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Boosting New York City’s Long-Term Fiscal Health

Tom Kozlik Head of Municipal Strategy and Credit, HilltopSecurities Inc.
Steven Malanga George M. Yeager Fellow, Manhattan Institute; Senior Editor, City Journal
Sheila A. Weinberg Founder & CEO, Truth in Accounting
Michael Hendrix Director, State and Local Policy, Manhattan Institute
Fri, Feb 19, 2021 EVENTCAST

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Boosting New York City’s Long-Term Fiscal Health

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Forum

Boosting New York City’s Long-Term Fiscal Health

Tom Kozlik Head of Municipal Strategy and Credit, HilltopSecurities Inc.
Steven Malanga George M. Yeager Fellow, Manhattan Institute; Senior Editor, City Journal
Sheila A. Weinberg Founder & CEO, Truth in Accounting
Michael Hendrix Director, State and Local Policy, Manhattan Institute EVENTCAST 01:00pm—02:00pm
Friday February 19
Friday February 19 2021
PAST EVENT Friday February 19 2021

While New York City struggles to shore up its finances in the wake of Covid-19, an even larger crisis looms: the city’s long-term public pension and healthcare obligations to retirees.

Even before the coronavirus crisis, New York City had set aside just 2 percent of the savings needed to cover retiree health benefits for public workers, while its pension funds contained only 79 cents for every dollar needed to cover projected benefits. These fringe benefits consumed one-third of the city’s municipal payroll and one-tenth of the city’s budget.

New York City ranks 75th for fiscal health out of 75 large American cities studied by Truth in Accounting, a nonpartisan watchdog group, due to its unfunded fringe benefits to public employees. The city would need each taxpayer to pony up $68,200 to pay all of its bills.

With the Big Apple shrinking in population and its economy in the doldrums, tax revenues are likely to suffer even as demands for greater operational and capital spending grow. How can New York City steer its fiscal ship in the right direction, keeping its promises to employees while serving its citizens and recruiting top talent?

Event Transcript

Michael Hendrix:

Welcome to the Manhattan Institute discussion on boosting New York City's long-term fiscal health. I'm Michael Hendrix, director of state local policy here at the Manhattan Institute. Well, New York City has been struggling to shore up its finances during the pandemic of COVID-19. The city's long-term pension and healthcare liabilities haven't gone away. Those public promises to public employees are still very, very real.

Michael Hendrix:

In some respects the long-term crisis that's been warned about by some people here on this call has also not gone away. In fact, may have gotten worse. For Sheila specifically her organization Truth in Accounting, just ranked New York City, 75th out of 75 large American cities due to their unfunded fringe benefits to public employees. One of the big questions that are going to be asking today is how can New York City pay its debts and keep the lights on?

Michael Hendrix:

Throughout our discussion, please enter your questions in the Q and A function and I'll wrap your questions into our discussion. Now to answer all of your questions and our questions collectively, we have a great panel today. We're joined by Tom Kozlik, the head of municipal strategy and credit at Hilltop Securities. Steve Malanga, the Yeager Fellow at the Manhattan Institute and senior editor at City Journal and last, but certainly not least, Sheila Weinberg, the founder and CEO of Truth in Accounting. It's good to be with you all.

Sheila A. Weinberg:

Thanks for having us.

Tom Kozlik:

Thanks Michael.

Michael Hendrix:

All right, Sheila, let's start with you. Your new report details New York City's long-term fiscal challenges and harrowing detail. What did you find?

Sheila A. Weinberg:

Well, what we do is we don't just look at those long-term deaths. We look at all the assets that the city has available and then we compare that to the longterm deaths. Unfortunately, we found that the city needs $194 billion to cover their unfunded debt. Obviously, the largest component of that is there a retiree healthcare debt and the city is choosing to do that as a pay as you go plan.

Sheila A. Weinberg:

Instead of the pensions and everybody highlights that New York City's pensions are well-funded. I might argue with that, but we won't get into that, but because they do contribute to that every year that the retiree health care, they're doing on a pay as you go basis. So we take that $194 billion that's needed to pay the bills divided by the number of taxpayers and come up with $68,000 per taxpayer.

Sheila A. Weinberg:

That represents the amount of money that future taxpayers are on the hook to pay off this debt and they're not going to receive any goods or services for that. We give the city-

Michael Hendrix:

Wait, sorry, Sheila, I just want to pause you right there. Say that number one more time.

Sheila A. Weinberg:

$68,000. That is the amount of taxes in the future that people in New York City are going to have to pay in order to cover the debt. Not any debt I'm talking about, they're going to incur in the future. This is debt that they owe right now. Because of that, we rank the city as the worst city in the country. I hate to give you bad news. We give them an F grade.

Michael Hendrix:

Now, out of curiosity and a quick question, compare New York City, if it's the worst in the country among the cities that you measured. What would be the second worst or the third worst? How bad is it in New York relative to the other bad cities?

Sheila A. Weinberg:

My home city of Chicago that number is $50,000 per taxpayer and honestly, I can't remember the third city off the top of my head.

Michael Hendrix:

But there's a sizeable difference then between New York City in Chicago then. And you call it a debt. You often hear this described more as a legacy costs, maybe long-term obligations, but you don't often at least in regular pension circles here described as debt. Why do you call it debt?

Sheila A. Weinberg:

Well, it is. It's a liability. It's the amount that the city owes and again, it owes it today. A lot of times they'll go, "Oh, well, it's kind of like a mortgage and we're going to pay that off in the future, but no, it's more like a credit card. Just because the city is not choosing to even pay the minimum on their credit card in relation to retiree healthcare benefits doesn't mean that they don't have a credit card balance.

Sheila A. Weinberg:

That theocratically is due today. They're choosing not to pay today, but if they really come out and they say they balanced the budget and balanced it using generally accepted accounting principles every single year, we have to do that. But they balance the budget by not paying even the minimum on their credit cards.

Michael Hendrix:

We're going to be talking more about those accounting principles and just a bit, but Tom, I want to turn to you. Continue to help us kind of benchmark this debt in New York City. What are you seeing around the country in terms of these long-term obligations and the long-term legacy costs? Is New York City unique?

Tom Kozlik:

Sheila was just expressing the costs as a like a per a taxpayer for individual costs. There are some other ways to look at this and as I've been thinking and trying to figure out a way to describe and let folks know if there's a better way to look at this. Almost no matter what metric you use, on the one hand, there are some cities that are in better shape than others, but in most cases, a lot of cities and states, as Sheila was putting it, they're not paying even an amount that is going to get them to a credit neutral or a tread water.

Tom Kozlik:

Moody uses the concept of tread water and there are a lot of entities that are not even quote unquote treading water. Where pensions are concerned, there are a lot of folks who express the funded level as a funded ratio. They take the assets and the liabilities and divide those, but one of the problems with using a funded ratio is oftentimes that includes overly optimistic assumption about what the discount rates going to be.

Tom Kozlik:

If you use a more realistic discount rate, oftentimes that funded ratio in a lot of situations falls by half. One of the things that I've started to do over the last couple of years is I've started to look at, especially in situations where the amount of assets has fallen pretty substantially. I now look at the amount of assets that exist in the plans and the annual payments that are required, because that gives me an idea of how long an entity is going to be able to continue to make payments based on the assets. Then some cases, there might be more money coming in on annual basis from the employer payment.

Tom Kozlik:

But one of the reasons oftentimes why that asset level is so low is just because the employer wasn't putting it anywhere near as much money, but that's how it is. There are different ways to look at it, but as I imagined and as I'm kind of illustrating almost. No matter what way you look at it, there is not a great way or optimistic picture to paint about the scenario.

Michael Hendrix:

So based on how you prefer to look at it, where would you place New York City relative to other major cities in America?

Tom Kozlik:

I don't have the number for the major cities in front of me. I think that overall, there are a handful of cities and states that have just a couple of years of assets left and then there is in general, another kind of a group of cities and states that have maybe 10 years of assets left. But that being said, that money is going to fall pretty quickly. It's not going to take very long for that group that has about 10 years of money left to be close to where it is that the handful of cities and states are where they only have three, four, or five years of money left.

Tom Kozlik:

So on the one hand, when you look at the amount of assets and it's expressed in billions of dollars, it seems like they've got a decent amount of money, but when they're having to pay on the annual basis, billions of dollars, it doesn't last for long.

Michael Hendrix:

I always find it hard to wrap my mind around pension and healthcare obligations. When you start talking billions and billions of dollars, it's hard to get a sense of scale. I appreciate how you expressed it, Sheila, but Tom, I want to stick with you for just an hour and we'll turn to Steve. The pandemic and the fiscal squeezes that have come with it, what have you seen COVID-19 reveal about the nature of these pension and healthcare obligations for cities, including New York?

Tom Kozlik:

One of the things that I'm going to be watching really closely is to see what it is that state and local governments do, not just this year, but in coming years with regard to their budgets. I just mentioned that there are a lot of cities and states that don't even make a tread water payment. What I'm wondering is, are they going to even short change or take a pension holiday for that amount? Are they going to pay 75%, 60% for 25%? Are they're going to come close to even making the payment that they've been, quote unquote, required to pay?

Tom Kozlik:

That's going to play out again, not just this year, but state local governments are going to be squeezed, I think from a budget perspective for the next couple of years because although revenues are coming in better than what we expected and better than what folks were forecasting towards the end of the summer. I think that there is going to be some budget uncertainty going forward.

Tom Kozlik:

One of the things that I am certain is going to impact funding levels is the fact that interest rates have fallen significantly. About a year ago, many folks were expecting that interest rates are going to rise. And I think that they are going to rise slowly, but that was going to have frankly a positive effect on liabilities.

Tom Kozlik:

I think that one of the things that we can certainly say is that at least in the next year or two, or next couple of years, interest rates are going to stay low. On the one hand, that's going to increase the liability number, but it might not necessarily and in most cases, it's probably not going to increase the amount that a state local governments are putting in funding.

Michael Hendrix:

That I think is a big worry that I'm not sure people appreciate it enough. I know Steve, you do, so let's bring it a little closer to home. Talk about today's budget challenges and what they had to do with these pension and healthcare obligations, including our attitude to spending in general. You can't detach debt from the budget, right?

Steven Malanga:

Well, not only can you not, but what's important to understand is that for years when some of us would have been writing about these obligations that were growing, people would say to me, and sometimes even editors that I worked for, that I was writing for would say to me, "Yeah, but when are we going to feel it? When's it going to be on the budget?"

Steven Malanga:

Another way of talking about this, Sheila talks about it in terms of the assets available, but another way that we talk about at the Manhattan Institute is in terms of the impact on the budget, what we now call crowd out. What do we mean by crowd out? We mean that basically these costs are becoming real and they are costs often for work that was done five or 10 years ago, maybe 20 years ago, but worked with people who were retired who were now paying for now, which means that an increasing amount of our tax revenues are going for things that were done a long time ago and so let's take New York City as an example.

Steven Malanga:

The city first of all, in its budget, especially during the De Blasio years, they've had some very good tax years, but De Blasio administration has spent much of that money. It's increased the budget by about 23, $24 billion over its tenure. One of the things that it did is it basically expanded the size of government added 30,000 new workers to New York City.

Steven Malanga:

Now that's really unprecedented since the aftermath of the fiscal crisis when the city had fired so many people and they started adding people back, but since then, we've never seen anything like this. 30,000 people, all of those people are now receiving those promises, those new people that everybody else is receiving in the pension system and for the retiring benefits, as well as receiving the benefits right now for instance for healthcare, which is very generous in New York City.

Michael Hendrix:

I'll just note as it stands, I believe as of 2018, maybe it's 2019, it was 2018. Every single public worker in New York City that earns $100,000 or more now accounts for every single dime taxpayers pay in are the personal income tax in New York City. It's just astounding. That's just the base pay.

Steven Malanga:

Another way of thinking about this as if you take all the city's debt and not all debt in cities in any way is bad. You pay for capital improvements through debt, but New York City uses debt much more than a lot of other cities to make capital improvements. Many cities kind of split it between current revenues and debt.

Steven Malanga:

But if you take all the debt that the payments that the city is making right now, including bonded debt, including the amount of money that they pay into the pension system, which includes both for current workers, but also for the debt that's there and also now for those retiree healthcare benefits, remember Sheila said that essentially, we're funding them at a pay as you go basis. What that means is we haven't put aside very much money, almost nothing while these people were working and that they're retired, we have to take the money out of the current budget.

Steven Malanga:

And how much is that? It's about two and a half million dollars. If you take all that money, we're getting to the point where about 20% of the New York City budget is simply going to make debt payments, to pay legacy costs and debt payments. If you count the fact that most federal funding that we get in state funding doesn't allow us to pay off debt. That's not about debt. That if you just account for what the city tax collections are, it's probably about a third of tax collections are actually going towards debt now, and that's going to continue rising. It crowds out other spending. We have a situation where in the pandemic there were tremendous needs and it accelerated a budget problem that the city was already emerging in the city.

Steven Malanga:

You have all these different needs, but you have these legacy costs that don't go away and so, so much of your budgets, like the City of Chicago is another good example. Their pension system is in such bad shape that all of their property taxes are not enough to cover the pension payments. That's where we're heading in New York.

Steven Malanga:

What was years ago this question will? How is it affecting our budgets? Because one of the reasons we got into trouble because the politicians could make these promises and immediately it didn't show up on the budgets. It's now on the budgets and you can see it in the New York City budget, and you can't get away from that. So that creates a crowd out where the revenues that are coming in, the people are paying now. Some of those, a good portion of their revenues aren't going for anything. That's going to give you services. It's actually going to essentially pay off these obligations that we've incurred over the years.

Michael Hendrix:

That's really where taxpayers may initially feel the pinch from these obligations is when they begin to crowd out other basic services that they've come to rely upon from the city.

Steven Malanga:

But the thing is they often don't realize that's what's happening, that it's pensions or these unfunded OPEB liabilities or even just bad debt that's incurred not to build a new school, but that's just incurred to funneled into new operating revenues that... These are complex subjects, but let's just bad debt. I actually did a piece once about this saying when you see a tax increases, think pensions.

Steven Malanga:

But this piece in the Wall Street Journal, it was about cities and around the country, which were raising taxes and saying they were raising taxes because they wanted affordable housing or they wanted a new, some kind of new jobs program. But in the end, when you looked at how much they were paying to pay off just their pension debt, you realize that the tax increases wouldn't have been necessary if they had been properly funding their pensions.

Michael Hendrix:

Great. So inevitably, that's a fantastic point. Inevitably, when you think about Lee's long-term obligations, you also begin to think long-term generally not just in years, but maybe decades. Talk to us just for a moment about any kind of long-term headwinds New York City may be facing in terms of growth or demographics or whatever else you think of that may harm, hinder, or even help New York City's ability to pay these debts.

Steven Malanga:

Well, if this were 2019, I would say, of course, that the cities, the headwinds were pretty good, but that I would still have been worried because essentially what had happened is the administration had taken the good years and used up all the money. When the pandemic hit for instance, we didn't have very much in terms of budget reserves in New York City. Other places had far more.

Steven Malanga:

In addition to that, when the pandemic hit, what the city did was it dipped into this very small trust fund that it has to pay the OPEB liabilities, which are, it's like 3% of the actual liabilities, but at least it was something. And it just took the money out of that to help cover the budget deficit. Essentially what happened is we had used up the good times assuming that either they were never going to go away, which of course, they always go away and that's the cyclical nature of the economy, but we had used them up.

Steven Malanga:

Now we have the pandemic and of course what happens is you can't even make accurate predictions about the direction of the city's economy anymore because there are so many unknowables, including how many workers are actually ever going to come back into those office towers that house the kind of jobs that generate the income.

Steven Malanga:

When you consider that New Jersey and Connecticut are now joining a lawsuit launched by New Hampshire against Massachusetts, New Jersey and Connecticut to recapture essentially the income taxes that were being paid by New Jersey and Connecticut residents, billions of dollars to New York State and it was being funneled into New York City, that New Jersey and Connecticut now wants those taxes. That gives you an idea of what happens if even a portion of those people who were working in the city never returned.

Michael Hendrix:

We have a question from the audience and please everyone also feel free to dive in with your questions. This is a good one. Alan asks, why isn't the lack of current funding for retiree medical and pension benefits a violation of the constitutional requirement to balance the budget. Steve, do you have thoughts on that?

Steven Malanga:

Yeah, sure. I can take that. Here's the thing, the same thing is true of pensions, essentially. Because what happens-

Steven Malanga:

Hello?

Michael Hendrix:

It's okay, go ahead, Steve.

Steven Malanga:

Oh, okay. Essentially what happens even with pensions is that you're making these promises in the future. With pensions in particular, as a Sheila can talk about, you can, if you will use formulas that are highly malleable, if you will, in the public sector to essentially make the case that you are properly funding these in the future, because you're funding a small percentage of them. Since they're not impacting your budget right now, there's no violation.

Steven Malanga:

The courts unfortunately have ruled in New York and other states that these don't constitute necessarily part of the operating budget because what you need to do is you need to essentially... in order to fund future benefits, you need to operate on a formula. And essentially you can manipulate the formula, so it looks like what you're doing is providing some funding.

Steven Malanga:

It's a big problem. It's a giant loophole and it exists and I'm trading it to Sheila's territory now, because-

Michael Hendrix:

Right. This is actually a great cue for-

Steven Malanga:

... GASB, the Government Accounting Standards Board, which is unfortunately dominated by municipal officials has left large loopholes that don't exist in the private sector because the Financial Accounting Standards Board which crafts these kinds of standards for publicly held private companies enforces them in a different way than what you have in the public sector.

Michael Hendrix:

All right. Sheila, let me turn you.

Sheila A. Weinberg:

What I would say is that the reason that they don't include pension and retiree healthcare liabilities in the budgets as the employees are earning them as the benefits are incurred, expenses are incurred by the government is because they use political math to calculate the budget instead of real math. The people in New York City always tout that their budgets are done according to these gold standards of generally accepted accounting principles.

Sheila A. Weinberg:

Well, most people as Steve mentioned knows FASB, which does set pretty good standards for corporations, but state and local governments of financial accounting standards are set by... They didn't want to live by the same rules as corporations. The governments are different. We can't go out of business. Well, good luck with that. We have governments going out of business, and created their own board and this board allows these budget shenanigans to happen.

Sheila A. Weinberg:

They can balance their budget by borrowing money. They can balance their budget by not funding their pension and retiree healthcare benefits properly. They can move money around. I think it's really hurting our representative forms of governments, because people are assuming that when an elected official tells me that they're balancing their budget, they must be living within their means, but they're not. And they've put us billions of dollars in debt.

Sheila A. Weinberg:

Now in New York City and other cities we're unfortunately have to deal with it now, especially during the pandemic when crises are bad like there were other... I'll stop in a second. This is just one of my pet peeves, but there are governments like California was saying they were running surpluses before the crisis happened. But again, it's all because they calculate political math and they don't include all the costs and they've fudged the numbers on revenue estimates also.

Tom Kozlik:

Michael,-

Michael Hendrix:

Tom.

Tom Kozlik:

... I wrote about this towards the end of 2019 at a piece called Barriers to Fully Funding Public Pensions and I described it largely being a problem with asymmetric information. Really what I was talking about is exactly what is it Steven, Sheila they're talking about. And that there's a discount rate typically close to about 6% that a lot of state local governments use and what they should be using is something closer to three or even lower.

Tom Kozlik:

That doesn't sound like a big difference, but using the 3% or lower versus the 6% in some cases could very well double the amount of money that a state or a local government would have to put in their pension plan on an annual basis, so it makes it a lot more expensive. So these kind of optimistic actuarial assumptions is that they are absolutely the number one reason of why it is that pension funding levels are so low and, or liabilities are so high.

Sheila A. Weinberg:

Well, and also politicians, they choose to do this too. Now, if I'm an elected official and I want to get reelected. If I say, "Hey, I'm going to put money into the pension plan or the OPEB plan. That's not very popular, but if I offer streets or bridges or other government services or benefits, that might get me reelected. Or if they had to truly balance the budget and fund these properly and go ahead and raise taxes, that might not get them elected. So it's just easier to use this political math that are generally accepted accounting principles that, Michael we can talk about now, how to change that or I can do that later.

Michael Hendrix:

Let's pivot for just a moment, because we've talked about the size of the obligations, but we haven't really talked much about the obligations themselves. Sheila, maybe you have some thoughts on this. How generous is New York City with its public workers?

Sheila A. Weinberg:

Well, New York City is so generous that when the Affordable Care Act had a Cadillac Tax for plans that were overgenerous, New York City was having to pay a penalty, an extra tax for these benefits. So they're obviously more generous. They're Cadillac of plan, obviously. And Steve might know more about the specifics of items that they get. Usually in a government, they don't just get the standard, they get dental, they get eye glasses, they get disability, they get life insurance. There's tons more.

Michael Hendrix:

And by some measures what New York City offers in healthcare, what we call these OPEB benefits are perhaps the most generous in the countries. Is that right, Steve?

Steven Malanga:

Yes, even for the public sector. Right now, the vast majority of city employees pay almost nothing towards their healthcare. Even one study done by the Citizens Budget Commission, which compared it to other big cities, that even other big cities and other cities in Upstate New York, for instance, employees are now paying contributing a quarter of their premiums. The vast majority of New York City pay nothing, though, that's just the tip of the iceberg.

Steven Malanga:

In addition to that, this retiree healthcare that Sheila was talking about, all of those retirees pay virtually nothing and they get not only for themselves, but for their spouses also. And because so many retirees in the public sector retire before they're eligible for Medicare, which is of course, the federal program for all of us, many of these retirees, the city has to essentially buy an entire package of healthcare equal to what a regular worker is earning.

Steven Malanga:

This is one of the reasons why the retiree health care costs alone are about $2.5 billion in New York City and that's on top of the four, five or $6 billion that we're paying for healthcare for the actual workforce itself. Then when you get to the pensions, the issue is you have a defined benefit pension system. We know the difference between that. It's what we do is we promise workers a certain percentage of their salary.

Steven Malanga:

When they retire based on years of service and so forth, though, that formula has nothing to do with how much money we actually can save for them or is saved for them or how the stock market does. And part of the problem before Tom was talking about the discount rate is simple and why a 6% rate or a 7% rate, which is what is often use now is so misleading and the simple way of understanding this is these pensions are guaranteed.

Steven Malanga:

Because they're guaranteed in the private sector, you're supposed to use a much lower rate that hasn't much, much less risk to it because they're guaranteed. Instead, what we're using is a rate that's very difficult to achieve in this environment right now and this goes back to the idea of low interest rates. When you have a low interest rate environment, the only way to achieve even the investment returns that they project is by putting money in risky investments.

Steven Malanga:

And so you have a guaranteed benefit, but they are using very risky assumptions for funding that guaranteed benefit and that their result over 20 or 30 years is big debts.

Tom Kozlik:

And usually what happens when you invest in riskier investments, the statistics and the analysis finds that oftentimes the returns are actually lower.

Steven Malanga:

Right. Right. It'd be better off. You would be better off in, what's the term I'm looking for, Tom? Just index funds.

Tom Kozlik:

Well, just an S&P index fund. There's a reason why it is that Warren buffet, when he talks to individual investors, he says, "Buy in or invest in a S&P index fund." If you can't buy Berkshire Hathaway at a certain level and you know that there is some truth to that because what ends up happening is if you continue to put money into an investment like that over time, that's going to grow to a pretty substantial number.

Tom Kozlik:

Now, what happens and if you kind of flip that, that's what it is that pensions are. That's why it is that these liabilities have run up to the levels that they have is because they are being promised or guaranteed at a certain level over a certain amount of time. And that number can change if you change that discount rate, but it doesn't necessarily change the fact that those bills are going to come due at a certain point.

Steven Malanga:

Michael-

Michael Hendrix:

Sheila.

Sheila A. Weinberg:

Oh I would say, they're coming due now. They're coming due now. I looked at the 2020 financial report. $9 billion is going to fund the pensions every year, plus another $2 billion to fund the retiree healthcare benefits. More than 10% of the general revenue of the city are going for these costs that again, if you really had balanced the budget in the past, wouldn't be exist right now. The assets would be set aside.

Sheila A. Weinberg:

Another way to look at it, is I looked at the pension contributions to the police and fire of funds. The police fund for every dollar that you pay in salary, they're paying more than 50 cents just to the pensions and the firefighters it's even worse, they're paying for every dollar that they pay. They pay another dollar into the pensions. These aren't costs and this isn't something that's happening in the future. And we're going to have to, this is stuff that's affecting the budget right now.

Michael Hendrix:

There's a couple of questions just came in. One from David is the value of healthcare for active workers. Taxable toward an individual's income tax?

Steven Malanga:

No.

Michael Hendrix:

No.

Steven Malanga:

No, no. Although the Cadillac Tax is an idea, basically. The Cadillac Tax was initiated during Obamacare in order to discourage very expensive plans. They were looking at basically wealthy people in corporations that essentially give a really beautiful, really pricey healthcare packages to their executives, but what they wound up trapping were a lot of public sector healthcare plans because they're so generous.

Sheila A. Weinberg:

Another thing to worry about as Steve was mentioning the retirement age. So he was saying that, well, when they retire early, then the government has to pay. They have to pay their healthcare between the time they retire and they get onto Medicare. Well, one of the fixes for Medicare is to raise the retirement age on Medicare.

Sheila A. Weinberg:

Well, that's going to go ahead and add all additional liabilities to all these local governments, including New York City and states, because they're going to have to fund for retiree healthcare benefits from the time they retire up to that new bumped up age group.

Sheila A. Weinberg:

So that might be one of the reasons that you don't get Medicare and Social Security reforms that raised the retirement age is because the city and states are like, "Don't add more liability to what we already have."

Michael Hendrix:

That's a great point. We're already seeing proposals being raised out there, I think from the People's Policy Project, for instance, to just provide state and local aid by nationalizing these health care obligations. When we've also seen people saying that Medicare for all is a solution to this, that it also doesn't seem like a solution. It doesn't solve any of the fundamental challenges behind these healthcare plans. It just lifts the burden from one level of government to another. Is that right?

Steven Malanga:

Well-

Sheila A. Weinberg:

We did 75 most populated cities in our study. There are 12 cities that actually have true surpluses. And there are also states when we do the study of the-

Michael Hendrix:

Irvine, California, right? Being number one.

Sheila A. Weinberg:

Yeah, they're number one. So there are also states, I think there was 12 states that have actual surpluses. This is all going in before the crisis, but so why should somebody in Utah, North Dakota, South Dakota these governments that are doing have lived fiscally responsible, why should those taxpayers be on the hook to fund New York City's, Chicago's, Illinois' problems?

Michael Hendrix:

It's a fair point.

Steven Malanga:

That's actually-

Michael Hendrix:

There's a great question from Paul here and I want to make sure we touch on it. He says, "Look, maybe you're preaching to the choir here, not to make a political charge of anybody's individual stance here. But what would somebody, he said, "Left or left of center make of these healthcare obligations and pension obligations? You don't have to think in terms of partisanship or party, but is there any sort of disagreement here? Do people-

Sheila A. Weinberg:

Oh, no. No-

Michael Hendrix:

... look at in different ways than maybe you do?

Sheila A. Weinberg:

Yeah. These benefits have been promised to these people. They have counted on them and we can debate whether they're generous or not. But, so all of a sudden, you're going to take away... As an employee, I didn't save for my retirement because I had a deal with the city to fund them, and now all of a sudden you're taking them away? But the reason that they have to is because they didn't fund them as they went along.

Sheila A. Weinberg:

But there is a discussion of like, well, to keep the employees happy and maybe their unions happy, they offered these benefits that again, didn't have to be included in the budget. The people got reelected and the employees, especially here in Illinois where these benefits, not just the pensions are constitutionally guaranteed, the retiree healthcare benefits are guaranteed. So they're just like, "Well, if they don't fund them, eventually, they still have... They're guaranteed, so they're going to have to pay him.

Steven Malanga:

Also Michael-

Michael Hendrix:

And during COVID, they were also classed some as essential workers and that's been another argument I've seen. Steve, go ahead.

Steven Malanga:

What I was going to say in answer to this, is that on a purely intellectual level, one of the reasons we argue from the point of view of looking at what crowd out is accomplishing in places like Chicago and New York is particularly because we're saying to people left of center, you have this agenda you want to fund, we can debate whether we agree with, let's say your social welfare agenda, but you want to fund it, but this is going to undermine that.

Steven Malanga:

There are unquestionably left of center, politicians around America who have been pension reform advocates for this reason. However, however, the public sector unions who have negotiated these benefits are political allies of many people on the left because they favor bigger government too and that I think undermined some of this discussion. But again, there are mayors and governors left the center who have been advocates for the very same reason that you suggest and that is that it is crowding out other essential spending.

Michael Hendrix:

I want to get to at least one other question and then I have a few more that I want to share with you. So Alan also asked, what would be your take on a taxpayer proposal that basically holds public servants to only making promises for retirement and healthcare that the private sector would offer? So no gold-plated Cadillac level offerings, just with the private sector offers. What do you make of that?

Steven Malanga:

Well-

Michael Hendrix:

Steve, You're smiling.

Steven Malanga:

I'm smiling because essentially when we do many of these studies, we compare them with, let's say fortune 500 company, employees of fortune 500 companies. New Jersey did a big study with their pension, a bipartisan pension commission did a big study and they said, "To save money, they're had stayed in a lot of trouble." We could save billions of dollars, if we made our healthcare plan, commensurate with what fortune 500 companies are offering their employees in the state. That was the comparison. The problem is politically, it never went anywhere, so that's a great idea. And those comparisons are very helpful to let the average person understand what the problem is, but politically, they're not going to go anywhere.

Steven Malanga:

I'll tell you something. Over the years at the Manhattan Institute, we have polled New York City folks. I've seen similar polls in Chicago, for instance, asking them whether we think that the city should meet these obligations as they grow. And people are vaguely aware now there's a problem. The majority of people say yes. When we then ask them the next question, would you be willing to pay higher taxes to fund these obligations? They overwhelmingly said, no.

Sheila A. Weinberg:

I just saw a survey yesterday in Illinois, where if they pay these benefits, but they crowd out other services and benefits, should they therefore be cut? And the overwhelmingly it was, yes, these should be cut if they're crowding out essential services and benefits. It reminds me of we. The years ago we gave the truth and accounting award to a Utah because they have... In addition to having quotas a taxpayer surplus, they also do really good budgeting practices.

Sheila A. Weinberg:

I got to present that to the budget director of Utah and I said, "You know what? People always ask me what you guys are doing differently than what other state and local governments are doing." Facetiously, she said, "Well, we do something here, very unusual. We only promise the benefits and services that we can afford." And Steve saying that is so politically unpopular in states like New York and Illinois. But isn't that the way it should be, that they should only... And that's why we don't just have balanced budget requirements just for the fun of it. We have them so that there aren't unsustainable debt and that they don't over promise, but also for accountability.

Sheila A. Weinberg:

There's a great quote by treasury, former treasury official, said, "The politicians shouldn't have the ability to spend," i.e. going to get a vote without the pain of taxing. i.e. they're going to lose a vote and you need to keep that in check so that they are only promising and providing services up to the point of what people are willing to pay for, because if they could provide these services and benefits that are higher, of course, they're going to get reelected. The taxpayers are getting a good deal. We need to keep these in line, otherwise we get uncontrollable debt like we have in Illinois and other states, and also in New York.

Tom Kozlik:

Michael, I'd add to that, that the crowding out theme that both Steve and Sheila are talking about is very real from my standpoint. I see it when I look at the amount of overall new money debt that's being sold by state and local governments at the kind of the highest level. I'm going to share just anecdotal evidence. There was a top-five school district in a Northeastern state who I was very familiar with the financial situation.

Tom Kozlik:

I was talking to the CFO of the school district and I asked him why they hadn't sold any debt for almost 10 years. And he said that the amount of money that they would be putting towards additional the potential debt service is going to the increases in pension liabilities and pension costs that they're having to pay every year.

Michael Hendrix:

By the way, there's a great piece in the New York Times about some of the more recent financial shenanigans that cities are taking to effectively sell off some of their real estate in order to pay these pension obligations. It's really quite, quite fascinating. Scary. Tom, I want to stick with you. How is the bond market however you want to class it, looking at these obligations? Are there signs of worry? Because honestly it doesn't seem that way right now.

Michael Hendrix:

Money is freely available in muni bond market. The Fed's ready to lend money. They've lent through the municipal lending facility. They have something like 500 billion to tap into. They've now lent to the MTA and the State of Illinois. It seems like lenders aren't worried. Why should we be?

Tom Kozlik:

Let me break that down into two groups, the first being kind of investors themselves and not a second the rating agencies. Because I think that's important because I think that one of the reasons that investors act the way that they do partially is because of how it is at the ready and she's has been treating this topic. I think that in general, the rating agencies see this more, especially pensions and I'm mostly going to be talking about pensions here.

Tom Kozlik:

The rating agencies treat this a little more like a long-term liability, a medium or long-term liability. I think that the way that Moody's and the work that Moody's has been what they've been doing with their adjusted net pension liability and how they use that in their metrics is probably a little more accurate than the way that the other rating end she's treat these liabilities. But that being said, the Moody's ratings and the Moody's treatment is not seen as favorably from some state local governments as a result.

Tom Kozlik:

That being said the kind of pension math that I was laying out in the beginning of our webinar is much more in line with how Moody's treats these liabilities. And as a result, I think that when investors then start to migrating to looking at and or using other ratings that might not necessarily be as accurately factoring in some of these liabilities, that I agree with, both Steve and Sheila in that it is much more of a short-term issue than what a lot of folks are contemplating.

Tom Kozlik:

For that reason, I think that... And it might not necessarily be today or this month or even this year or next year that the real bills are real costs come home, but it's going to happen soon.

Sheila A. Weinberg:

I think there is a detrimental effect on the market. Why did they have to open up the federal reserve? Why did the federal reserve, because they were nervous that the bond market was going to collapse during this time. Illinois could not borrow any money anywhere else, so that's where they had to go to. When we first started doing the financial state of the states and the financial state of the cities, we did not include a grade in our study.

Sheila A. Weinberg:

But we did a seminar on the rating agencies and found that unlike what most people think, most people think a government rating, a bond rating is looking at the financial condition of our government. No, that's not what it is. It is the risk that the bonds are going to be paid. And the bonds dollars usually come out of the first tax dollars, so it's usually very highly likely that these bonds are going to be paid.

Sheila A. Weinberg:

The pension and retiree healthcare, those are... I've heard in that when we did the seminar a few years ago, it was less than 10% was consideration of bond and OPEB debt. The credit ratings, again, when people... We approach governments like Delaware, I think we gave them an F and the people are like, "Well, how can you do that? We get a grade of a AAA from the bond ratings. Well, no, but those aren't looking at the overall financial condition. They're just looking at the risks that the bonds are going to get paid.

Michael Hendrix:

We've looked at the challenges, we've looked at how generous New York City is. Steve turning to you for the final, maybe the critical part of our conversation. So what do we do about this? Some of this isn't exactly rocket science. Steve, you've been talking about reform ideas for a long time. What's the low hanging fruit for reform. If you were advising and mayoral candidate right now for New York City, what would you tell them is the low hanging fruit reform, keeping politics in mind for curbing these pension and healthcare costs. And then maybe we can think big, big picture and dream, but what really could be?

Steven Malanga:

Well, when you talk about low-hanging fruit, you think about the things that are especially generous and that aren't protected by something that we haven't discussed here, but there was a constitutional amendment in New York that guarantees pensions. Now, the guarantee itself is not unusual. Anybody who's earning pension credits, you can't just take it away from them. What new York's constitution says and the way it's been interpreted is that once you're in the pension system, the government can never reduce the rate at which you earn pension credits for your entire time in the system. So we can only save money by changing the pension system for new workers and that saves money very, very slowly. It's a very, very, very high standard.

Steven Malanga:

Among other things however, though, there are things that fall outside of that standard. Now it's all about politics. The reason these things haven't been changed is because the unions are so powerful, but I'll give you an example. The uniform service workers in New York for years have been getting a bonus of like $12,000 over a year. It was originally supposed to be back when the pension system had a surplus, which is a fiction anyway because you're supposed to... The surplus is supposed to guard you against the times when the market dies.

Steven Malanga:

But it was originally supposed to be for that, but it's been basically just been institutionalized so that every year we're giving this and it comes just like... it adds like like a billion dollars to the pension debt every year. That's the kind of thing that goes. Another thing it adds about 500,000 a million dollars. Another thing for instance, though, is that we instituted to New York a savings plan for workers in addition to pensions.

Steven Malanga:

What do we mean by a savings plan? Well, we encourage them to save their own money towards retirement to pre-tax. That's a great idea. Except we guaranteed that all that money they put in gets a 7% return. Don't laugh, right? You can't find a 7% return guaranteed anywhere, particularly given what interest rates are like right now, but we guaranteed that costs the city about a billion dollars a year. There's no reasons for this. Nobody has an employee self savings plan.

Steven Malanga:

Then we talk about asking retirees to make a contribution towards their health care. It's unprecedented really to have retirees who are getting complete healthcare. You're talking about hundreds of millions of dollars to saving there. I've just enunciated to you what amounts to several billion dollars of SIGs. That's without even touching the pension system.

Steven Malanga:

The other thing about the pension system of course, is that the defined benefit plan is a very high risk. And over the years there have been changes to the system, even going back to the seventies because of the financial crisis, where we changed the system for new employees, and that savings started to accrue, but then because the system still exists, we just went back and eliminated that and put them back into the more expensive system when times were good. Again, another political move.

Steven Malanga:

This is one of the reasons why we've said over and over again, going back to this issue of defined benefit pension plans are essentially are guaranteed and therefore raise tremendous risks for taxpayers the kind of risk that we've been talking about. That's why we have advocated going to the defined contribution system. And it's not unprecedented in New York State.

Steven Malanga:

In New York State, the state universities, SUNY and CUNY, they have the teacher's annuity system. They're defined, very generous, defined contribution plans. You can have a plan, which is extremely generous. You could put away. I think in Utah, we were talking about Utah. They have a defined contribution plan where they put away up to 10% of a worker's salary. That's a very generous, certainly by the terms of the in the private sector.

Steven Malanga:

That's a very generous plan, but it's still much cheaper than what we're paying for these defined benefit plans, where right now I believe it's to fund the system. We're essentially paying the equivalent of a third of salary. So you take whatever salaries we are, and we have to add a third of that just to fund the system.

Steven Malanga:

We could devise a very generous, defined contribution plan and it would have the benefits of portability, which is actually very important because about 40 to 50% of all public sector workers don't stay in the public sector or they get out of there, they change, go to other cities and the defined benefit system accrues benefits very slowly for them until they're basically been in the system for 15 to 20 years.

Steven Malanga:

So if you're going to work for the public sector and you're not even sure you're going to stay or you're a young person, you really get the raw end of the deal with the defined benefit plan and the contributions becomes much better.

Michael Hendrix:

You raised two points that I don't think are raised enough. One is that you can simply compare what New York City is offering in benefits to what New York State offers. And say, if what a state professor gets in terms of benefits is good enough for a state professor, why is it not good enough for a local teacher? And you can say the same for police, for state troopers, or you name it.

Michael Hendrix:

When you put it that way, it seems like New York City is being perhaps a little too generous than what it needs to be to otherwise attract talent. And then in terms of talent, it seems hard to attract good talent when you have to work sometimes decades to be able to get any sort of a stake in this generous retirement system.

Michael Hendrix:

If you can offer a stake in a system, that's also relatively generous, still, perhaps a defined contribution system or something akin to that. Then maybe it will be easier to hire talent, especially young talent that may be more mobile. Tom, in the time we have, I want to turn to you to. What have you seen works to curb these costs in other jurisdictions while also staying true to promises?

Tom Kozlik:

So I actually made a couple of notes here about potential pension funding solutions. The first paydown on fronted obligations over time, which is expensive and that's one of the reasons why it's not happening. Two, folks could renegotiate a pension debt, which is not likely to happen. Number three, it could be restructured as part of some kind of insolvency plan, mostly that's not legal and it's definitely not a politically appealing. Four, they could pay out pensions with pension obligation bonds.

Tom Kozlik:

There are some negatives to that. It fixes out that payment, which in effect could make it a little more expensive and there are also other market risks where there is concerned. Or a final option is a federal bailout, which is also not likely to happen. And so the answer to the question is that brings us back to why it is that we are where we are. It brings us back to why it is that liabilities continue to rise and funding levels continue to fall.

Michael Hendrix:

Sheila.

Sheila A. Weinberg:

I would tie that to political math. Let's get rid of the political math of New York. When they went bankrupt, went ahead and instituted this generally accepted accounting principles, but there's deep flaws in that. And there is a unique opportunity right now, a week from today as the end date for GASB to take comments from people to say, get rid of this bad accounting.

Sheila A. Weinberg:

You can go to our Truth in Accounting desk as .org/fact, F-A-C-T, and find out more information. We have where you can click and send a comment letter to GASB, just a simple email to require them to get rid of this bad accounting that allows the city to pretend that they're balancing their budget while going deeper and deeper and deeper and deeper and deeper into debt.

Michael Hendrix:

Well, and that bright note, Sheila, Tom, Steve, it's great talking with you and thanks to our audience. Please stay in touch, subscribe and support us and also tune in next time. This is an important conversation. It's certainly not going to be the last time, I think that we'll have this conversation. But hopefully under brighter circumstances with some concrete reforms that we can discuss, fingers crossed. Thank you again and stay in touch. Appreciate it.

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