Why NYC benefit costs soared
The stock-market crash of 2000-02 lit the fuse on a decade long explosion in taxpayer-funded contributions to New York Citys municipal-pension systems. But a new report from Comptroller John Liu shows that roughly half the damage was avoidable -- resulting from the citys own bad policy choices and mismanagement.
According to the comptrollers analysis, the citys pension contributions from 2000 to 2010 were $31.6 billion higher than would have been expected under pre-2000 benefit levels and actuarial assumptions.
“Net investment losses” by the five city pension funds get the blame for $15.2 billion in added costs, or about 48 percent of the total increase over the 10-year period. No surprise there: The funds assumed an 8 percent annual return but actually earned an average of 2.5 percent.
Making matters worse, then-Mayor Rudolph Giuliani and the citys labor unions had agreed in May 2000 to “restart” pension calculations based on peak asset values, departing from a rolling five-year average that included lower values from prior years. That same spring, then-Gov. George Pataki and the state Legislature approved public-pension sweeteners that drove nearly $13 billion in cumulative pension cost increases for the city from 2000 to 2010. These included an automatic cost-of-living boost in pension benefits, enacted over Giulianis objections.
The ink was barely dry on these deals when stock values started tanking -- destroying the optimistic financial assumptions that politicians had used to sell the pension sweeteners as a free lunch. Mayor Bloomberg, who often counts pensions among the citys “uncontrollable” expenses, isnt blameless in this story. Lius report indicates that a total of more than $1 billion in added pension contributions have been generated by pension increases approved since Bloomberg took office.
The costliest, which has added $100 million a year to tax-funded pension costs, was an early-retirement package for teachers approved by the Legislature with Bloombergs support in 2008. The mayor agreed to that perk in order to win union approval for an experimental incentive-pay program. While teachers who took advantage of the incentive will collect their fatter pensions for decades to come, the incentive program was branded a failure and is now history.
The Comptrollers Office itself, under Liu and his predecessor, William Thompson, is primarily responsible for $982 million in pension contributions attributable to “higher-than-expected investment and administrative fees” since 2000.
The result of all these factors is depicted in the above chart. Projected pension contributions in 2012 will consume fully 20 percent of projected tax revenue, crowding out basic services in an austere fiscal environment.
The long-term costs of New Yorks inflated pension promises were obscured or grossly understated until it was too late. Now the system is demanding more of taxpayers when they can least afford it. Thats not a bug -- its a feature of defined-benefit public-pension plans across the country.
Liu has done much to expand financial transparency in city government. But the comptroller, a staunch union ally, is unwilling to acknowledge the real implications of the pension data hes collected. Instead, his report concludes with a fairy-tale ending: “New Yorkers,” it says, “should be proud that in spite of tough economic times the city has appropriately funded its pension liabilities and, with normal investment returns, the pension funds should become stronger in the years to come.”
In other words, well all live happily ever after. Sweet dreams!
Bloomberg, meanwhile, is taking a same-but-less approach to fixing pensions -- proposing to retain the DB system with higher retirement ages, lower benefit levels and higher employee contributions for new workers. Yet that approach has been tried before in New York -- and failed to deliver lasting savings. Unions can be expected to start clawing back any lost benefits as soon as pension costs fall back below “normal” levels, assuming they ever do.
The mayor also believes he can get a better pension deal by restoring direct collective bargaining of pension benefits between the city and its labor unions, which state law has prohibited for nearly 40 years. Yet, with the exception of the 2000 cost-of-living hike, nearly all the costly enhancements identified in Lius report were endorsed by Bloomberg and his predecessors in contractual side-deals with the unions.
Ironically, New York Citys biggest potential pension savings in decades are a gift from Albany. Then-Gov. David Paterson consigned newly hired city police and firefighters to a less expensive retirement plan when he vetoed a previously routine extension of the old police and fire “tier” in 2009. Its unlikely that Bloomberg could ever have achieved such a change at the bargaining table.
The comptrollers numbers make it clearer than ever that the traditional public-pension system has exposed New York taxpayers to intolerable levels of financial risk and volatility. The mayor needs to rethink his pension reform agenda -- and the comptroller needs to get one.
Original Source: http://www.nypost.com/p/news/opinion/opedcolumnists/blame_it_on_the_pols_vRgIJm5YBPe97CBI2kaAzJ