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Crain's New York Business


Tweaks Won't Reform NY State Pension

May 29, 2011

By E. J. McMahon

System needs overhaul to be defined-contribution.

In his opening message to the Legislature, Gov. Andrew Cuomo pointed out that public-pension costs are “exploding” across New York state.

He certainly wasn’t exaggerating. New York City alone has seen its annual bill rise from just over $1 billion a decade ago to a projected $8.4 billion in fiscal 2012. Pension costs for other localities are doubling, tripling or even quadrupling over the levels of a few years ago.

The state’s own pension bill has increased 50%, or $500 million, in the past three years. It would be climbing much higher in coming years if the Paterson administration had not adopted a funding gimmick that will delay and “amortize” a projected $5 billion in pension contributions by 2017-18.

After months of preoccupation with other fiscal matters, Mr. Cuomo is getting ready to present his long-awaited proposals for dealing with the pension-cost crisis.

Among other things, the governor will reportedly propose higher retirement ages, lower benefit levels and increased employee contributions to retirement funds. He is also likely to address notorious abuses, such as overtime “spiking” and double-dipping.

But if Mr. Cuomo’s plan begins and ends with changes to the boundaries of defined-benefit pensions, it will represent yet another missed opportunity to reform the state’s pension system.

The problem is not only the system’s cost but its basic structure, which is dauntingly complex, encourages excess and abuse, and needlessly exposes taxpayers to open-ended financial risk and volatility.

It’s no coincidence that the latest rise is occurring after a deep recession, when New Yorkers can least afford it. This is not a bug but a feature of the traditional defined-benefit system, and it can’t be fixed by tweaking benefit levels�especially when public employee unions have a track record of persuading the state Legislature to boost benefits whenever economic conditions improve.

Real structural reform would move government workers to defined-contribution plans, already the prevalent retirement savings vehicle in the private sector.

With such a system, taxpayers would no longer bear all the financial risks associated with providing guaranteed pension benefits. The tax-funded share of retirement benefits would become both predictable and easily understandable, and the real costs of proposed benefit increases would be transparent.

Even if New York’s current pension plans are closed to new entrants, their legacy cost will be a gigantic headache for decades to come. But we should at least heed the lesson of what the late Sen. Daniel Patrick Moynihan called Political Economy 101: When you’re in a hole, stop digging.

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