Unlike state Comptroller Tom DiNapoli, who says he’s still thinking it over, one upstate local official has already concluded that Governor Cuomo’s local government pension smoothing proposal would be a bad deal.
Gates Supervisor Mark Assini, a former corporate financial analyst and cost accountant, ran some numbers to see how the option would affect pension expenditures for his Monroe County town, based on projected contribution rates gleaned from a chart presented by state Budget Director Robert Megna.
The plan, which would require approval from DiNapoli and from the trustees of the state Teachers’ Retirement System, would immediately slash local employer contributions and thus allow for significant under-funding of the pension system in the short term, based on the expectation that Cuomo’s Tier 6 pension changes will ultimately yield more than enough savings to make up the difference later in the 25-year period.
A top Cuomo administration official has contended that “at the end of the 25 years, a local government would not have paid a dollar more than they would have if they stayed in the current system, and the locality would save millions in pension costs over the next five to eight years.”
But Assini’s conclusion, detailed in this spreadsheet, is that Gates (population: 28,400) will pay nearly $4.2 million more in pension contributions over the next 25 years if it opts in to Cuomo’s “level payment” plan. In fact, even after saving about $779,000 in the first five years (through 2018-19), the option would represent a net cost to the town by year eleven (2024-25).
This estimate assumes the pension system realizes a 7.5 percent rate of return on assets throughout the period. Assini also produced an alternative estimate based on the assumption that pension fund returns fall short of current actuarial targets, leading the comptroller to “bump up” costs by a total of 4 percentage points after year 10. In that case, Assini found, the added 25-year cost of the governor’s plan would nearly double, to $8 million.
Cuomo’s proposal would allow local employers opting into the level payment plan to “un-elect” or opt out of the plan at any time. But in that case, says the governor’s bill memo, they would have to make “a reconciliation contribution, as calculated by the Comptroller or (TRS) Board, equal to what such employers would have owed had they not chosen the stable contribution option.”
“The bottom line is, you’ve got to make the system whole, sooner or later,” says Assini. ”I don’t care where you opt out.”
A caveat is in order here: the actual course of pension payments in Gates will depend on the rate at which current employees are replaced by Tier 6 members hired after the pension changes took effect last April 1. A low attrition rate would mean more savings in the short run, and thus a lower net cost in the long run, than Assini assumes based on the budget director’s chart. But that raises the question of whether any one-size-fits-all 25-year plan will produce exactly what the pension system needs to collect from each employer to remain “fully funded” by normal actuarial standards during that period.
Gates is in relatively strong financial shape and thus is better situated to resist any pressure to opt into Cuomo’s plan, even if the comptroller approves its implementation. However, Assini is concerned that even if his town and others like it avoid the pitfalls of smoothing, they will end up shouldering any added long-term pension funding shortfall created as a result of under-payments by cities like Rochester, whose mayor would like to opt in.
Assini estimated the impact on his town’s Employee Retirement System (ERS) members only. Relative to payroll, the excess cost of Police and Fire Retirement System (PFRS) members could be even higher, he said.
Meanwhile, the Cuomo administration has yet to release the work product of the actuaries that are said to have helped with the proposal. And Cuomo has not identified the “financial experts” who are supposed to have reviewed it.