ALBANY — State Comptroller Thomas DiNapoli on Thursday said that local and state governments will soon have to pay more into their workers’ pensions, which could further pressure governments already struggling because of lost revenues during the COVID-19 emergency to raise taxes.
DiNapoli said the governments’ employer contribution for most workers in the state pension system will rise to 16.2% of their payroll, from 14.6%. For the Police and Fire Retirement System pension, the government cost will rise to 28.3% of payroll, from 24.4%. The higher costs will be for the 2021-22 fiscal year and won't have to be collected until Feb. 1, 2022. DiNapoli in 2012 instituted a two-year forecast to give governments more time to budget for increases.
“Although expected given recent market volatility, this is bad news for state and local taxpayers,” said David Friedfel of the independent Citizens Budget Commission. “The increase in contribution rates will increase state costs above current projections for next year, making the projected $17 billion deficit worse.”
Gov. Andrew M. Cuomo said that school districts and state and local government face a potential 20% cut in funding because of the virus if billions of dollars in aid for New York isn’t approved in Washington. Those talks have languished in Congress and approval is uncertain.
“At a time when school districts are reeling from the double whammy of a potential 20% decrease in state aid and added expenses due to COVID-19 safety protocols, they can ill afford an increase in pension contribution rates,” said David Albert of the state School Boards Association. “This is another example of the need for federal lawmakers to provide additional emergency funding to schools.”
Predictions of just how much the pension cost increase might add to the pressure to raise property and income taxes aren't known because of the uncertainty of the federal aid.
The $194.3 billion pension system for 1.1 million public workers, retirees and their beneficiaries is funded by investments in the stock market, other securities, real estate, cash and other investments as well as the employer contributions. When investment returns decline in poor economic times, the employer cost increases because the public pension is guaranteed under the state constitution. Other factors in setting the employer rate include the number of workers who retire, the number of new hires, and the mortality trend for retirees.
But the COVID-19 virus that forced a shutdown of most of the state economy for months and sapped state and local government tax revenues is only part of the reason for the increased pension costs on governments.
“Employer contribution rates have gone down or remained relatively flat for several years, but demographic changes, such as longer lifespans, and market volatility are nudging up rates,” DiNapoli said.
The state comptroller kept the projected return rate on investments at 6.8%, but will review that for change in a year. He lowered the assumed rate of return on investments last year, from 7%. It was the third time DiNapoli has lowered the expected rate of return since becoming comptroller in 2007. The pension fund return hit a recent high of 8.5% in 2000.
DiNapoli said retirees and beneficiaries are living longer and workers are retiring at a higher rate, factors that drive up payouts. Those come at a time when the pension fund systems are getting a lower return from a volatile stock market and other investments impacted by the virus. DiNapoli warned that continued turmoil this year could further drive up the cost of pension payments by governments in the future.
Actuary Mike Dutcher in his report to DiNapoli urged caution.
“If this year’s increase in employer contribution rates looks insufficient a year from now, we can act accordingly,” Dutcher wrote DiNapoli in his report. “I think that self-control, calm, and a steady hand are more likely to prove prudent than rashness and actuarial grandstanding.”
By comparison, the 16.2% rate to be paid by governments as the employer contribution to the pension system follows a decline in rates since it was 18.2% in 2016. The police and firefighter pension rate for employers that will be 28.3% is the highest since 2014, when the rate was 28.9%, according to DiNapoli’s report.