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Editorial: Idea could ease pension crunch for New York localities

Comptroller Thomas P. DiNapoli's office has said he

Comptroller Thomas P. DiNapoli's office has said he had "serious concerns" about Gov. Andrew M. Cuomo's pension smoothing plan because it could undermine the funding level of the Common Retirement Fund, which is currently fully funded. (Oct. 9, 2012) Credit: Newsday / Audrey C. Tiernan

Gov. Andrew M. Cuomo has addressed the challenges of spiraling pension costs in the right order. Last year he and the State Legislature reduced the long-term liabilities of the state's public employers with a new level of benefits and contributions for future employees projected to save $80 billion. This year, he wants to allow governments and school districts to take advantage of those savings.

Under Cuomo's proposal, most government entities that pay into the state pension fund could decide to pay a fixed pension contribution rate of 12 percent of payroll (18.5 percent of police and firefighter pay) for 25 years. The term could be longer or shorter depending on the fund's investment returns. Such contributions would be far higher than in the stock market's glory days in the early 1990s, when the pension fund's stellar investment returns allowed public employers to kick in almost nothing. But 12 percent is far lower than the 20 percent contributions (and 30 percent on police and firefighter pay) they face now.

The idea is that some of the decreased costs of the new pension setup established last year, called Tier 6, could be harvested now, before they actually accrue. In return, participants in this "smoothing" plan would pay more later than if they decline to participate.

Some criticisms of the plan are worth considering. Participation in this program can be viewed as kicking operating expenses down the road, ordinarily a terrible idea. The fact that interest would be charged on the difference between what the contribution should be and the "smoothed" payment makes it akin to borrowing. But the fact that the borrowing would be offset by lower future costs, and the payment rates are considerably higher than the contributions that would be required to fund pensions in Tier 6, make it a fairly prudent plan.

This would also, in the short term, make the balance of the pension fund, now $150 billion, a bit lower than it would have been. But the state itself and state authorities, huge participants in the pension fund, wouldn't be allowed to use the smoothing tactic, and New York City has its own fund, so the impact would not be all that significant.

The predictability of a steady 12 percent payment, rather than one that fluctuates between zero and 20 or 30 percent, has real value for municipalities and school districts trying to budget. And finding a bit of mandate relief at a time when costs have soared and revenues have stagnated may be the crucial help that allows the worst-off communities and school districts to keep providing needed services.

Any public employer that can still pay its bills and provide for its constituents while making its pension contribution each year should avoid this mechanism: That's a prudent and responsible path. But for those that would have to lay off essential employees in order to pay their full pension contributions, this is a decent option.

Comptroller Thomas DiNapoli has reservations about the plan. That conservatism is appropriate for the man who has sole responsibility to safeguard the pensions of many public servants. But after making sure every "i" is dotted and every "t" crossed, he should approve this option, and those municipalities and school districts most in need of help should take advantage of it.