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 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."
A Project of the Howard Samuels New York Policy Center, Inc. Web Development by Kallos Consulting