At the end of August, New York Comptroller Thomas DiNapoli announced that pension contributions for governments in the state would increase by about 35% in 2011, or some $880 million.
By 2015, he predicted costs would rise to as much as $8 billion statewide so that “counties will have to contribute an amount equal to nearly one-third of their civilian payrolls to the state pension system and more than 40% of their payrolls for police and fire departments.”
Under any economic conditions, this sort of expense growth is unsustainable. Under current economic conditions, the comptroller’s warning is a call for immediate action.
Tough economic times jolt organizations out of their “business as usual” ruts, and force all of us to find new ways to do things. New York State must find a new way to deal with retirement costs and other post-employment benefits. Gov. David Paterson has proposed replacing the current Tier 4 retirement plan with a new retirement plan, under which employee contributions would increase. Moving to such a new plan requires approval of the state Legislature but to date, the Legislature has taken no action.
Paterson’s plan does not go far enough. About 97% of all government employees statewide are in Tier 4. Retirement costs will not go down until these employees leave active employment in significant numbers. There must be a new plan plus an exit strategy to encourage expensive Tier 4 employees to retire or resign. However, the plan must also be attractive enough to ensure that government employment remains attractive as a career choice for capable future employees.
Legislation is needed that would:
• Require that employees contribute to the pension system at a fixed rate every year that they remain in government service.
• Include a cost effective early-retirement incentive.
• Offer future employees flexibility in their retirement options and payments.
A new plan with options for different levels of employee contribution and retirement ages is feasible. New employees could plan the percentage of the contribution that they would make to the retirement plan, and estimate the length of service to be completed before retirement. For example, those wanting to make the smallest contribution from their salaries would work longer to accrue full pensions. Those wanting an accelerated career that would allow them to retire early would make a larger contribution than others.
Those choosing the accelerated option would be eligible to retire at age 50, with retirement payouts determined actuarially. Others could plan on becoming eligible for retirement as early as age 55 with proportionately smaller contributions to the pension system, while those making the smallest percentage contribution would not be eligible for full retirement benefits until age 65.
Length of Service:indefinite
Length of Service:30 years
Length of Service:25 years
An employee would select an option at the beginning of his or her employment. The option would be fixed, without possibility of change. Payments would be deducted from salaries for the duration of employment. Employees would continue to be vested after five years of service, and actuarial calculations would determine any retirement benefits and penalties for employees who resigned before retirement age and/or targeted years of service.
As Tier 4 employees retire, the number of employees under the proposed new plan would increase and taxpayer support of the pension system would decrease. For a government of 5,000 employees where all employees are under the new plan, employee contributions to the retirement system would be as follows at an average annual salary of $65,000:
If employees were equally divided among Options A, B and C, the annual savings for a government of 5,000 would average approximately $17.3 million. For a government the size of New York State — currently about 160,000 employees — the annual savings could conceivably average about $500 million. Taxpayers would benefit from savings at both the state level and their local government level if Tier 4 employees were replaced swiftly with employees under the new plan.
With the establishment of this category of employees, it would be in New York’s best interest to offer an early retirement incentive, or ERI, to employees in other tiers in order to decrease taxpayer support of pension costs as rapidly as possible, and generate a new revenue stream for the retirement system from the contributions of members of the new plan.
Offering a one-month credit for every year of employment to employees with more than 15 years of service, plus a reduction in penalties for those between age 55 and 62, would result in an increase in retirements. The benefits to governments and taxpayers could include:
1.Positions would become vacant, allowing:
•Upward mobility for remaining employees.
•Job opportunities for those unemployed as a result of layoffs in other employment sectors.
•The ability to reduce government size and costs by abolishing some positions.
2. Retirees would have income from their pension, and newly promoted and newly hired employees would also have a stable income.
3. If layoffs are being contemplated by a government in severe financial difficulties, retirements are a better alternative.
4. The government could benefit from an infusion of new skills by hiring from the unusually large pool of the talented but unemployed that has been created by this recession.
There is unquestionably a cost to most retirement incentives. However, with the partial shifting of some of the retirement and other post-employment benefit costs to employees under the new plan, the net effect would be savings to governments and to taxpayers.
Costs of an ERI can be spread over a longer period with a change in state law allowing long-term bonds of 10 to 20 years to be issued to cover ERI costs. This could offer governments the opportunity to save money in the short term by spreading the payments over time
It would allow governments to take advantage of the difference between the annual debt service payment for long-term ERI bonds and the contribution to the pension system that would be required to keep a Tier 4 employee on the payroll; current low interest rates; the savings from eliminating and/or downgrading some positions; and the contributions of employees hired under a new plan to the retirement system rather than the non-contributory Tier 4 employees.
The obvious downside to this proposal is that since those hired into a new plan under the pension system would have to make annual contributions to their own retirement, government service might become less attractive to capable candidates. Since pension plans nationally in both the government and private sectors are under pressure as a result of the economic downturn, this is not likely to be a significant deterrent. The stability of government service would likely outweigh the disincentive of increased pension contributions for potential job applicants.
John Waltman is a 19-year veteran of municipal finance in the public sector and a lifelong New York resident.