 2014 and varying rates in the future.

But a cost of making flat pension payments is that municipalities would miss out on the investment gains that would accrue to their higher initial contributions.

It's akin to the problem people face in funding their 401(k) retirement plans: Set aside too little money when you're young, and you end up having to pay more into the plan when you're older to come up with the same amount of money at retirement.

"It's not free money," said Elizabeth Lynam, director of state studies at the Citizens Budget Commission, a fiscal watchdog group. "There are costs and it's essentially like taking out a loan because you're not making the payments when they're due."

Last week, a budget department source who didn't want to be named said that to deal with this potential shortfall in the pension fund, Cuomo's proposal would allow the state comptroller to step in and raise rates to 14 percent of salaries, from 12 percent, in the fifth year of joining the program, and 16 percent in the 10th.

"We would hope that he would use that discretion to minimize any significant long-term costs to the localities," the source said.

Budget officials in Nassau and Suffolk said they are reviewing Cuomo's proposal to see if it would save money or cost more.

Nassau County Comptroller George Maragos said last week, "We do not think it would be a good idea for the county to lock itself into Gov. Cuomo's plan." But Tim Sullivan, Nassau's deputy county executive for finance, said, "It appears the plan will bring stability and predictability to pay down crushing pension costs."

Suffolk spokeswoman Vanessa Baird-Streeter said the county was analyzing the proposal.