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Analysis: NY's pension headaches to endure

Gov. Andrew Cuomo speaks to the New York

Gov. Andrew Cuomo speaks to the New York Conference of Mayors in Albany. Cuomo wants mayors to pressue their senators and Assembly members to vote for his cheaper pension plan for future workers over the opposition of public employee unions. (Feb. 27, 2012) Credit: AP


Rising pension costs are hitting local governments hard, but the problems won't end any time soon -- even if state legislators approve a new, less lucrative pension system, as Gov. Andrew M. Cuomo has urged.

Experts and officials say it will take years for taxpayer contributions to make up for the losses that pension funds incurred when financial markets melted down in 2008.

In addition, the booming markets of the 1990s inspired politicians to promise more generous benefits that will be paid out for decades to come.

"If you knew then what you know now, obviously it's a mistake," Cuomo said last month of the choices made during better financial times. "Look at how much of our tax dollars are going to the pension system. Obviously, in retrospect, you would have never done this. It's crushing the state."

The squeeze is forcing lawmakers to confront a tough reality:

If Cuomo's proposal is adopted this year, cities, towns and villages won't realize a significant impact for almost 20 years. For example, Glen Cove would have to pay to the pension funds only $15,670 less in the first year than if no changes were made. Glen Cove's contribution savings wouldn't hit $1 million until 2030, according to Newsday calculations based on information provided by the Cuomo administration.

The current spike in what municipalities must pay into the funds will flatten somewhat in the next few years even if no pension-system changes are made because of the improved financial markets. Pension costs climbed 47.8 percent from fiscal 2010 to fiscal 2011, but by 2015 the annual increases are expected to be 11.9 percent, according to Cuomo's projections.

State and local governments relied on the stock market boom of the late 1990s to fuel the state pension fund and did not put extra money aside for any future decline in the financial markets.

Analysts: Lessons ignored

Sylvester Schieber, former chairman of the federal Social Security advisory board and a consultant on public and private pensions, said people have forgotten the biblical lesson of Joseph and his interpretation of the Pharaoh's dream: Store up grain during the good years because famine will follow.

"We keep relearning these lessons and then we keep forgetting them," Schieber said. "We quit contributing to the pension piggy banks. When the markets readjusted, we hadn't saved any of our surplus grain -- any of our surplus returns -- and, lo and behold, now we're hungry."

In fact, Cuomo's proposal does not call for any sort of rainy day fund. He has suggested that even if cuts are made this year, lawmakers could make pension benefits more generous again in the future if the economy improves. "Five years, 10 years, if the economy comes back, fine, [increase] the pension," he said recently.

When public workers who have put in enough years of service retire, they receive a guaranteed annual benefit. To pay for the benefits, the state, local governments, schools and public authorities contribute into several pension funds that then are invested into financial markets.

When the markets do well, contributions go down as profits pay more of the cost of retirement benefits. The pension benefit depends in part on which plan, called a tier, was in place on the date of hire.

In 1992, New York's pension funds were valued at $51.9 billion, according to the state comptroller's office. Six years later, they had doubled to $104.9 billion. This kept employer contributions for nonuniformed workers low -- for many years less than 1 percent.

The more generous benefits put in place in 2000 and later years were responsible for 44 percent of additional pension costs over the decade, according to a report last year by New York City Comptroller John Liu, who oversees the city's pension funds.

Among them: Workers no longer had to contribute money to their retirement after 10 years; the retirement age was lowered to 55 from 62 after 30 years of service; and a cost-of-living increase raised pension benefits for older retirees.

"They made pensions a lot more expensive right before the market conditions drove it through the roof," said Edmund J. McMahon, a senior fellow at the Empire Center for New York State Policy, a conservative research group. "They sold it to themselves as a free lunch."

McMahon goes further back, saying some of the issues today had their start in the 1980s, when pension funds moved away from more conservative investments toward stocks that offered higher returns, but also greater risk. The projected higher returns allowed government to contribute less money to the pension system, McMahon said.

Ned Regan, who was state comptroller in the 1980s, acknowledged that the office increased stock investments from about 25 percent of the portfolio to 45 percent.

"The markets were just roaring away," he said.

Eyeing affordability

Every year lawmakers introduce dozens of bills to improve benefits for one public-employee bargaining unit or another, said Robert Ward, deputy director of the Rockefeller Institute of Government, a public policy think tank. "There has very seldom been much attention to the broad balance of affordability," he said.

The number of employees in the state pension system has increased by 9.4 percent over 20 years, while pensioners and beneficiaries climbed by 52.3 percent during that time, according to the state comptroller's office. Meanwhile, the average annual benefit per person has risen to $21,984 from $13,113, using 2011 inflation-adjusted dollars.

The average benefit received by new retirees in fiscal 2011 was significantly higher than the overall average. New police and fire retirees' average benefit was $63,026 and civilian retirees' was $29,300, according to the comptroller's office.

With the economy slowly recovering, Cuomo's estimates for future pension contributions show that year-to-year increases aren't growing as quickly as they had been.

From fiscal 2010 to fiscal 2011, pension contributions for schools and local governments grew $1.1 billion to $3.4 billion. The annual increase was $900 million in the current fiscal year and the administration projects the increases will be $700 million in each of the next three years.

State Comptroller Thomas DiNapoli said that while no one can predict where the market is going, no one is projecting another historic meltdown on the horizon. "I do believe that based on historic trends that the rates will go down in two years," he said.

Morris Peters, a spokesman for the Division of Budget, said Cuomo's proposal, which projects $1.6 billion in savings over the next five years, is nothing to scoff at. "Pension reform provides significant near-term relief, and the savings only increase with time," he said in a statement.

Peter Baynes, executive director of the New York Conference of Mayors, which represents cities and villages, said even as contribution cost increases slow down, they still can bust budgets.

"The trajectory of the increase is going to flatten out marginally, but it's the cumulative effect of it that's the problem," Baynes said.

Moody's Investors Service analyst Marcia Van Wagner agreed, saying pension sweeteners and overly optimistic assumptions from the boom years will offset some of the recent market gains.

"What you're likely to see is that the increases in pension costs that we've been seeing will level off, but we're still going to be left with very large required pension contributions that will continue to put pressure on public sector budgets," she said.

Plan might save $113B

Cuomo's proposal for a Tier VI pension program would give new employees the option of a less-generous defined benefit plan, or a 401(k)-style defined contribution plan. Cuomo has signaled that he could drop the 401(k) proposal. The defined benefit plan would raise the retirement age to 65, eliminate overtime in calculating final pension benefits, and increase employee contributions in part based on how well the market performs.

The proposal would save a projected $113 billion over 30 years, according to Cuomo, though most of those savings come in later years and the projection doesn't account for inflation.

Those projections assume that wages will increase by 4.1 percent annually while contributions will be 4.5 percent less for new employees than under the current system.

Nassau County, for example, where salaries totaled $833.3 million in fiscal 2011, would pay $812,750 less in the first year then if the proposal did not pass, based on Newsday calculations.

By 2022, contributions would be cut by $22.2 million while salaries would be $1.3 billion. The county's cumulative savings would be $1.6 billion over 30 years, not adjusting for inflation.

Brian McDonnell, legislative and political director for American Federation of State, County and Municipal Employees in New York, said union members understood that budgets were under stress.

"Tier VI [Cuomo's pension proposal] isn't going to solve any of those problems," McDonnell said.

With Yancey Roy

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