Cost is hurdle as Albany looks at better retirement deal for many workers

ALBANY — State budget discussions on whether to sweeten retirement benefits for public workers hired after 2010 are centered around lowering the retirement age and reducing pension contribution rates — changes that would come with an estimated price tag of billions of dollars a year.

The sixth pension tier, known as Tier 6, was created 14 years ago as lawmakers looked to tame fast-rising pension costs. As a result, public workers hired on or after April 1, 2012, receive fewer benefits, must wait longer to retire with full benefits and contribute more toward their pensions.

Union leaders say the tier needs to be "fixed" to attract and retain public-sector workers, as employers struggle to find workers, particularly in high-demand areas such as corrections, nursing and some teaching positions. 

"The state has really eroded the promise of a dignified retirement by creating Tier 6. It’s no longer the same type of appeal that it used to be ... when it was a path to a middle class life," said Melinda Person, president of the New York State United Teachers, the state’s largest teachers union, representing nearly 700,000 members. "Now, people don't want to come work for public service, and that’s a shame."

Union leaders say the changes also would cover workers from the fifth pension tier, known as Tier 5, who were hired from Jan. 1, 2010, through March 31, 2012.

The two main proposals would lower how much employees contribute to their retirement and allow members to retire younger as long as they’ve worked a certain number of years, union leaders and lawmakers told Newsday. The changes would affect those working in government, teachers, firefighters, police and health care workers at public hospitals such as Stony Brook University Hospital and Nassau University Medical Center.

Democratic Gov. Kathy Hochul and Democratic lawmakers, who hold the majority in the Assembly and Senate, support making changes to the tiers.

Hochul and all 213 members of the State Legislature are up for election in November. Some union leaders also are up for reelection this year, adding pressure to deliver for their members.

The push for pension changes comes as lawmakers pledge to make the state more affordable, taking aim at costs for child care, car insurance and housing in the state’s $260 billion budget, due April 1.

The price tag — which varies widely, depending on the proposal — has become a major sticking point, union leaders told Newsday.
 

School district and municipal leaders say without financial help from the state, the increased cost would mean cuts to services or increased taxes.

"What’s being proposed, so far, is unaffordable and unfortunately a budget-buster for the taxpayer," said Chris Koetzle, executive director of the New York Association of Towns.

What’s being proposed?

The two main proposals are lowering the retirement age to 55 for workers who have 30 years of service and reducing employee pension contributions to 3% across the board.

Currently members of tiers 5 and 6 who are not in special retirement plans can retire at age 62 and 63, respectively, and face penalties if they retire earlier.

Pension contributions for Tier 6 are set at different levels based on wages and range from 3% to 6%. Tier 5 member contributions are set at 3% for the length of a worker's career, though it can vary, with teachers statewide paying 3.5%. Members in other tiers contribute for a set number of years or don't contribute toward their pension benefit at all.

"We need to see significant change in both the age and contributions because they’re so egregious," said Michael Mulgrew, president of the United Federation of Teachers, which represents more than 200,000 members, including New York City public school teachers and professionals.

Additional proposals include reducing the number of years workers must contribute to the pension system and increasing the amount of overtime pay that can be counted toward pension benefits. 

Lawmakers have pressed the unions to come together on one proposal, which Person said they now have. Union leaders declined to share the details.

"If they don't have consistent asks, I think they’re going to be burning their own bridges," Senate Finance Committee Chair Liz Krueger (D-Manhattan) told Newsday. "Come back with one coherent ask for everybody and don't ask us to choose who we’re going to support and who we're going to say no to."

Who would it help?

There are about 787,241 members in Tier 6 and 38,873 in Tier 5, according to the most recent data from the state comptroller's office, state Teachers' Retirement System and the New York City Office of the Actuary. Changes would not generally affect members of the NYPD or FDNY pension funds because new members are generally considered Tier 3, and the city retirement systems don’t include Tier 5, according to the Office of the Actuary.

Tier 6 members make up a large share of public workers in the state. For example, more than 46% of those in the state Teachers’ Retirement System are in Tier 6, as are 66% of those in the state Employees’ Retirement System, which includes nonteaching staff, correction officers and sheriffs.

Increasing the cap on overtime would be a "big step toward providing firefighters a fair and equitable benefit for their time worked," said Samuel Fresina, president of the 18,000-member New York State Professional Fire Fighters Association. Municipalities have been reducing the number of professional firefighters, even as call volumes increase, putting strain on the remaining firefighters to fill those shifts with mandatory overtime, he said in an emailed statement.

Lowering contribution rates to 3% across the board and allowing members to retire at 55 with 30 years of service would largely benefit longtime workers with the highest salaries, traditionally men, union leaders confirmed. Women are more likely to take leave for child rearing or to take care of a parent, which doesn’t count toward their years of service.

Person said there could be savings, as older, typically higher-paid staff retire earlier, allowing employers to save money on the higher salaries.

What would it cost?

"This is a really big deal. It can easily go into the billions of dollars a year," said Ana Champeny, vice president for research at the Citizens Budget Commission.

It's difficult to estimate the cost until there is a final proposal.

Limiting employee contribution rates for Tier 6 members to 3% for those earning $75,000 or less, 4% for those earning from $75,001 to $100,000, and 5% for those earning more than $100,000 would cost an estimated $2.9 billion, according to a fiscal note within bill language.

And changes could be retroactive, meaning the state would owe money to those who already paid in, Champeny said.

Lowering the retirement age to 55 with 30 years of service for just tier 5 and 6 members of the state Teachers’ Retirement System would cost an estimated $371.5 million annually, according to a fiscal note provided to Newsday.

Earlier retirements would mean fewer worker contributions, and pension costs will hit earlier than anticipated and be paid out for longer, Champeny said.

Changes made cannot legally be undone, she said. "Once you do this there is no going back and you are committing to this level of funding for decades."

Who pays for it?

The unions have been pressing the state to raise taxes on the wealthy to pay for the proposal — something Democrats in the legislature have been open to. But Hochul has said this is a nonstarter.

Mulgrew said employers don't need to offset any changes in contribution rates because the pension funds are healthy.

But Assemb. Michael Fitzpatrick (R-Smithtown) warned that changes to contribution rates would be unsustainable, especially if there's an economic downturn.

"They want to sweeten Tier 6, not fix Tier 6, and we can’t afford it," he said, adding that people aren’t leaving because of pension issues. "How can you claim we’re working toward affordability when you’re sweetening pensions that don’t need to be sweetened?"

Without state help, the cost to ensure the pension funds are made whole will be left up to the employers — including the state, counties, municipalities and school districts.

"It would significantly increase taxpayer costs. It's one or the other — you either have fewer services or higher taxes," Champeny said, adding that changes to the pension systems would basically amount to an unfunded mandate.

School districts could have to lay off newer teachers or increase school taxes, said Greg Berck, assistant director of governmental relations and assistant counsel for the New York State Council of School Superintendents.

"It’s a massive cost and it's unclear what that will actually provide in terms of retention and recruitment," Berck said, adding that they haven’t seen data showing that Tier 6 teachers are leaving at greater rates than those in Tier 4.

Koetzle said town leaders are open to the Tier 6 changes, but the ones being proposed are too expensive. For example, the state could allow lower contribution rates when the market is doing well or let people pay to retire early, he said. "We have to make it more attractive, which we think we can do with these common-sense ideas."