In the growing debate over pension reform, objective facts are sadly becoming victims of politics. While this is too often the case when politicians oversee important fiscal issues, New Yorkers deserve a data-driven review of our state’s pension problems as well as a solution for them.
State Comptroller Thomas DiNapoli (full disclosure: I lost the 2010 election for comptroller to him) has been portrayed as defending the interests of his primary supporters in public-sector labor by opposing the relatively modest reforms put forward by Gov. Cuomo, his fellow Democrat. In turn, DiNapoli has sought to portray proponents of pension reform (including, presumably, Cuomo) as enemies of the middle class.
The reality, however, is different: Sensible pension reform, which our state sorely needs, can be both pro-middle-class taxpayer and pro-public employee.
Pension costs have grown dramatically in recent years and now consume a large portion of our state and local budgets. In fiscal year 2012, New York state is expected to pay $2.1 billion into the state pension fund — including $635 million of disguised borrowing from the fund itself (more on that later) — while local governments will have to kick in over $2 billion more.
The crisis is even worse in New York City, which will put about $8 billion into its public-pension system, a full 12 percent of the city budget. With less than 3 percent of the US population, the city now makes roughly a quarter of the nation’s local-government-pension contributions.
The problem is extreme enough to have prompted an unprecedented bipartisan coalition of local-government officials, who spent yesterday in Albany lobbying for the Cuomo reforms.
The many reasons for the crisis range from poor investment returns to unrealistic expectations to excessive promises by politicians of both parties at election time. (One group that should not be blamed is the employees themselves, who have made the modest contributions they have been asked to make, year in and year out.) Cuomo deserves a great deal of credit for seeking to stop this vicious circle of escalating election promises.
Establishing sensible pension policy is clearly in the interests of taxpayers, who fund public pensions to the tune of more than $1,000 per non-New York City household and more than $2,600 per New York City household in 2012. But creating sensible pension policy is also in the interests of public employees themselves.
As the economist Herb Stein famously said, “If something is unsustainable, it tends to stop.” Likewise, with pension costs growing to unsustainable levels, public employees risk two things: a pension fund that will be increasingly underfunded, threatening their retirement security, and a growing public backlash that can lead to far more draconian reforms.
Masking these dire prospects are poor accounting standards for public pensions that would make Enron’s management blush. Exacerbating the problem is the risky “pension-borrowing” scheme noted above — which allows governments to defer otherwise-mandatory payments in the guise of borrowing from the funds. (This “reform” was championed by DiNapoli.)
I’ve seen these problems come home to roost in both the private and public sectors. In my corporate-turnaround work, I’ve seen far too many mismanaged companies default on their pension obligations, leaving hard-working employees and retirees with empty promises.
In the public sector, I served on a bipartisan commission to develop pension reform for Rhode Island, which had one of the country’s most troubled systems. Through that work, Rhode Island was able to preserve its existing defined-benefit structure, reduce its unfunded liability by more than 40 percent and install a hybrid pension plan. Those reforms benefited taxpayers and saved the system for public employees — a “win-win.”
The good news is that New York’s pension system is in better shape than was Rhode Island’s — at least for now. But the fundamental imbalances — unrealistic expectations about the returns on pension investments, as well as employee contributions that don’t keep pace with the expected benefits — leaves the Empire State system similarly unsustainable.
What worked in Rhode Island? An independent governor and Democratic treasurer created an expert commission, put politics aside and focused on the simple math required to save the system.
Hopefully, our state’s political leadership, including DiNapoli and the legislative leadership of both parties, will support Cuomo in his efforts to do the same for New York.
Harry Wilson was the 2010 Republican, Independence and Conservative Party candidate for state comptroller. He also served on the US Treasury’s Auto Task force and led the restructuring of General Motors.