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March 15, 2012


Another step on the trail of tiers

E.J. McMahon

So, what to make of this Tier 6 pension thing?  Is it truly “bold and transformational” ?

Uh, no. Suffice to say, Governor Cuomo’s hyperbole machine is in overdrive today.

Tier 6 is a net positive from the standpoint of taxpayers, however. The bill passed by the Senate and Assembly in the predawn hours today creates a new pension plan that is about one-third less costly than the current plan.  It will save money principally by shifting costs to employees, through an increase in pension contributions deducted from their paychecks.  As explained in this earlier post, there also will be a relatively small reduction in benefit levels, compared to those provided under Tier 5.

Those enormous 30-year dollar savings attributed to Tier 6 (totaling $80 billion, the governor says) need to be viewed in a larger context–and taken with a grain of salt.  This much has been clear from the moment Cuomo unveiled his Tier 6 proposal:

  1. Pension costs will continue to increase over the next few years, because the changes apply only to new employees and thus will take years to generate significant savings.
  2. Long-term savings are contingent on the assumption that the Tier 6 benefit and contribution structure remains absolutely unchanged for the next 30 years.

Concerning that second point: since World War II, there has never been a 30-year period in which the Legislature has not tinkered with New York’s public pensions, either on a wholesale basis or for targeted occupations and bargaining units. Under the state Constitution, benefit reduction can only apply to future workers, while benefits for current employees (in whom unions take the greatest interest) can only go in one direction: up.

History would suggest that as long as the traditional defined-benefit pension structure remains in place, changes will occur.  Some of these changes, sooner or later, will be designed to undo what has just been done. The governor himself has suggested as much, repeatedly, saying just two weeks ago: “You can always raise the pension benefits. You know, three years from now, let’s say the economy turns around and people say we want to have a better pension plan to attract different workers, then raise it, fine.”

In other words, we can’t actually take that $80 billion to the bank. As for New York City’s purported $21 billion share of the long-term savings, keep in mind that the city is already spending over $8 billion a year on pension contributions, and Comptroller John Liu has cited estimates by actuarial consultants that the city will spend a total of $359 billion on pension contributions over the next 30 years.  Tier 6 will cut that amount by 6 percent.

Meanwhile, three big pieces of the original Tier 6 reform fell off the table:

  • The governor’s original Tier 6 bill eliminated all overtime from pension calculations.  That’s gone from the final version; the only tweak involves elimination of severance pay.
  • The original Tier 6 bill included a “risk-reward” provision requiring employees to share in added pension funding costs above a certain amount, whenever declines in asset values require it.  That’s also gone.
  • Cuomo initially included an optional defined-contribution retirement plan to all state and local employees. As explained here, the DC option was seriously flawed and open to criticism before Cuomo preemptively abandoned it a few weeks ago.

On the plus side, the Tier 6 bill includes a DC option for non-union employees who earn more than $75,000 a year. This benefit will be available throughout state and local government in New York. As the governor’s release points out:

In the modern economy, employees often change jobs multiple times and need pension portability. Many states, the federal government, and most private employers provide some form of defined contribution plans to their employees. The state will make an 8% contribution to employee contribution accounts. Currently, SUNY and CUNY offer such an option through TIAA-CREF that has been successful and popular. This is a voluntary option for those employees who prefer the portability and vesting feature not available with defined benefit options, and will help attract top talent to state government.

Giving more employees access to the SUNY and CUNY plans might be seen as a tiny opening to fundamental change.  Unfortunately, the current governor and Legislature clearly have no inclination to push the door open further, even though a solid majority of the largest group of public employees in the state would like the same option.

There’s one more, widely overlooked piece of the pension bill that might actually qualify as “transformational,” but not in a good way from the taxpayer’s standpoint.

Near the end of the bill are three curious sections headed “Benefit Enhancements.” These essentially give all public employee unions, except those representing police and firefighters, an avenue to petition for the right of their Tier 6 members to retire at age 57 after 30 years — essentially a global early retirement option.  Consider these provisions, which apply to unionized state government employees:

An almost identical section follows, allowing the governor to approve the same benefit for members of the New York State United Teachers — that is, NYSUT specified by name, with no input required from school districts, by the way.  A third section sets up the same process for New York City, with the mayor given power to make the “election” for benefit enhancements for members of all non-police, non-fire unions.

That last paragraph (section 1303) is key: it says the cost of the added benefit shall be covered entirely by “additional member contributions.” The problem is that these additional contributions will be calculated on the basis of the pension systems’ usual fallacious assumptions (assuming investment returns of 7 to 8 percent a year, depending on the fund). As with previous early retirement legislation, this will under-price the benefit and could lead to substantial unfunded liabilities in the future.

These provisions are highly questionable, to say the least. It’s not difficult to foresee a circumstance in which a governor or mayor will use this power to his or her own short-term political benefit, with potentially costly long-term consequences. Did groggy lawmakers seriously think about the precedent they were setting before they voted for this?

The fundamental flaw in New York’s public pension system remains unresolved: like similar systems across the country, it exposes taxpayers to massive open-ended financial risks.  Pension accounting is incredibly arcane and opaque, setting up a proven moral hazard for elected officials who customarily have little regard for long-term consequences.  Unfortunately, the governor did not address this problem, or even acknowledge it.

Filed under: Public Pensions, Uncategorized

2 Comments »

  1. It would appear that this reform is a collosal failure, especially viewed in the context
    of a really serious effort like Rhode Island.

    I don’t think Chris Christie would have caved on the overtime issue

    There is no reason that state pensions should be fully vested eaerlier than
    social sceurity for private sector worders-

    in a word - a travesty

    Comment by will wiener — March 16, 2012 @ 8:43 am

  2. Voters think of sporting events as a contest between two teams. The teams most frequently mentioned in media coverage of Gov Cuomo’s Tier 6 proposals have been the Governor, the NYS Legislature (Senante and Assembly), and unions. Guess who’s missing? NYS Voters - who happen to be the boss to whom the Governor and the Legislature report.

    Gov Cuomo has said he wants mandate relief, but lacks sufficient votes in the Legislature to even pass his original version of tier 6 which only affects future, employees, i.e. people who haven’t even been hired or even identified yet He has a bipartisan legislative problem.

    To his credit, Gov Cuomo has vigorously tried to mobilize voters. Remember all his people’s tours last spring for the tax cap? And more recently, listen to these speeches by him, as he tries to enlist voters directly and recruit mayors and other local elected officials to be his local cheerleaders/community organizers for pension reform in their local communities:
    http://www.lohud.com/VideoNetwork/745124132001/Gov-Cuomo-Talks-Tax-Cap-Working-With-Legislature

    http://www.lohud.com/VideoNetwork/1476760449001/Cuomo-on-pensions

    http://www.stargazette.com/VideoNetwork/1427902080001/Cuomo-Talks-Mandate-Relief

    What must Gov Cuomo and other pension and mandate reformers do?
    (1) mobilize voters across NYS to force change in the Legislature - elect NYS Senators and Assemblymen next fall of whatever party who pledge meaningful mandate relief, not nibbling around the edges to create a public appearance of reform which masks preservation of the unsustainable status quo
    (2) county legislators, county executives, school board members, and town board members need to shift their focus from trying to persuade legislators who wish to preserve the status quo to the NYS voters who are being beaten down by the status quo. These local elected officials are, let’s face it, discouraged by years of voter indifference and state legislator pushback. Also local elected officials have a tradition of focusing only on their budget, their voters, their local problems But mandate relief is a solution to a problem all of them share - it is time for them to think outside their borders and unite with their colleagues across the state in a unified effort to mobilize voters to change a legislature chained to an agenda that is crippling NYS, producing the highest property taxes in the country, and driving residents out of New York State to other states. Imagine - we live in a country where people from around the world are doing everything they can to get in and we live in a state with one of the highest percentages of people leaving.
    (3) voters are discouraged and beaten down by years of indifference from the NYS Legislature and by years of the Legislature’s trick of dividing, dispersing, and hiding state spending in local budgets where voters can’t easily see the connection between the spending item in the local budget and the state legislators who planted it there. NYS legislators unfortunately have great motivation to continue this system where they get to spend,somebody else pays, and no one holds them accountable for that spending because it’s not included in the state budget, not transparent and the Legislature never shows up at local public hearings on county, school, and town budgets to take responsibility for their spending lines in those budgets. Voters need to realize that many grains of sand make a desert, and that if many voters did even a few small things, a sea change in NYS politics would occur. What small things? Call or email as many NYS legislators as you can, and ask for, a blunt instrument - Mandate Relief Now. Don’t let them divert or distract you with question sof which mandate, or how much. They know full well and that’s their problem, the same as the tax cap made the choice of which local spending and how much to cut to reach the cap the local elected official’s problem. Write a one line letter to the editor of your newspaper, “I will vote for any candidate for NYS Senate and NYS Assemblyman who convinces me he’ll provide meaningful Mandate Relief Now.” Ask your county executive, county legislature, school board, and town board to have a joint public meeting and press conference to announce their united support for Mandate Relief Now and educate voters about mandates and point the finger at ALBANY. If you need further convincing, find a child’s picture version of Gulliver’s Travels. You’ll find a picture of a gigantic Gulliver tied down by many Lilliputians. Key Concept - what’s needed is many voters statewide taking small local actions. Nobody has to do it all, Nobody has to do monumental anything or donate huge money. Lots of people (the voters ignored by the Legislature because we’ve never taken to the playing field in numbers) - each doing something small - that can turn into a tidal wave of support for Mandate Relief Now.

    New York is at a tipping point. Next fall, NYS elections for State Senate and State Assembly are just as important for New York State as federal elections always are. And many thanks to the Empire Center and Ed McMahon for providing the necessary knowledge for voters to choose wisely.

    H. Robinson BEST4NY.org

    Comment by H Robinson — March 16, 2012 @ 12:47 pm

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