News Coverage on Private Participation in Public Pensions

Times Union

Pension option raises questions

Rick Karlin
Wednesday, January 23, 2013


ALBANY — Gov. Andrew Cuomo's proposal to allow localities to smooth out their pension costs over time is either a money-saver or a risky gimmick, depending on whom you ask.

Either way, the "stable contribution option" for public employee pensions could turn out to be one of the broadest-reaching proposals in Cuomo's 2013-14 budget, released Tuesday.

Supporters say it's like allowing a homeowner — municipalities and school districts — to choose a fixed-rate mortgage on a home, which gives the advantage of predictability.

If a homebuyer takes out a fixed-rate mortgage at, say, 4 percent, the cost is set for the time the obligation takes to pay off.

While the concept is supported by groups including the Conference of Mayors, opponents see a risk in committing to a set payment for the next 25 years, as laid out in this plan. To stay with the mortgage analogy: If interest rates drop to 3 percent or 2 percent, participants stuck with the 4 percent rate would find themselves paying more than needed.

Conversely, if rates rise too high, the bank — in this case, the pension system — could lose out.

Opponents are coming from both sides of the political spectrum.

E.J. McMahon of the fiscally conservative Empire Center views the plan as costing localities money over the long run, especially as the lower-cost Tier VI pension obligations kick in during future years. He also sees it as unstable — a view shared by the Civil Service Employees Association, a major union representing local government employees.

CSEA spokesman Stephen Madarasz also wonders if it provides an opening for pension reductions for future employees, especially if a shortfall comes up. "It's like a wink and a nod, giving them an opportunity to put in less than they should," he said.

No matter what one thinks of the smoothing plan, there's little doubt that mushrooming public-sector pension costs are adding significant amounts to local property and school tax bills.

The rising costs are causing localities to blow through the 2 percent property tax cap since the additional increases are exempted from the limit.

Some $8.9 billion in public pensions are being paid out this year, according to data from Comptroller Tom DiNapoli. The bulk of the payments come from investment returns through the $150.1 billion state pension fund, or the similar teachers and police funds.

But local governments are obligated to make up any shortfalls. With the funds still recovering from the 2008 financial crash, localities are being forced to devote more and more of their budgets to pensions.

This year, for instance, municipalities will have to allocate 20.9 percent of their payroll to non-uniformed employee retirement costs, with 28.9 percent of police and firefighters payroll going toward pensions.

The costs for counties alone are running more than $900 million annually, or a 2,000 percent increase since 2001, said Stephen Acquario, executive director for the Association of Counties.

Under the governor's proposal, the percentage going toward pensions would be fixed for 25 years at 12 percent and 18.5 percent, respectively, for non-uniformed and uniformed retirees.

School districts would pay 12.5 percent toward their pension costs.

Localities could buy out of the system if they thought they were saving money. And the rates could be adjusted if needed.

With no one knowing how much income the pension fund will generate in future years, many can't yet say if they support or oppose the idea.

"People are just trying to absorb it and process it," said Dave Albert, spokesman for the state School Boards Association.

"We're doing a lot of analysis and asking a lot of questions," added Richard Iannuzzi, president of New York State United Teachers. "At first blush, this could be a pragmatic way of providing some breathing room."

"My team is examining it to see what impact it's going to have," agreed Albany County Executive Dan McCoy.

The plan also may be setting up potential conflict between Cuomo and DiNapoli, who opposed the governor's creation last year of the less-generous Tier VI pension plan for public employees.

As the sole pension fund trustee, DiNapoli would have to approve a smoothing plan. He is offering his own version, in which localities can amortize their payments over a five-year period.

On Tuesday, the comptroller withheld judgment on the governor's proposal: "My office just learned of the governor's financing proposal for the state pension fund," he said in a statement, "and we are examining it from the perspective of our fiduciary responsibility."



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