New York Takes a Bite Out of Pensions?

Quelle surprise! Bloomberg reports that N.Y. Raises Pension Requirements to Save $48 Billion:

New York state’s pension program will raise the retirement age and financial contributions for new workers to save the state and local governments about $48 billion over 30 years.

The change, affecting workers hired Jan. 1 or after, was approved by legislators today and is supported by Governor David Paterson. The two biggest public employee unions backed the change after Paterson agreed to drop proposals to eliminate a 3 percent pay increase this year and cut 8,700 state jobs.

“Savings will be achieved not only in state spending, but at the local level, which will help to reduce property taxes,” Paterson, 55, said in a statement. The state constitution bars reductions in pension benefits for existing workers.

New York’s pension fund, the third-largest in the U.S., covers 1 million current and retired workers, and had $126 billion in assets on Sept. 30, according to Comptroller Thomas DiNapoli, the sole trustee.

For new workers, the bill raises the age for retirement without penalty to 62 from 55, imposes a 38 percent penalty on non-uniformed workers who retire before 62 and increases the minimum years of service to draw a pension to 10 from 5, according to Paterson’s office.

Overtime payments included in calculating pension benefits will be capped at $15,000 a year for civilian workers, and 15 percent of wages for police and firefighters.

Savings Estimates

The Division of Budget estimated in December 2009 that a similar package of pension changes would save $30 million in its first year. In June, Paterson, a Democrat, said savings would be at least $48 billion over 30 years. Assembly Speaker Sheldon Silver, a Democrat from Manhattan, said today the changes would save state and local governments $48.5 billion.

For teachers outside New York City, whose pension fund covers 420,000 current and retired workers, the bill raises the minimum retirement age to 57 from 55 without penalty, and increases their pension contribution to 3.5 percent from 3 percent.

The bill changes New York City teacher pensions to save the city $19.1 million this year, rising to $64.1 million in 2019, according to a news release from the governor’s office.

The agreement with the United Federation of Teachers will save New York City $100 million over the next 20 years, Mayor Michael Bloomberg said in a statement.

“I look forward to working with our other partners in organized labor to begin creating the pension savings the city needs, while still providing deserved benefits to city workers,” Bloomberg said. The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.

Existing Teachers

Pension and health benefits for existing city teachers are unchanged, the mayor said. New hires will pay 4.85 percent of their pay to the pension plan for 27 years and 1.85 percent thereafter, up from current contributions of 4.85 percent for 10 years and 1.85 percent through 27 years, he said.

New teachers must have 10 years of service to collect a pension, up from five years now, and must work 15 years to collect health benefits after retirement, up from 10 years. The alterations require changes in city law.

The new category of pension benefits will do little to solve the state’s problem of growing retirement costs, said E.J. McMahon, director of the Empire Center for New York State Policy, an Albany-based group that advocates less government spending. Benefits promised current workers allow retirement at 50 percent of salary after 25 years.

“The legacy costs of our pension promises to current employees will remain a massive headache for decades,” McMahon said.

I urge you to read E.J McMahon's 2006 report, Defusing New York's Public Pension Bomb as well as his more recent comment, The Budget New York Needs, where he discussed New York's pension bomb:

New York’s public-pension system has become the epicenter of an influence-peddling scandal that has attracted the attention of the Securities and Exchange Commission and the state’s attorney general. But the millions in shady “placement fees” pocketed by a few politically connected middlemen are small change compared with the mushrooming cost of lavish pension benefits for state and local government retirees. Keeping these retirees in clover will demand billions more from New York’s sorely stressed taxpayers over the next few years. And the real scandal is that politicians are so reluctant to do anything about it.

In New York, as in almost every state, public employees are entitled to defined-benefit (DB) pensions—a guaranteed post-retirement income, based on peak salaries and career longevity. By private-sector standards, benefit levels are extraordinary. New York state and local government employees, as well as employees of public authorities, can retire earlier, with larger pensions, than the vast majority of the people who pay their salaries.

A New York teacher with 30 years on the job, for example, can stop working at 55 and start collecting an annual pension of roughly $55,000—entering retirement with the equivalent of a $1.2 million golden parachute, according to calculations by City Journal contributing editor Nicole Gelinas.

Taxpayers must shoulder the risks of covering these already-promised benefits. The pensions are paid out of gigantic pooled retirement funds, to which government employers contribute varying amounts, depending on actuarial assumptions and market fluctuations. During the Wall Street boom of the 1990s, pension-fund assets grew enough to reduce employer contributions to all-time lows as a percentage of salaries.

The downturn of 2001–03 had the opposite effect, rapidly driving pension contributions up. Since 2000, the combined annual pension costs for all governments in New York, including New York City, have risen from slightly under $1 billion to nearly $10 billion—reflecting both market conditions and benefit increases effective at the beginning of that period.

New York City’s annual pension contributions alone, up more than $3 billion over the last five years, are projected to rise by another $1 billion over the next three. Annual pension bills for the state and its local subdivisions, which now total about $3 billion, could double or triple by 2015. Rising pension costs also pose a considerable financial threat to the already-troubled Metropolitan Transportation Authority.

And these official numbers actually understate the problem because New York’s pension funds, like their counterparts throughout the country, calculate employer contributions based on government accounting standards that lowball their long-term liabilities. According to these skewed standards, the pension funds for New York State and New York City are technically at or near “fully funded” status. But Gotham’s actuary calculated in 2006 that New York City’s plans alone would be $45 billion in the hole if they employed the more sensible liability calculations that private-sector DB plans use.

Under the state’s constitution, pension benefits can’t be “diminished or impaired” for any current member of a public-retirement system in New York. So it will be difficult to stem the tide of mounting pension costs in the short term. The debate over pension reform is really about the appropriate mix of compensation for the next generation of government workers—and the impact they will have on state and local finances in the long term.

Far-fetched as it may seem, given the New York State Legislature’s shameless pandering to unions in recent years, there is precedent for pension reform. During the fiscal crisis of the 1970s, the legislature managed temporarily to scale back pension benefits for new public employees. However, the unions spent most of the next 25 years successfully clawing back much of what they had lost—and then some.

Governor David Paterson’s “Tier V” retirement plan, part of a June 5 deal with state employee unions, merely reset pension benefits to the levels of the early 1990s by raising the retirement age to 62; restoring a ten-year pension vesting period; and requiring employees to contribute to the pension fund throughout their careers. The governor also vetoed an extension of the existing “Tier II” retirement plan for police and firefighters, who can retire at half pay after 20 years, regardless of age. In its place, he proposed a plan that would set a minimum age of 50 for half-pay retirement after 25 years, which could produce significant savings for all New York municipalities, especially New York City.

Real pension reform, however, would go much further—by essentially throwing out the outmoded DB model for future employees. New York should follow the lead of a handful of other states, including Michigan, that have shifted non-uniformed government workers to defined-contribution (DC) accounts, like the 401(k) plans that have come to dominate the private sector.

Paterson has estimated that his proposal would save the state and local governments outside New York City a total of $32 billion over the next 30 years. By comparison, a DC plan like Michigan’s, with the annual employer contribution capped at 7 percent of payroll, might save at least $10 billion more. But the greatest benefit of a DC system is that taxpayers would no longer bear all the financial risks associated with providing guaranteed pension benefits. For the first time, public-pension costs would become both predictable and easily understandable, and the real costs of proposed benefit increases would be completely transparent. With normal turnover, between one-quarter and one-third of state and city employees would be in the new system within a decade.

Of course, if pension reform were subject to regular contract negotiations, public-employee unions would never accept a shift to a DC plan from the guaranteed, ultra-secure DB plan. But this is a rare case in which elected officials can alter a fringe benefit without the unions’ consent—because the state’s Taylor Law, which governs public-sector labor issues, specifically prohibits collective bargaining on pensions. Retirement benefits could be changed legislatively, ensuring that future generations of New Yorkers aren’t stuck with the same pension problem.

Unfortunately, as the legislature’s 2009 regular session wound toward its June adjournment, leading politicians continued to seek union permission to make any changes. New York City mayor Michael Bloomberg has repeatedly called for the state to revert to a system in which pension benefits are collectively bargained, and Paterson made a series of costly concessions to the unions in exchange for their agreement not to oppose his modest restructuring of pension benefits. It’s time for the governor, the mayor, and other elected officials to reassert their managerial prerogatives—to understand that government unions will never voluntarily relinquish the gold-standard pensions that taxpayers can no longer afford.

While I agree with Mr. McMahon that legacy costs of gold-plated pensions will remain a massive headache for decades, his solution is to basically pass the buck to individuals through DC plans.

As I've stated many times, cheaper DC plans are not the solution since they have been performing miserably. Also, what's wrong with providing a teacher, a police officer, a fireman some retirement security?

I say New York taxes the crooks on Wall Street to fund these public pensions. The investment bankers, private equity and hedge fund managers have to share the responsibility for the underfunded status of these pension plans.

***UPDATE***

E.J. McMahon criticized these reforms stating that Teachers clean up on "pension reform".