Start Spreading the News: A Public-Pension Crisis May Be Brewing

As the saying goes, if you can make it here, you can make it anywhere. But it seems New York public employees may be making too much -- on their pension plans. And it’s not good news for taxpayers.

According to a foreboding new report from the Empire Center for New York State Policy, tax-funded employer contributions to New York's pension funds (the amount of money taxpayers fork over each year to cover the state’s obligation to its public-employee pension system) will be $17.3 billion in 2010, which is up a staggering 1,630% in the last 10 years. (In 2000, it was $1 billion.) The dramatic jump in contributions isn’t part of the natural course of funds -- it’s a direct result of the financial crisis.

“This is to make up for the big investment losses of the last few years,”said E.J. McMahon, one of the authors of the report, entitled New York’s Exploding Pension Costs.

In the last two years, McMahon estimates $109 billion was lost during the financial downturn, 29% of total pension assets. That means New York needs to find other means to pay the 1.3 million state and local employees who belong to defined-benefit pension plans, which guarantee post-retirement income based on peak salary and career duration.

The rising cost of public-sector employee pensions has been a hot topic across the national grid. A 2010 report from The Pew Center, a public policy research organization, found that states and participating localities were short $452 billion in pension liabilities in fiscal year 2008. And everyone, including Congress, is taking notice.

A bill introduced last week by Republican Representatives Paul Ryan (Wis.), Darrell Issa (Calif.) and Devin Nunes (Calif.) proposed legislation that would require all state and local governments who want to sell tax-exempt bonds to report their pension liabilities with the Treasury Department.

“Right now there are five or six different actuarial methods that states use to come up with their estimates. This bill would help give a better picture by using a common benchmark,” said Maria Doulis, a senior research associate for Citizens Budget Committee, a nonprofit civic organization.

New York, which is among the states viewed as more responsible for its pension obligations, is still deeply in the red. According to the Empire Center’s reports, its $132.8 billion pension plan is underfunded by $71 billion when private sector standards are used.

That’s important because watchdogs like the Empire Center believe the pension crisis is being muddled up by the Government Accounting Standards Board’s lax accounting rules, which they feel don’t stand up to private sector scrutiny.

Most actuarially determined standards assume an overly optimistic growth of 8% year over year, observed Professor Joshua Rauh  of the Kellog School at Northwestern University.

“Nobody gets that kind of return without taking risk,” he said.

Risk that produced huge losses in 2007 and 2008, according to The Empire Center report, and that taxpayers in New York are now going to have to help pay.

The debate over whether or not taxpayers should be accountable is getting heated. Carl Korn, media director at the New York State’s Teacher Union, said The Empire Center’s report is bogus.

“It’s just another piece of misguided information from a foundation that represents millionaires and billionaires,” said Korn. (The Empire Center is the not-for-profit arm from conservative think-tank Manhattan Institute.)

He points out that teachers’ salaries, along with other public employee workers, have long lagged behind the private sector.

Korn explained that in New York those in education are required to get a graduate degree, which is an added degree of financial debt. That’s not the case for many jobs in the private sector.

“Part of the bargain was in return for less salary, teachers participate in a dignified retirement,” he said.

That “dignified retirement” seems to be too much for Empire Center’s McMahon. According to his report, a private sector retiree would require a lot of money to purchase an annuity that measures up to a teacher’s pension. He estimates you’d need $860,000 to have a nest egg comparable to a $47,000 a year pension fund, which is the median average pension fund for a New York State teacher.

“You can be a teacher with that [type of] pension plan or you could win a million dollars in the lottery at 58,” said McMahon.

One way to reform the three New York State public pension systems and five New York City systems, according to McMahon, is by changing the existing defined-benefit plan, (where employers promise a predetermined monthly benefit based on a formula) to a defined-contribution plan which are dependent on contributions made by both the employee and employer and earning performance (which is similar to a 401k plan in the private sector). That, he argues, will get public employees to share in some of the financial risks of their pension fund. Others agree.

“We need to eliminate overtime that’s used to compute pensions. We need to ask employees to put in more of their earnings, and need to increase the retirement age,” said CBC’s Doulis. (Currently, if you’re part of the New York State and Local Retirement System, a 62-year-old could retire with 50% of his final average salary, which excludes the social security check the retiree would receive each month.)

But it’s not like there hasn’t been any reform to the system. Recent budget crises across the country have forced legislators to take a hard look at public employee salaries, benefits and pensions.

In New York, the Tier 5 system reform bill that passed last year requires workers hired after Jan. 1, 2010, to work 10 full years before getting into the pension system. (It used to be five years.) The limit on the amount of overtime that can be used in the calculation of a final average salary was also capped at 15% of annual wages.

Korn said the New York State and Local Retirement System (NYSTRS), which has over 280,000 members and 141,000 retirees and beneficiaries, is growing its employer contribution year over year and said it was supportive of the reform in 2009.

But McMahon said the reform last year wasn’t worthy of being called reform. “We need to stop the defined-benefit contribution plan now,” he said. “We need to stop the bleeding.”

McMahon forecasts that taxpayer contributions to fund the state’s teacher pension could more than quadruple in the next five years, rising from about $900 million as of 2010-2011 to about $4.5 billion by 2015-16. But the teacher’s union thinks their math is fuzzy.

“Notice they always say could or maybe throughout the entire report,” said Korn.

What is certain is this contentious argument over pensions isn’t going away anytime soon with Governor-elect Andrew Cuomo likely to make it a priority when he begins his term next month and Congress increasing its concern over the condition of local government finances.