As New York City grips with a major financial crisis due to the effects of COVID-19, another call has emerged to overhaul its public pension system.
Manhattan Institute recommended a four-pronged approach that includes paring “unusually generous” benefits back to a prevailing standard in the private and public sectors and transitioning new employees toward a defined-contribution system through annuity programs or cash-balance plans.
The free-market oriented think tank also suggested that any early-retirement program target incentives to the areas where coronavirus-induced innovations have reduced necessary personnel; and called for consolidating asset managers across the city’s five separate pension funds.
“Even before the COVID-19 pandemic, the city was on a dire trajectory,” said John Hunt, a public policy researcher at the institute. “Now, the city's financial future is particularly vulnerable and uncertain, with its population base, economic performance, and property values all facing unprecedented pressure.”
Smaller measures such as consolidating asset management would save an estimated $14 million annually, Hunt said, while more-ambitious measures could save far more.
The pension funds have a combined $221.6 billion in assets under management as of July, according to city Comptroller Scott Stringer’s office, and constitute the fourth largest public pension plan in the U.S.
They are the New York City Employees’ Retirement System; the Teachers’ Retirement System of the City of New York; the New York City Police Pension Fund; the New York City Fire Pension Fund; and the New York City Board of Education Retirement System.
“One side of the benefit debate sees the answer to the problem as the responsibility of the worker and the other asks why doesn't the legislature contribute more,” municipal bond analyst Joseph Krist said. “On its own, the plan is already a ‘tiered’ plan so it's not like pension management in New York has not been ahead of the curve relative to the pension basket cases."
Of the Manhattan Institute report, Krist said: “They're not wrong about the burden the city faces but once the current regime is gone from City Hall, there will be numerous areas to cut costs without the grief of dealing with negotiations about pensions.”
Mayor Bill de Blasio will leave office at the end of 2021. Term limits prohibit him from seeking re-election.
De Blasio's budget team has projected a $9 billion revenue hole through the next fiscal year. The mayor is seeking a minimum of $5 billion from the federal government, which is stalled over the next rescue package, and is also seeking permission from New York State to borrow to cover operating deficits.
According to the institute, the city’s annually required pension contribution spiked to $9.8 billion in fiscal 2019 from $1.4 billion in FY02.
“Now, the recent downturn in the stock market means that, over the medium term, these contributions will grow in absolute size, even as the city’s revenues decrease,” Hunt said.
Were the value of the pension funds’ assets to shrink by 5%, the city’s pension contribution would have to be $183 million greater for 2022 and 15 years thereafter, according to Hunt. Were the value of the pension funds’ assets to shrink by 10%, the city’s pension contribution would have to be $259 million greater for 2022 and 15 years thereafter.
De Blasio’s warning about layoffs of up to 22,000 city workers is still on the table despite a deal with the United Federation of Teachers earlier this month over $900 million in back pay.
Under agreement, which arbitrator Martin Scheinman brokered, the city will pay $450 million by Oct. 31 and the other half by July 1, when the next fiscal year begins. It also includes a no-layoff provision through June. Teachers will also receive a 3.5% pay hike by May.
If the city receives state or federal assistance of at least $5 billion, it would extend the no-layoff pledge to June 30, 2022.
Moody’s Investors Service, citing the effects of the coronavirus, lowered the city’s general obligation bond rating on Oct.1, to Aa2 from Aa1. The move affected $38.7 billion of city debt.
S&P Global Ratings and Fitch Ratings assign AA ratings to the city’s GOs.
