Wednesday, March 14, 2012

New York Pension Reform Or Else?

A follow-up to my previous comment on New York's pension battle. Thomas Kaplan and John Eligon of the NYT report, Plan to Reduce Pensions for New Public Workers Takes Shape in Albany:
Gov. Andrew M. Cuomo and legislative leaders, seeking to limit the impact of soaring pension costs on government budgets, were putting the finishing touches late Wednesday on a deal to reduce the retirement benefits promised to new city and state workers in New York.

The developing agreement, which came despite attacks from labor unions, was part of a policy package that would resolve several of the thorniest issues facing lawmakers this year, including a reconfiguration of the state’s Assembly and Senate districts, the language of a proposed constitutional amendment to legalize casino gambling and the creation of one of the most extensive criminal DNA databases in the nation.

The pension changes appeared likely to be less drastic than those sought by Mr. Cuomo, applying to fewer employees and saving less money than the governor had hoped. But any reduction in benefits for future employees would represent a victory for the governor over the state’s public-employee unions, which are enormously powerful in Albany and have been frequent sparring partners for Mr. Cuomo as he has sought to rein in costs.

The pension deal under negotiation in Albany comes as state and local governments around the country take similar steps to reduce retirement costs, often prompting pitched battles with labor unions. From 2009 to 2011, 43 states enacted major changes to retirement plans for public employees and teachers, according to the National Conference of State Legislatures.

“The message is, the traditional package of retirement benefits has become unaffordable,” said Ronald Snell, a senior fellow at the conference who has studied the pension changes.

Mr. Snell said the deal under discussion in Albany was similar to measures passed in other states, in that it reduced the benefits offered to some public employees instead of overhauling the structure of the pension system itself.

Mr. Cuomo was expected to significantly scale back the most contentious portion of his pension proposal, which would have given new public workers the option of forgoing a traditional pension and instead choosing a defined contribution plan, similar to a 401(k). He and lawmakers agreed to offer the defined contribution option only to new state workers who earned relatively high salaries and were nonunionized.

In another concession, the deal would not make significant changes to the retirement benefits of New York City police officers and firefighters.

But a senior Cuomo administration official, who spoke on the condition of anonymity because the agreement had not yet been made final, said it would still save about $80 billion for the state and local governments in the coming decades — including more than $20 billion for New York City — by reducing the benefits promised to new workers. For example, the minimum retirement age for newly hired state employees was expected to increase to 63 from 62.

The changes to the pension system come two years after Mr. Cuomo’s predecessor, David A. Paterson, a fellow Democrat, signed into law a more modest measure to reduce pension costs. But Mr. Cuomo said further reductions were needed because the state and local governments were still struggling to balance their budgets.

Mr. Cuomo’s efforts have infuriated labor leaders. The executive council of the national A.F.L.-C.I.O. condemned his proposal on Wednesday as “unfair to public workers who have already made significant sacrifices.”

“Instead of cutting pensions for workers,” the council said, “we should focus on ensuring that corporations and the wealthiest New Yorkers are paying their fair share of taxes.”

As the Legislature and Mr. Cuomo completed negotiations on pensions, they also reached an agreement to expand the state’s DNA database and were nearing a deal on the redistricting required after the 2010 census.

Lawmakers were also expected to approve a constitutional amendment that would allow full-scale commercial casinos. The state has nine racetrack gambling parlors and five American Indian casinos; the amendment, which would have to be approved by two separately elected legislatures and once by voters, would authorize up to seven Las Vegas-style casinos.

As part of the emerging deal, Mr. Cuomo was to sign new maps of Assembly and Senate districts. He had pledged during his campaign for governor not to approve maps unless they were drawn by an independent body, but he has reversed his position because, he said, it was the best way to get long-term redistricting reform.

In exchange for Mr. Cuomo’s approval of the maps, lawmakers were expected to endorse a constitutional amendment to create a bipartisan redistricting commission after the 2020 census. As a backup, the Legislature would also agree to pass a law that would effectively prevent it from reneging on the deal.

Mr. Cuomo’s compromise on redistricting drew criticism on Wednesday from Democrats in the State Senate, as well as from government watchdogs who have pressed the governor to veto the proposed maps, which they described as gerrymandered to protect incumbents and as unfair to minority voters.

The Senate minority leader, John L. Sampson, a Brooklyn Democrat, questioned whether Mr. Cuomo had dropped his opposition to the lawmakers’ redistricting maps in exchange for passage of his pension proposal.

“We will be disenfranchising minorities while simultaneously eliminating retirement security for working families in a classic Albany back-room deal,” Senator Sampson said.

The DNA database expansion was resolved more amicably. The state now collects DNA from all convicted felons and some misdemeanants. The new pact will allow it to collect samples from anyone convicted of a crime.

In an effort to address concerns raised by defense lawyers about wrongful convictions, the legislation allows people convicted of a crime to petition a judge to force the prosecution to turn over all evidence from the case. It also permits defendants to ask a judge to allow them to test DNA samples from that evidence against the state’s database.

Also, people convicted of misdemeanor marijuana possession will not have to give a DNA sample if they have no prior criminal record.

I think New York and other states should focus their attention on collecting the 'pension DNA' of their citizens. Interesting how they passed an amendment that would allow commercial casinos. When people get bored of gambling in the market, they can gamble their savings in casinos.

But at least Gov. Cuomo scaled back the most contentious portion of his pension proposal, which would have given new public workers the option of forgoing a traditional pension and instead choosing a defined contribution plan, similar to a 401(k).

Still, the New York Daily News came out with an editorial stating Gov. Cuomo must stand his ground in battle to tame retirement costs:

As push comes to shove in Albany on taming the government pension beast, Gov. Cuomo must hold fast on three points:

No pension reform, no budget.

No substantial savings on traditional retirement benefits, no pension reform.

And no 401(k) option, no pension reform.

The ballooning pension tab is draining billions from New York State, New York City, the Metropolitan Transportation Authority and every other government entity across the state.

Left unchecked, the expenses will drive ever higher tax hikes, ever more layoffs of teachers, police officers and firefighters and ever more diminished public services.

As Cuomo declared Tuesday: “It would be irresponsible of me as governor to accept a budget for this state that doesn’t have pension reform.”

Contrary to public employee union propaganda, Cuomo’s proposal would not cut a penny from the pensions of any current worker or retiree. Their benefits are constitutionally untouchable.

His reforms would apply only to future workers — and their retirement benefits, while somewhat smaller than what’s offered today, would be very generous compared with the private sector’s.

Non-uniformed personnel would retire at 65 instead of 62 or 55. Workers would contribute more of their own income toward pensions. Overtime pay would no longer count in calculating their payouts. And their monthly benefits would be about 50% of their final salary instead of 60%.

Also — critically — he’d give future hires the option of joining a defined-contribution plan, like private-sector 401(k) accounts, but better.

Many state and city university employees already have this option, and more than half take it — because it’s a better deal for those who don’t intend to spend their entire careers in one job.

The plan would save taxpayers an estimated $113 billion over the next three decades — making pension reform such a no-brainer that the labor interests are resorting to rank misinformation.

Brazenly, Norman Seabrook of the city correction officers union claims in a radio ad that Cuomo’s proposals would “eliminate our pensions” and “force us to accept a 401(k) plan.” False and false, as Seabrook knows.

Terrified to buck labor in an election year, Assembly Speaker Sheldon Silver and his Democrats omitted pension changes of any sort from their budget counterproposal.

And Senate Republicans under Majority Leader Dean Skelos, while claiming to back reform, gave it only vague lip service in their spending plan.

If lawmakers refuse to pass Cuomo’s spending plan in full — with pension fixes included — the governor has a ready fallback: He can insert the pension overhaul into temporary spending bills necessary to keep the state running.

The polls would be forced to choose between giving their okay and shutting down government — with Cuomo fully prepared to bring the debate to the public.

Well, not to burst the New York Daily News' bubble, but that is the sloppiest reporting on pension reforms I've ever read! Please go back to carefully read my last comment on New York's brewing pension battle. Both Governor Cuomo and the unions make excellent points and all stakeholders need to compromise on pension reforms.

But I draw the line on shifting new workers to defined-contribution plans. Jim Keohane, President and CEO of the Healthcare of Ontario Pension Plan (HOOPP), arguably the best defined-benefit plan in North America, sent me these comments after reading that post:

I read this blog with interest and I would like to add a few points to the discussion.

There seems to be an underlying myth behind these discussions that defined contribution plans are cheaper than defined benefit plans. Actually, facts show that the reverse is true.

The cost of operating defined benefit plans such as HOOPP is a fraction of the cost of operating the typical DC plan. And switching from a DB to a DC plan doesn’t save the employer any money if the contribution rates remain the same.

Switching from DB to DC plans is really about risk transference. By switching from a DB to a DC plan employers are shifting the risk of future underfunding from themselves to the employee and ultimately to the social welfare system. Savings to the employer are only achieved by lowering the employers contribution rates.

Government employers should view the decision to shift from DB to DC differently than corporate employers. You could say that corporate employers are acting rationally by shifting from DB to DC plans. This allows them to shift risk off of their balance sheet onto the employee and the social welfare system.

However, if you are the government, you are simply shifting the risk from one bucket to another – from you the government as employer to you the government as the administrator of the social welfare system.

In fact this shift makes the problem worse. Due to the higher cost of administering DC plans, for the same contribution levels they produce lower pension incomes (a UK study found that they produce pension incomes which were 50% lower for the same contribution rates!) creating a greater strain on the social welfare system.

Front end contribution rates are a function of investment returns and the back end benefits. The front end costs can only be reduced by reducing the back end benefits. Who bears costs and risk are a function of plan design and these issues can be dealt with within a DB structure.
These are all excellent points. People need to understand that shifting workers into DC plans will only add strain to the social welfare system. Why is this never discussed when politicians warn of the ballooning costs of pensions? How about the ballooning costs of pension poverty?

We need to get real on pensions and stop spreading myths. The biggest myth out there is that defined-benefit plans are unaffordable and too risky. In fact, we know they're a lot cheaper than DC plans and perform a lot better precisely because they pool pension monies and lower fees. I challenge politicians to carefully think about pension reforms and eschew any solutions that call for 'cheaper' DC plans.

Westchester County Executive Rob Astorino and city leaders meet at the Capitol in Albany Feb. 29, 2012 to push for reform in what they claim is their most worrisome cost: burgeoning retirement expenses for employees. Also, union workers rally in Albany as pension reform fight continues.

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