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New York's Pension Peril


New York's Pension Peril

June 8, 2006
Public SectorOther

Mayor Bloomberg has opened negotiations with the city's largest union by asking for pension concessions like those rejected by transit workers before their walkout in December.

The potential implications go far beyond the union in question, District Council 37 of the American Federation of State, County and Municipal Employees. Pension benefits for state and municipal workers throughout New York are set by state law, not by collective bargaining. By asking DC 37 to support a change in benefits, Bloomberg is aiming to put pension reform on a track that ultimately must run through Albany.

It's about time. As the nearby chart shows, the city's pension costs are approaching four times the average level for the 1990s. But pensions are only part of Gotham's massive and mounting long term liability for employee compensation.

Other post employment employee benefits, including health insurance for retirees, now cost the city $1.4 billion annually—and within a few years, new accounting rules are likely to reveal a long term unfunded liability in the neighborhood of $40 to $50 billion. That's why Bloomberg wants to set aside $2 billion in a trust solely for retiree health benefits; it not only goes down well with bond raters, but it signals the unions that they've got to help the city reduce costs.

Expensive by comparison with counterparts in the private sector, the 100,000 maintenance workers, clerks and technicians who belong to DC 37 are cheap by city standards: Their salaries average less than $30,000.

But the pension and fringe-benefit load in agencies where they are concentrated adds 47 to wages, according to Bloomberg's latest budget. Education Department employees are more expensive, with a benefit load equivalent to 52 percent of salary.

For uniformed workers—who can retire in their 40s with "half-pay" pensions padded in many cases by overtime and special supplements—the cost is much higher. The pension fringe load is 72 percent of salaries in the Sanitation Department, 74 percent in the Correction Department, 93 percent in the Police Department and 107 percent in the Fire Department.

To reduce pension costs for future workers, Bloomberg's chief labor negotiator reportedly has asked DC 37 to go along with raising the retirement age from 55 to 62, requiring all employees to contribute to their pensions throughout their careers, and slightly reducing benefits for long-term employees.

These are very similar to the changes that the Metropolitan Transportation Authority proposed in last year's contract talks with Local 100 of the Transit Workers' Union. As it happened, the TWU had precisely the opposite in mind: a further reduction in the retirement age, to 50. Union anger over the MTA's insistence on confronting the pension issue was supposedly among the issues that precipitated the disastrous strike.

MTA management ultimately dropped the pension proposal—but the transit talks still represented something of a turning point, For the first time since the 1970s fiscal crisis, a high profile public sector employer actually tried to reverse the growth in public pension benefits.

Compared to state officials and his sheepish fellow mayors and county executives around the state, Bloomberg looks like a radical agent of change. Yet what he is seeking from DC 37 doesn't go nearly far enough to reform New York's outmoded, needlessly expensive—and ultimately inequitable public pension system.

A far better deal, for workers as well as taxpayers, would be to offer DC 37 members the chance to shift from a guaranteed "defined benefit" pension model to the 401(k)-style "defined contribution" plan that is; the norm in the private sector. To be sure, this would involve a fundamental shift of financial risk from taxpayers to workers. But in the process, workers would gain a portable account that they own and control—on the same basis as the better paid professors at CUNY, which has had a savings based retirement plan for more than 40 years.

While such a change would not quickly reverse the recent runup in citywide pension costs, it would bring significant reductions (compared to a continuation of the existing system) within 10 years.

Such reforms are already law in some states, including mandatory defined-contribution plans (Michigan and Alaska), and expanded defined-contributions options (Florida and Colorado). The idea is now spreading to Massachusetts, where Lt-Gov. Kerry Healey (who wants to run for governor) this week will propose a sweeping overhaul of the state retirement system.

Because New York's Constitution guarantees pension benefits for all current employees, the debate over pension reform is really about the appropriate mix of compensation for the next generation of government workers—and the impact they will have on state and local finances. .By putting the issue on the table now, Bloomberg is at least keeping alive the opportunity for New York's next governor to push the kind of pension reform the state and city really need.