New York's public pensions are socking taxpayers: Costs jumped 100 percent
by Delen Goldberg / The Post-Standard Sunday February 15, 2009, 5:18 AM
In 1998, New York spent about $3.4 billion on pensions for state and local government workers. A decade later, that figure had ballooned to nearly $7 billion, a jump of more than 100 percent, according to the state comptroller.
State taxpayers footed most of the bill.
In fact, last year, for every $100 a government worker spent on his or her retirement, taxpayers contributed about $1,000. At the same time, residents continued to see their own private pensions shrink or disappear.
New York's public workers can retire at age 55 with guaranteed benefits. They have to contribute to their retirement plan for only their first 10 years on the job, and they pay no state income taxes on their pensions.
Compared with the average New York worker, state and local government employees receive the gold standard of pensions.
In 2009, New York is estimated to lose $776 million in income taxes because pensioners are exempt -- much needed money considering the state faces an estimated $13 billion budget gap.
"These are very generous benefits not available to the private sector," said E.J. McMahon, executive director of the Empire Center for New York State Policy, a budget watchdog group. "Even those private-sector workers ... with the largest employers in the heyday did not get benefits approaching what state or local government workers receive."
These days, New Yorkers with private-sector jobs are lucky to receive a pension at all. Companies are rapidly moving away from guaranteed, defined-benefit pensions in favor of fluctuating 401(k) retirement plans.
New York's public pension policies also appear to be out of whack with those of most of the rest of the country. Only seven states, including New York, exempt government pensions from income taxes, according to the National Conference of State Legislatures. New York is also one of only three states that allow overtime to be included in pension calculations.
Gov. David Paterson has proposed changes to the state's retirement plan -- namely, creating a new retirement tier -- but several political watchdogs doubt whether any of the proposed changes will make a difference.
"It's far too little," McMahon said. "It does not deserve the word 'reform.' We really need a much more significant overhaul than the governor has proposed."
In his executive budget, Paterson recommended creating a fifth retirement tier for public workers, which would raise the retirement age to 62, exclude overtime pay in pension calculations (except for firefighters and police, who use it most often) and require workers to remain on the job 10 years, rather than five, to be eligible for pension pay.
The changes, if adopted by the Legislature, would apply only to new hires. Most believe lawmakers cannot retroactively alter existing pension plans.
Budget officials estimate Paterson's proposals would save $10 million next year and $30 million the following year.
"The savings are small in the beginning," said Elizabeth Lynam, of the Citizens Budget Commission, a nonprofit focused on government finances and services. "That's part of the reason why it's difficult to get pension reform enacted. It's a heavy political risk for small dollars in the short term.
"But it's symbolic of the kinds of things that New York is going to have to change now that Wall Street, which we relied so heavily on, is in collapse."
State budget spokesman Matt Anderson said that, over the next 30 years, taxpayers would save $32.2 billion if Paterson's Tier V proposal is adopted.
New York's public pension system still operates as a defined benefit plan, meaning retired workers are promised a specific amount of money each month based on their salaries and years of service.
Currently, only employees with less than 10 years on the job must contribute to their pension plan. They kick in 3 percent of their earnings. Paterson's Tier V proposal would require employees to contribute 3 percent for their entire careers. Incidentally, 95 percent of other states require employees to contribute more than 3 percent, Lynam said.
State Comptroller Thomas DiNapoli manages the pension money by investing it, mostly in stocks and bonds. In flush times, the money rolls in. When market values skyrocketed in the late 1990s, for example, pension funds grew so large that the state was able to virtually suspend its contributions.
But in bad economic times, the market dips and the state must cover those losses to ensure that retirees continue to receive their pensions. Tax dollars make up the difference.
"Right now, there are tremendous losses, and that's going to mean pension costs are more heavily borne by the taxpayers," Lynam said.
Independent budget analysts suggest the state could save millions if it moves to a defined contribution plan, such as a 401(k) plan, which does not promise a specific pay to retirees. Instead, workers, and usually their employers, contribute to an account that fluctuates based on market conditions. At retirement, the employee cashes out the balance of that account.
At least 12 states nationwide have switched to defined contribution plans. They're also the norm for the vast majority of private companies. Only about 24 percent of private business still offer defined benefit plans, Lynam said. In 1985, about 80 percent of companies did.
"Defined contribution really rules the day in the private sector," she said.
So why hasn't New York followed the trend? Union pressure and legislative inaction.
"Unions don't want change in the current system," McMahon said. "They're the key enemy."
Stephen Madarasz, spokesman for the Civil Service Employees Association of New York, acknowledged that the union is against a Tier V but defended the group's stance.
"It really comes down to a belief that we shouldn't have different categories of employees," Madarasz said. "It's unfair, and it creates divisions."
CSEA has opposed new pension tiers for decades. As for defined contribution plans, union members reject those, too.
"All these folks who argue that we should have a defined-contribution system -- we don't think that's a responsible way to be governing," Madarasz said. "The fact of the matter is, what's happened in the private sector with pensions is reprehensible."
Public pensions aren't overly generous, Madarasz said. The average CSEA member receives about $16,000 a year. The expense is a reasonable cost of doing business, union members and state workers said.
"You have to look at the reality of the cost and not the knee-jerk reaction," said Michael B. Fitzgerald, of the Retired Public Employees Association. "We spent our careers as public servants. Our retirement and health insurance was part of the deal. Plus, retirees are major contributors to the economy of an area."
Legislators typically fall on the unions' side. Workers unions contribute huge amounts of money to lawmakers and their political campaigns, so voting to tone down public pension benefits could cost elected officials important union endorsements, Lynam and McMahon said.
Not only do lawmakers usually shy away from pension reform, they often vote to sweeten the deal for government workers.
During the 2005 session, the Senate and Assembly passed at least 46 bills increasing pension benefits for public employees, at an estimated cost of more than $100 million, McMahon said. In 2007, the Legislature passed 21 pension-boosting bills, Lynam said.
H
istorically, states offered public workers plush pensions because they earned lower salaries than their private-sector counterparts. But generous retirement benefits no longer are needed to attract municipal workers. Now, in most cases, government workers earn significantly more than private citizens, according to the U.S. Department of Labor.
National studies show that public employees are paid about 42 percent more than private-sector workers doing similar jobs.
And while a recent study by U.S. Government Accountability Office estimated that public pensions are underfunded by $1 trillion nationally, government workers in New York will receive pension checks no matter what the future brings.
Workers' benefits are insured and guaranteed by the federal Pension Benefit Guaranty Corporation, which is supported by federal tax dollars.
In 2000, the PBGC paid for 500,000 pensions, according to the U.S. Government Accountability Office. By 2007 -- well before the current economic crisis -- that number had grown to 1.3 million.
"The people who need to be concerned about the pension fund are us (the taxpayers)," McMahon said. "And the (government) employees need to be concerned as taxpayers, not pension recipients. A state government bears absolutely no risk for their pensions. Taxpayers bear 100 percent of the risk."
Delen Goldberg is a staff writer for The Post-Standard. She can be reached at dgoldberg@syracuse.com or 315-470-2274.
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Public unions are the enemy of the taxpayer, plain and simple.
