NEW York’s public-pension system has become the epicenter of an in fluence-peddling scandal that has at tracted the attention of the SEC as well as state Attorney General Andrew Cuomo. But the millions in shady “placement fees” pocketed by a few politically connected middlemen are small change compared with the mushrooming cost of lavish pension benefits for state and local government retirees.
Keeping these retirees in clover could require $5.4 billion more from local taxpayers outside New York City over the next five years, if investment returns follow one scenario floated by the state comptroller’s office. And the real scandal is that politicians are reluctant to do anything about it.
In New York (as in almost every state), public-employees’ pensions are defined-benefit — meaning that the government guarantees an income stream based on peak salaries and career longevity. By private-sector standards, benefit levels are extraordinary: Our state and local government employees (and employees of public authorities) can retire earlier, with larger pensions, than the vast majority of those who pay their salaries.
Taxpayers must shoulder the risks of covering these promised benefits. The pensions are paid out of gigantic pooled retirement funds, to which government employers contribute varying amounts, depending on actuarial assumptions and market fluctuations.
Since 2000, the combined yearly pension costs for all governments in New York (including New York City), have risen from slightly under $1 billion to nearly $10 billion — reflecting both market conditions and benefit increases effective at the beginning of that period.
New York City’s annual pension contributions alone are up more than $3 billion over the last five years — and projected to rise by another $1 billion over the next three. Annual pension bills for the state and its local subdivisions could easily double or triple by 2015.
Under the state Constitution, pension benefits can’t be “diminished or impaired” for any current member of a public-retirement system in New York. So it will be hard in the short term to stem the tide of mounting pension costs. The reform debate is really about compensation for the next generation of government workers — and the long-term impact they’ll have on state and local finances.
Far-fetched as it may seem, given state lawmakers’ shameless pandering to unions in recent years, there is precedent for reform: During the ’70s fiscal crisis, the Legislature managed to scale back pension benefits for new public employees. But the unions spent most of the next 25 years successfully clawing back much of what they’d lost.
There’s a risk that the same thing will happen again if Gov. Paterson somehow wins approval of his modest reform proposals. Paterson’s “Tier 5” pension plan, applying only to future state and local employees, would: raise the retirement age to 62 (same as the Social Security minimum); increase the pension-vesting period; require employees to contribute to the pension fund throughout their careers, and curb the practice of padding pensions with overtime. In the main, all this would simply replicate the Tier 3 and 4 benefits of the mid-’80s.
The governor has proposed more dramatic changes in police and firefighter pensions. He’d change the current “20 and out” plan — retirement at half pay after 20 years, with no minimum retirement age — to half pay after 25 years at a minimum age of 50. Mayor Bloomberg projected that this would save the city $200 million a year almost immediately.
Real reform, however, would go much further — by essentially throwing out the outmoded defined-benefits model for future employees. New York should follow the lead of a few states, including Michigan, that have shifted nonuniformed government workers to defined-contribution accounts — like the 401(k) plans that have come to dominate the private sector.
With a defined-contribution retirement system, taxpayers would no longer bear all the financial risks associated with providing guaranteed pension benefits. For the first time, public-pension costs would become both predictable and easily understandable — and the real costs of proposed benefit increases would be transparent. With normal turnover, between a quarter and a third of state and city employees would be in the new system within a decade.
If pension reform were subject to regular contract negotiations, public-employee unions would never accept a shift to defined-contribution plans. But this is a rare case in which elected officials can alter a fringe benefit without the unions’ consent — because the state’s Taylor Law, which governs public-sector labor issues, specifically prohibits collective bargaining on pensions.
Thus, retirement benefits could be changed legislatively, ensuring that future generations of New Yorkers aren’t stuck with the same pension problem. Unfortunately, leading politicians like Paterson and Bloomberg continue to seek union permission to make any changes.
It’s time for these officials to reassert their managerial prerogatives — and to understand that government unions will never voluntarily relinquish the gold-standard pensions that taxpayers can no longer afford.
E.J. McMahon is a Manhattan Institute senior fellow and -RD>directs the Empire Center for New York State Policy. ejm@empirecenter.org