Legislators Still Aim to Sweeten Public Pensions
FISCALWATCH MEMO Revised July 15, 2005
By E.J. McMahon

The employer share of pension contributions in New York has risen by more than $3 billion in the last five years, straining taxpayers throughout the state. Yet state legislators this year have passed dozens of bills—and introduced literally hundreds of others—that would further expand the already generous retirement benefits of government workers.

During the 2005 session, both Houses of the Legislature passed at least 46 bills increasing pension benefits for entire groups of employees, at a total estimated cost of more than $100 million[1] in onetime or recurring expenses to taxpayers.

As of July 8, Governor George E. Pataki had already signed at least a half-dozen of these measures, the biggest of which (Ch. 93) grants "presumptive disability" benefits to New York City employees who claim disabling illnesses resulting from working at Ground Zero after the 9/11 attack. This bill will require a $50 million annual boost in taxpayer-funded pension contributions, city officials estimate.[2]

Still in the legislative hopper are roughly 500 other pension-related measures with estimated fiscal impacts totaling $5 billion to state, local, and school district taxpayers in New York. Nearly two-thirds of that amount, which includes recurring annual expenses as well as immediate one-shot costs, can be attributed to just 10 bills proposing large benefit increases for broad categories of government employees. These bills didn't pass in 2005, but they will remain "live" during the 2006 election year session – when, if history is any guide, state legislators will be even more anxious to curry favor with public employee unions.

Members of the Senate and Assembly have also introduced several bills designed to introduce or pave the way for the first Deferred Retirement Options Plans (DROPs) in New York's public retirement systems. DROPs have been implicated in some of the worst pension funding crises to be experienced by large government employers elsewhere in the country.

Public pension benefits in New York, which are guaranteed by the State Constitution, far outstrip those available to private sector workers. Yet, on the other side of the ledger, Governor Pataki and legislators have not introduced a single bill that would save tax money by reducing or restructuring retirement benefits to make them more closely resemble the packages available in the private sector, even though such changes would necessarily be limited to future workers. Nor has Albany responded to Mayor Michael Bloomberg's call for a new, less expensive pension "tier" based on the traditional public model.[3]

The source of the problem

All state and local government workers in New York, as in most other states, are currently entitled to a guaranteed "defined benefit" pension based on career longevity and highest average pay. Basic pensions typically range from 60 to 70 percent of final average salary for career civilian employees, who can retire with full benefits as early as age 55.[4] These benefits are free of payroll taxes and state and city income taxes. When government retirees reach 62, they are supplemented by Social Security. They are financed out of common pension trust funds, invested mainly in stocks and bonds, and replenished mainly by employer contributions, with some contribution by employees as well.[5]

The percentage of employee salaries that government employers must contribute to the pension fund is based on actuarial assumptions concerning the number of active and retired workers, the projected salaries, pensions and life expectancies of retirement system members and their beneficiaries, and the current and projected rate of return on pension fund investments. Retirement systems are considered fully funded when they keep enough money on hand to meet all current and future pension obligations.

When market values skyrocketed in the late 1990s, New York's Common Retirement Fund grew so large that the state was able to virtually suspend its employer contributions. Many municipalities outside New York City reduced their contributions to low or negligible amounts during this same period.[6]

In 2000, Governor Pataki and the Legislature agreed to the most significant increase in retirement benefits in roughly 30 years. Employee contributions were eliminated for all Tier III and Tier IV workers with 10 years or more of service ­ effectively a 3 percent raise for those employees, on top of annual and longevity "step" increments required by their union contracts.[7] In addition, a partial annual cost-of-living adjustment (COLA) was approved for all retirees. Over the next four years, these changes would contribute to a 44 percent increase in NYSLERS and PFRS benefit payments. Similar increases were experienced by New York City funds and by the state TRS.

Annual Tax-Funded Share of Government Employee Pensions ($ millions)

retirement system fiscal years

Sources: City of New York, Comprehensive Annual Financial Report of the Comptroller; Comprehensive Annual Financial Report of the New York State & Local Retirement System; Annual Report of the New York State Teachers' Retirement System

The timing of pension sweeteners couldn't have been worse. The stock market had actually peaked a few months before the increased benefits were signed into law by Pataki in June 2000, and equity values declined sharply in 2001 and 2002 following the bursting of the dot-com bubble. Meanwhile, thanks to Albany’s action, contributions by employees dropped steeply. The net result is shown in the chart above: annual taxpayer contributions to state and local government retirement systems throughout New York have risen by more than $3 billion since 2000, exceeding the growth in the local share of Medicaid during the same period.

Recent trends have been nothing but bad news for taxpayers in every region of the state:

• New York City's pension obligations have risen from $615 million in fiscal 2000 to a projected $3.4 billion in 2005 (a growth rate of 453 percent), and are projected to hit $5 billion in fiscal 2007. Rising pension contributions alone account for more than half the overall increase in the latest city budget.
• Tax-funded employer contributions to the New York State and Local Retirement System (NYSLRS) and the Police and Fire Retirement System (PFRS), which cover all state and local employees other than teachers outside New York City, increased by $1.1 billion (670 percent) between 2000 and 2004.
• Employer contributions to the New York State Teachers Retirement System (TRS), which covers most public school employees outside New York City, rose by $250 million (730 percent) in just the last two years and are slated to double again in the year ahead. Moreover, the TRS recently warned school districts that pension contributions "in subsequent years...will likely continue to increase".[8]

After a strong recovery in 2003, the stock market has not risen enough to support the pension funds' 8 percent rate of return assumptions without making it necessary to continue billing employers at double-digit rates.

The Legislature's Response

The State Constitution provides that pension benefits cannot be "diminished or impaired" for any current member of a public retirement system in New York. This functions as an ironclad guarantee that benefits will not be reduced for current employees – only for workers hired after a change becomes affected.

But the reverse is not true; in fact, proposals to raise pension benefits generally have a retroactive impact on all active and retired workers. The savings generated by a reduction in benefits for new employees only build slowly and gradually. Benefit increases, by contrast, cause an immediate, recurring and permanent growth in pension obligations, which taxpayers must cover whenever investment returns fall short of targets.

By the first week of June there were nearly 600 bills before the State Legislature (including Assembly and Senate "same-as" introductions) dealing with retirement and pensions. Most of these bills seek to enhance benefits or loosen eligibility standards in one fashion or another. This count did not include all of the nearly 200 bills targeted only to individual government employees and retirees.[9]

In addition to the 9/11 disability measure, other major benefit sweeteners passed by both Houses this year and either signed by the Governor or awaiting the Governor's signature include:

Looser "Heart Bill" Standards – New York State has enacted a series of laws allowing many police officers and other public safety employees with heart-related ailments to retire with disability pensions (usually three-quarters of final average salary). The latest measure on this front (A.8052-Zebrowski) applies to local police and firefighters outside New York City, as well as state corrections officers and court officers. It responds to a series of state appellate court rulings by making it easier for retirees to prove eligibility for the more generous disability benefit. This would cost taxpayers statewide an additional $17.2 million in pension contributions.[10]

Increased Maximum Benefits for Cops and Firefighters – By allowing Tier 2 police officers and firefighter outside New York City to add an additional two years of service in the calculation of their retirement benefits, non-New York City taxpayers are on the hook for an estimated $16.8 million annually. The legislature granted a similar – but even more expansive – benefit for New York City police and firefighters back in 2001.

Healthy Retiree Bonus – With a one-time cost of $2.5 million, Chapter 143 of 2005 (A.6142 Weinstein), grants non-judicial court officers the ability to gain a day of retirement credit for a day of unused sick leave, up to 200 days, from the current 165-day limit.

35 Year Plan for All Teachers – At an added cost to taxpayers of $2 million a year, all teachers would be eligible for retirement after 35 years of service – a perk now available only to Tier I members—under this bill (A.6230-Abbate).

Based on fiscal impact statements contained in many (but not all) of the bills, the pension enhancement proposals have a total price-tag of over $5 billion. Roughly one-third of all pension fund bills carry fiscal notes claiming their added costs would be "negligible." It should be noted, however, that analysts for municipal governments and pension fund managers have long complained that legislative pension proposals often feature inadequate or even inaccurate forecasts.[11]

Some of the most costly proposals introduced but not passed in either house include:

Bonuses for More Retired Cops and Firefighters. New York City Police and Fire Department members with at least 20 years of service are currently entitled to a "variable supplement" that amounted to $10,500 last year. Despite its name, the supplement is not actually "variable" but is fixed by law, with an annual $500 escalator in the current plan. This bill (A.6598/ S.3434) would extend the same benefit to all retired New York City police officers, firefighters, housing police and transit police, including those on disability payments. The total price tag for the city would come to a whopping $965 million.

More COLA for More Retirees. The inflation adjustment enacted in 2000 allows only those who retired prior to 1961 to calculate the benefit at 100 percent of the consumer price index. This bill (A.7238/S.4457) would extend that benefit to all who retired before 1966. The first year cost would be $270 million to the state, and $410 million to local employers.

Free Ride to Retirement. Thanks to the 2000 pension sweeteners, New York is one of only a handful of states to exempt large numbers of government employees from making any contribution to their own pension funds. However, workers with less than 10 years in service are still required to contribute 3 percent of their salaries annually. This proposal (A.5396/S.5480) would eliminate the requirement for all employees. The immediate impact would be an increase of $358 million in taxpayer-funded contributions, including $225 million for New York City alone.

Earlier Retirement for All Non-Uniformed Workers. Current law permits retirement without loss of benefits at age 55 for an employee with at least 30 years of service, a perk virtually unheard of outside of government. This bill (A.5807/S.3201) would reduce the service requirement to 25 years – heretofore an incentive available for only limited periods of time under special state and local early retirement programs. The total cost to all public employers in New York would come to $332 million a year.

Another Apple for Teachers. Pensions for members of the state Teachers' Retirement System hired after 1971 are now based on final average salary for their last three years in service. This bill (A.6203/S.4496) would boost the pension base for these teachers by allowing them the option of computing final average salary as a five-year average including payments for termination, retirement bonuses, annual leave or unused sick leave. This would cost school districts outside New York City an added $189 million a year.

How are pension hikes justified?

The legislative sponsors of pension benefit increases seldom offer justifications that extend beyond flat assertions to the effect that public employees deserve more, or that it is simply "fair" to extend to one group of government workers some special benefit already available to another group.

Some pension bill sponsors haven't even bothered to update their support memos to reflect the post-2000 explosion in pension costs to taxpayers. Take, for example, this statement from the "justification" section of the memo filed by Assemblyman John McEneny (D-Albany) in support of his proposed "25/55" early retirement bill:

"The public retirement systems in the state have enjoyed significant growth in assets due to investment gains. Employer costs have dropped significantly and there is no employer cost for benefits in some systems. This bill would provide an improved retirement option to members with at least 25 years of service allowing the workers to share in the benefits of the pension funds that were created largely out of their contributions."

Similarly, the sponsor's memo filed by Assemblyman Peter Abbate for the bill eliminating all Tier III and IV employee pension contributions asserts that such a move would be justified by "the significant decline in employer contribution rates" since the 1970s.

"DROP" dead?

Legislators have introduced nine bills creating DROP plans for various categories of state and local public safety workers, including corrections officers. A tenth bill would require the state comptroller to study the feasibility of instituting DROP plans for all workers.

Under a DROP, an employ could "retire" but continue to work at his previous salary for a number of years. The employee's pension checks would accumulate in an interest-bearing account, which would be converted into a lump-sum payment once he finally stopped working.

The argument in favor of DROP programs is that they would make it easier to keep experienced workers on the job past the government retirement age – which is typically lower than that of private sector employees.

However, DROP plans have led to serious problems for some public employers that have adopted them. In Houston, for example, a DROP plan "along with other pension improvements, drove the city's pension plan down from 91%-funded in 2000 to just 60% two years later," Business Week recently reported. The magazine account continued:

According to [an actuary's] calculations, it was possible for employees to become millionaires thanks to the system. Under one scenario, a lifelong city employee retiring with a salary of $92,000 could get $420,000 a year in pension benefits. The citizens of Houston agreed with [the actuary's] conclusion that the system was a "win-win for the employee and a lose-lose for the employer." Last May, they voted to end the benefits. [12]

Conclusion

Pension costs are among the most serious and intractable financial issues facing government managers. New York is not alone in having to grapple with this problem; indeed, pension funding crunches have been reported across the country. In some cases severe shortfalls in pension funding have threatened to bankrupt several major cities (such as San Diego).

In the long run, New York's public employee retirement plans could be made much more predictable, affordable, and controllable through a move to the sort of "defined contribution" plan common in the private sector. Such plans consist of individual accounts supported by employer contributions, usually matched at least in part by the employees' own pre-tax savings. But the concept is hardly new to government. After all, for decades now, a defined-contribution plan has been the retirement vehicle of choice for employees of public higher education systems such as the State University of New York.

To initiate such reform statewide, existing government employees would stay in the old system, but the overall expenses would drop quickly over the next 10 years due to natural turnover as replacement employees join the new retirement system.

A more modest reform of the existing system, supported by New York City Mayor Michael Bloomberg, would be to create a "Tier V" for newly hired employees, under which benefits would remain guaranteed but would be scaled back to the pre-2000 level.

In the short run, there is nothing government officials can do to reverse the recent run-up in pension costs. But they should at least observe the Hippocratic oath: "first, do no harm." Rather than routinely reintroducing the public employee unions' full wish list of pension benefit enhancements, it would be more appropriate for the Legislature to declare a moratorium on consideration of any new retirement benefit increases.

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Notes

1. A previous version of this memo carried an erroneous estimate of $120 million based on a misinterpretation of one of the bills passed by the Legislature, which included some unspecified pension impacts along with a larger sum for back wages and interest resulting from an arbitration award.
2. The bill's sponsors claimed the city estimate was exaggerated and that it would cost only $500,000 a year.
3. The only proposed measures that would generate any measurable savings through adjustments in benefits are a handful of bills (such as S.2213, introduced by Sen. Liz Krueger, D-Manhattan) that would require forfeiture of pensions by politicians convicted of crimes related to their official duties. These proposals were inspired by the case of former State Sen. Guy Vellella of the Bronx, who is eligible for an $80,000 annual pension despite having pleaded guilty to a felony.
4. Public safety employees – and sanitation workers in New York City – can retire at half pay with as few as 20 years on the job, with no minimum retirement age.
5. There are eight different retirement systems for government employees in New York State, organized along jurisdictional and occupational lines. These are the New York State & Local Employees Retirement System (ERS), New York State & Local Police and Fire Retirement System (PFRS), New York State Teachers Retirement System (TRS), New York City Employees Retirement System (NYCERS), New York City Teachers' Retirement System (NYCTRS), New York City Board of Education Retirement Systems (NYCBOERS), New York City Police Department Pension Fund, and the New York City Fire Department Pension Fund.
6. New York City’s funds never came as close to "fully funded" status as the state funds during the 1990s. The city's pension contribution remained flat at roughly $1.2 billion a year for most of the decade and declined to a low of $650 million in 2000, reflecting onetime savings from the "re-start" of actuarial assumptions.
7. Public pension plans are organized into benefit "tiers" based on hiring dates, as follows.
   
   

   - Tier I – The most generous plan, requires no employee contributions and allows unrestricted retirement with full pension as early as age 55. Tier I does not cap the final average salary used for computing the pension and is available to all government employees hired before June 30, 1973.
   - Tier II – With a retirement age of 62, or 55 with 30 years of service, Tier II does not require employee contributions but subjects the final average salary to a cap. This tier is open to workers hired between June 30, 1973 and July 27, 1976.
   - Tier III – Employees hired between July 27, 1976 and September 1, 1983 are subject to the same retirement ages as those in Tier II, but must also contribute 3 percent of salary to their future retirement benefits during their first ten years of employment. Tier III also caps the final average salary.
   - Tier IV – As a result of legislative action, Tier IV is now virtually identical to Tier III. This tier includes all employees hired since September 1, 1983.

   As various public employee unions have lobbied successfully the State Legislature has created special plans for specific employee groups, such as sheriffs, corrections officers, etcetera. As a result, Tier IV alone also encompasses 11 separate retirement plans.
   Vested employees, those with a minimum of five years service, can begin drawing at least a partial pension as early as age 55, with full benefits at 62. Civilian retirees with fewer than 20 years in the system receive 1/60 of their salary for each year of service. Those with 20 to 30 years receive 1/50 of their salary for each year of service.
   For each year of service over 30 years, the pension includes an additional 1.5 percent of final average salary.
8. New York State Teachers' Retirement System, Administrative Bulletin No. 2005-02, February 2005.
9. A typical example of such bills would be S.2219 and A.4446, designed to provide more generous Tier I benefits for a constituent of Senators Hugh Farley (R-Niskayuna) and Paul Tonko (D-Amsterdam). The woman in question first took a government job in 1970, which would have qualified her for Tier I, but she inexplicably "was not afforded an opportunity to join the system." The woman permanently rejoined state government service in June 1983, by which time Tier III retirement system was in place. Restoring her to Tier I status would immediately cost the state pension system $136,000, plus recurring annual increases of $3,800. In a typical two-year session, the Legislature approves dozens of such bills.
10. The same bill passed both houses in 2004 but was vetoed by Governor Pataki.
11. For example, S.4666 sponsored by Senator Joseph Robach (R-Monroe) would allow Tier II members of ERS and PFRS to include 30 days of unused accumulated vacation time in the calculation of their final average salaries. The sponsor's memo attached to the bill cites the bill itself as the source for an estimate on its estimated cost. Yet there is no fiscal note attached to the bill.
    Senator Robach – who, as the Chair of the Senate Civil Service and Pensions Committee, is sponsor of most major pension legislation – also failed to include a fiscal note to go with another bill that would allow teachers to retire at age fifty-five after 20 years of service, which surely would have enormous cost implications.
12. "Sinkhole: How public pension promises are draining state and city budgets," Business Week, June 13, 2005, at http://www.businessweek.com/magazine/content/05_24/b3937081.htm.