It would be easy to think that what happened in Detroit couldn’t happen in New York City. But it did almost happen here, back in 1975. And while we’ve traveled a long way since then, we’d be foolish to ignore the factors that drove Detroit to bankruptcy.
One major reason Detroit couldn’t stop its downward spiral was that its labor costs, especially its retiree costs, crowded out its ability to invest in the things that make a city an attractive place to live and visit. In New York City, that risk is still very real. And the primary driver is the same factor present in Detroit: the explosion in pension and health-care costs.
In Fiscal Year 2002, New York City’s pension costs were $1.4 billion. By Fiscal Year 2009, even after one of the strongest bull markets ever and before any impact from the financial meltdown, pension costs had grown to $6.3 billion.
Clearly, our increase in annual pension costs wasn’t driven primarily by poor market returns. It was the result of a benefit structure that promises retirees too much too soon, and requires them to contribute too little to pay for it. At the same time, the idea that our pension costs can be substantially reduced through increased market returns is a fantasy perpetuated to avoid the hard choices.
Today, much of the city’s civilian workforce contributes only 3 percent of salary for the first 10 years of employment toward their pensions, and nothing after that. You’d be hard-pressed to find a single company in the private sector with that kind of pension plan. For that matter, you’d be hard-pressed to find many governments with that kind of plan.
Nearly all private-sector companies, and more and more governments, have switched from defined-benefit to defined-contribution plans — which are increasingly popular because they’re portable as people change jobs. For instance, SUNY and CUNY offer employees the choice between defined-benefit and defined-contribution plans, and three-quarters of the faculty at both institutions have chosen the defined-contribution plans. Why shouldn’t all city workers have the same choice?
Last month, Chicago laid off 2,100 teachers and school support staff, largely because its pension costs had increased substantially. Mayor Rahm Emmanuel said, “The pension crisis is no longer around the corner. It has arrived at our schools.”
Chicago is far from alone. Anyone who thinks it can’t happen here needs only to look at the late 1970s, when the city laid off more than 10,000 teachers and thousands of police officers, firefighters, sanitation workers, hospital workers and others.
The situation with health-care costs today is no less troubling: About 95 percent of our employees and retirees contribute nothing — not a dollar — to their basic health-care premiums. Compare that to state government, where more than 90 percent of workers contribute to their premiums, usually between 10 and 20 percent.
We’ve sought reasonable employee contributions for years. And beginning in 2010, we made it a mandatory condition of any new labor contracts. But no union has been willing to sign a new deal with that provision. So this year, in addition to our $8 billion-per-year pension bill, we’ll spend $6.3 billion on health insurance — almost double what it cost us when I first came into office.
The municipal unions are working under contracts that were due to expire three and four years ago, but because of the state’s Taylor Law, they remain in effect until new contracts are signed. That means the hours, wages, benefits and raises built into those contracts continue. For instance, a teacher with five years of experience in 2008 making $58,000 has continued to get raises, and is now making $79,000.
So when the union leaders say they don’t have a contract — they do. But they’re demanding new contracts with retroactive raises on top of those they’ve already gotten. Given the fiscal realities, we can’t afford retroactive raises. In any case, the unions can’t give us retroactive productivity savings to pay for them.
And remember: During the Great Recession, most people in the private sector, who pay the salaries of our municipal workers, didn’t get raises; many took pay cuts.
The question is: Will the next mayor continue to hold the line — or capitulate?
My successor will enter negotiations with enormous leverage, because union leaders will have gone four years without new contracts, which has never happened before; they won’t be willing to wait another four years. That puts the next mayor in a position of strength in negotiating not only salaries, but also pension and health-care reforms. In fact, there may never be an opportunity quite like this again.
It will be up to you, the voters, to make sure that we elect a mayor who understands how important this opportunity is.
Excerpts from Mayor Bloomberg’s prepared remarks for his speech yesterday in Brooklyn.