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How to Start Defusing NYC’s Pension Bomb

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How to Start Defusing NYC’s Pension Bomb

New York Post October 28, 2020
Urban PolicyNYCPublic Sector Reform

Gotham’s public-health crisis risks becoming a financial crisis — including by ravaging the underfunded retirement systems promised to public workers. Four essential steps could avert catastrophe.

Even before the crisis, the city had set aside just 2 percent of the savings needed to cover retiree health benefits for city 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.

Now the city’s future revenues are suddenly even less secure. New York City faces a $9 billion, two-year budget shortfall that is compounded by Albany’s own $14.5 billion deficit. Between 15 and 20 percent of Manhattanites were still absent from the city as of this summer, rising to 50 percent in the wealthiest neighborhoods whose tax revenue helps sustain the city’s coffers.

Market losses on the scale of the Great Recession today would mean New York City paying an additional $41.2 billion to make the public pension system whole, according to the city’s Independent Budget Office. And already, the city spent half of its savings for Other Post-Employment Benefits expenses to cover this year’s budget deficits, only worsening its projected $100 billion OPEB ­liability.

The risk that the city’s retirement systems will crowd out other spending priorities, break its promises to retirees and blunt competitiveness is very real. But the options for change are limited, as New York is one of the few states with a constitutional prohibition on amending existing public-employee pension plans, essentially guaranteeing them.

That’s why we propose a four-pronged strategy for reform.

Start with management. The current system wastes a surprising amount on overhead by running five parallel retirement systems, all with their own real estate, redundant staff and extra audits. The IBO estimates that by consolidating them into three funds, “the city could save $20 mill­­ion in the first years, with the savings growing to $41 million by the second year.”

Second, health care. New York City’s liabilities total $132,464 per employee, the highest of any major city in the country. Gotham is also the only city in the country to pay for Medicare Part B premiums, and it’s one of the few employers anywhere to provide full and fully subsidized health coverage for retirees under the age of 65.

Lax enforcement of eligibility rules could mean that many people covered under a spouse’s health plan still receive gold-plated subsidies. Eliminating Medicare Part B subsidies, requiring a half contribution to premiums and making sure retirees take alternative plans when they’re on offer would save more than $1 billion dollars a year, while still ensuring high-quality coverage to municipal retirees.

Then there are New York City’s retirement plans, which should vest faster and have more portability to help the city attract a high-quality workforce, rather than short-changing younger and more mobile talent. The city should transition to a cash-balance system as in Rhode Island, a way to offer affordable benefits to all employees, no matter how long they stay in city government.

For more immediate savings, the city should consider paring back supplemental benefits, which are not constitutionally protected. Each year the city spends more than $1.7 billion giving uniformed retirees a $12,000 bonus, contributing to union annuity funds and guaranteeing a 7 percent return for teachers’ voluntary contributions. All three of these programs should be scaled back or eliminated.

Finally, the city is considering an early retirement program, offering employees full benefits if they retire immediately. The city and state often implement these programs during fiscal crunches, but the impulse to refill the positions that just emptied tends to undermine the whole exercise. This time, the crisis has forced the government to find new efficiencies, while making certain city functions obsolete under social distancing. Any coming initiative must target positions that will not need to be replenished.

Big reforms to the public retirement system are long overdue. Now that savings are desperately needed, there is no excuse not to make them.

This piece originally appeared at the New York Post

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John Hunt is the author of the “Reforming New York City’s Public Retirement System,” a recent report from the Manhattan Institute, where Michael Hendrix is director of state and local policy.

Photo by olegkalina/iStock

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