Tuesday will be the 10th anniversary of a state legislative landmark: the creation of a new public-pension “tier” reining in the explosive cost of state- and local-government retirement benefits in New York.
While Tier 6 wasn’t the “bold and transformational” breakthrough touted by then-Gov. Andrew Cuomo in 2012, it was a solid net positive for taxpayers, building on incremental changes in the Tier 5 pension reform enacted two years earlier. (Tiers 5 and 6 cover most occupations other than police and firefighters, who belong to other pension plans modified in different ways by the same legislation.)
The reforms have saved billions of taxpayer dollars for the state and local governments over the past decade — including $1 billion this year alone — plus significant added savings for New York City’s separate pension systems.
The state’s well-fed public-sector unions tried to block pension changes at every turn. Now, under the slogan “Fix Tier 6,” they’re pushing the Legislature to roll back pension reform as part of the budget for the fiscal year that starts April 1.
The “fix” sought by the 200,000-member Civil Service Employees Association and other government unions is a return to the state’s enriched pre-2010 pension plans, which (among other sweeteners) required no employee pension-fund contributions after 10 years and allowed for early retirement on full pensions as early as age 55 after a minimum 30 years of service.
The Tier 5 and Tier 6 changes combined are saving New York state and local governments outside New York City more than $1 billion this year.
After record-busting investment returns in 2021, most of the state’s public pension plans report they are fully funded—but adjusting for financial risk, their combined unfunded liabilities still total nearly $400 billion.
The traditional defined-benefit pension system remains biased in favor of career and long-term employees, to the disadvantage of those who work shorter government careers.
DiNapoli announced today that he’s approved a recommendation by the State Retirement System Actuary to reduce, from 6.8 percent to 5.9 percent, the assumed rate of return (RoR) on investments by the $268 billion Common Retirement Fund, which underwrites the New York State and Local Employee Retirement System (NYSLERS) and Police and Fire Retirement System (PFRS), of which the comptroller is the sole trustee.
To be sure, even at 5.9 percent, the RoR that the pension fund literally counts on to pay constitutionally guaranteed benefits will remain considerably higher than the yields from commensurate low-risk U.S. Treasury or high-quality corporate bonds, which currently range from 2.3 percent to 3.3 percent. Nonetheless, in isolation, cutting the RoR assumption is an unequivocally good and prudent thing for the comptroller to do.
Assuming lower earnings also tends to result in higher required contributions by employers—which is why politically sensitive public pension fund administrators across the country have tended to set their RoRs at much higher levels than those required for private corporate plans. To guard against volatility in investment returns, which has been especially pronounced over the past 25 years, DiNapoli and other pension fund administrators also resort to “asset smoothing” — i.e., counting average market returns over several years—as a basis for estimating the assets available to pay retirement benefits. In New York’s case, the smoothing period is five years.
As Governor Cuomo already has pointed out on the state level, the federal stimulus aid amounts to “the ultimate one shot . . . a sugar high.” The highest priority of state and local officials should be to avoid plowing the federal money into recurring spending commitments that will create bigger budget deficits in the future.
In an ideal world, New York pols will embark on a careful, painstaking assessment of needs, weighing short-term relief against recurring long-term benefits. Since most upstate cities are very old, with crumbling physical infrastructures, they would be well advised to invest the bulk of their “Biden bucks” into streets, sidewalks, water and sewer systems. This will save money on maintenance costs—which are high in many of these places. It also will help these cities retain and attract business activity they cannot afford to lose—and were already losing before the pandemic.
Local governments could also consider ways to help small local retail businesses and their landlords, especially restaurants and entertainment venues, which were crushed by the pandemic. One way of doing this might be a property tax holiday, or a long-overdue assessment and equalization update, whose transitional costs could be covered by the federal money.
Governor Cuomo’s Division of the Budget (DOB) and the Legislature’s fiscal committees have agreed to boost New York State’s revenue projection for fiscal years 2021 and 2022 by $2.45 billion—the latest in a series of upward adjustments that have dramatically improved Albany’s short-term outlook, even as sexual harassment allegations against the governor will complicate negotiations towards a new budget for the fiscal year beginning April 1.