BEFORE staggering away from Albany last week, the state Senate delivered a pleasant surprise for taxpayers — rejecting a well-intentioned but badly designed bill that would have allowed the state and local governments to borrow billions from the state pension system while potentially compounding financial risks for generations to come.
The measure had been promoted by state Comptroller Thomas DiNapoli in anticipation of a coming spike in tax-funded pension costs. The pension fund, which the comptroller manages, lost $44 billion in the recent market crash and has fallen 40 percent short of its target rate of return over the last two years.
Taxpayers will be asked to make up that shortfall through increases in employer contributions to the fund, which are figured as an average percentage of payroll.
The problem is that no one — including the comptroller — can say exactly how high the contribution rates will need to go over the next few years, or how long they’ll stay there.
Suppose, for example, that the pension fund can duplicate its investment returns during the years following the 1987 stock market crash. In that case, it’s estimated, employer contributions would need to triple by 2015. The state and local price tag: well over $5 billion a year.
This scenario assumes a small investment gain in 2010, followed by solid double-digit returns every year for the next five years — and even then, pension contributions wouldn’t subside to current levels until the early 2020s. Raise your hand if you’re willing to bet your house on that.
To help state and local governments cope, DiNapoli proposed a bill allowing them to “amortize” — in other words, borrow from the pension fund itself — a potentially large portion of their pension contributions.
The DiNapoli-supported bill would cap pension-fund contributions for six years, from fiscal 2010-11 through 2015-16. It would also set a new pension contribution floor of 5.5 percent of payroll — although New Yorkers will be lucky if a figure that low ever becomes relevant again.
Amounts exceeding the caps would be financed through a series of 10-year loans from the pension system, potentially pushing billions in tax-funded pension obligations all the way out to 2026. Maybe — just maybe — pension contributions will have dropped back down to single digits by the early 2020s.
Of course, it’s just as likely the stock market will endure another lost decade of sharp ups and downs, leaving taxpayers to shoulder contribution rates in the 20 to 30 percent range for many more years. In that case, the multiyear borrowing authorized by the comptroller’s plan would only make the funding problem worse as time went on. And what then?
That crucial question wasn’t answered or even raised as the bill advanced in classically stealthy Albany fashion. Rushed to an Assembly vote on the basis of a “message of necessity” from Gov. Paterson on June 22, it passed 138-2 without debate. But the reunited Senate Democratic majority needed to vote again to make it official before adjourning.
Then something very unusual happened. Sen. George H. Winner, Jr. (R-Elmira) laid the bill aside, preventing a quick consent vote. “I am fearful that this proposal is reckless, it will cost the pension system even more money, and it will cost municipalities more money . . . because it will further erode the value of that fund, which again they have to make up in the end,” Winner told his colleagues.
With no further debate, the bill lost, 35-27. Five New York City Democrats joined all 30 Republicans in voting “no.”
To be sure, several of those 35 “nays” may simply have been thumbing their noses at the comptroller for withholding their pay during the Senate leadership stalemate. But the defeat of any bill brought to a floor vote in the state Legislature is extremely rare in New York.
And now, at least, there is a little more time for the comptroller and other policymakers to consider options more carefully.
DiNapoli is right: New York’s hard-pressed taxpayers need protection from the impending leap in pension costs. But pension relief must be conditioned on real pension reform. Here’s the right way to achieve both goals in a fiscally responsible manner:
1) Create a new “tier” of less generous traditional pension benefits for newly hired employees, as Paterson has proposed.
2) Authorize pension fund borrowing only one year at a time and limit the payback period to between five and seven years, with borrowers required to pay the same 8 percent interest rate that the fund needs to earn on its investments.
3) Extend the pension borrowing option only to those government employers who agree to enroll their newly hired workers in a 401(k)-style defined-contribution plan, which is the only sure way to permanently stabilize future retirement costs at a lower cost to the taxpayers in the long run. There’s a model at hand: the retirement-savings programs that already cover tens of thousands of State University and City University employees.
4) Require current public employees across the state to share in the rising costs of their pensions — by freezing their pay, if necessary. (The Legislature has the power to do this in fiscal emergencies, and a tripling of pension costs would surely qualify.)
5) Imitate the New York City actuary and institute a truth-in-accounting requirement to expose the true market costs of public pensions, which are now obscured by lax government accounting standards.
6) Enact all of the above in the same omnibus bill. No reform — no relief.
Unthinkable? Maybe. But all sorts of strange things have been happening in Albany lately.
E.J. McMahon directs the Manhattan Institute’s Empire Center for New York State Pol icy. ejm@empirecenter.org