New York state and localities including Westchester County borrowed a record $1.4 billion to cover retirement contributions this year, showing how even the wealthiest communities are struggling to make the payments.
The IOUs to New York’s $161 billion pension fund rose about 22 percent from last year, according to budget documents and data from Comptroller Thomas DiNapoli. The programs let the governments spread out some obligations over as long as 12 years with interest. The state put off $937 million and municipalities $472 million through two programs, one created by DiNapoli in 2010, the other by Governor Andrew Cuomo last year.
Even as Standard & Poor’s is poised to raise the state’s grade to its highest since 1972, rating companies have cut some New York City suburbs, citing the loans as a sign of imbalanced budgets. Westchester, north of New York City, lost its top mark from Moody’s Investors Service in November. In March, Moody’s lowered Suffolk County, home to the Hamptons beach towns, to four steps above junk.
“It’s a one-time shot, and a one-time shot to fill a budget hole is never a positive thing in our minds,” said Chad Farrington, head of municipal research in Boston at Columbia Management Investment Advisors, which oversees $161 billion, including New York debt. “You expect it from weaker credits like Suffolk.”
From California to New York, obligations to retiring workers have strained local finances after pension funds suffered investment losses during the 18-month recession that ended in 2009. As of 2012, there was a gap of more than $1 trillion between promised payments and available funds, according to the Pew Charitable Trusts.
New York’s pension, which covers more than one million state and local-government employees and retirees, had about 90 percent of the cash needed to meet its pledges as of 2012. That made it the sixth-best-funded state plan, according to data compiled by Bloomberg.
To help maintain it, DiNapoli raised governments’ annual contributions. Since fiscal 2010, the average rate they owe on every dollar that police and fire employees earn has almost doubled to 28.9 percent, and almost tripled for other workers to 20.9 percent, according to statements on DiNapoli’s website.
“Pension rates, which spiked due to the recession, remain extremely high,” Morris Peters, a spokesman for Cuomo’s budget division, said by e-mail. “Amortization takes volatility out of the state’s pension contribution costs and helps us maintain stability.”
Moody’s has lowered grades for some localities deferring pension obligations. Last week, Hempstead, a Long Island town of about 750,000, lost its Aaa rating from Moody’s, which cited the IOU program, as it did with Westchester and Suffolk.
“When we look at expenditures, we include full payment of pensions,” said Robert Weber, a Moody’s analyst in New York. “Anybody who enters into these programs will still have structurally imbalanced budgets.”
Rob Astorino, the Westchester County executive who is seeking the Republican nomination for November’s gubernatorial election, said he was “disappointed” with Moody’s move. S&P and Fitch Ratings give top grades to the county, whose median household income of about $81,100 is about $28,000 above the national level, Census data show.
Westchester borrowed $43.5 million from the system this year, up from about $25 million in 2013, after cutting 14 percent of staff in the last four years, according to data from DiNapoli and Astorino.
“It was the best of bad options,” Astorino said. “This is the one we chose as opposed to raising taxes a lot, or decimating departments with layoffs and service cuts.”
Suffolk, with a median household income of about $88,000, deferred about $87 million, more than any of the 134 localities in the programs. Moody’s cut its rating in March one step to A3.
Vanessa Baird-Streeter, a Suffolk spokeswoman, said spreading out pension costs has helped balance combined deficits of close to $530 million since 2011.
Suffolk chose the deferral “because of the fiscal crunch” from the recession and Hurricane Sandy, which struck the region in 2012, she said by phone.
In Suffolk’s $68 million sale of tax-exempt bonds this month, notes maturing in February priced to yield 0.55 percent, or about 0.31 percentage point above benchmark one-year munis, Bloomberg data show.
Hempstead is working to wean itself off the borrowing program, said Kevin Conroy, town comptroller.
“The rising pension costs are impacting any municipal or governmental entity in this state and it has been difficult,” he said.
For New York and its municipalities, the 2014 levels represent the peak as the pension system’s assets have rebounded to an all-time high. For the bill due in 2015, rates will fall to 27.6 percent for police and fire and 20.1 percent for other workers, DiNapoli said in August.
Next year, the state expects to defer about $200 million less than in 2014 and by 2016 it plans to end the practice altogether, budget documents show. Yet, that year the total amount New York pays toward pensions will tally $2.1 billion, up from $1.3 billion in fiscal 2011, partly because of $396 million it owes for previous deferrals, documents show.
“Our employers are looking for some stability and the ability to budget as rates have risen,” Thomas Nitido, deputy comptroller for the New York State and Local Retirement System, said in an e-mail. “Many systems address rising rates by doing things that have long-term consequences and result in underfunding. We believe this more conservative approach to mitigate rate increases is appropriate.”
The borrowing practice hasn’t undermined the state’s standing with Moody’s. The company has the third-most-populous state on positive outlook, and said April 4 that the budget that the Democratic governor and lawmakers passed March 31 is “credit positive” because it restrains spending.
S&P said in August 2012 that two more on-time budgets may warrant New York earning its highest credit rating since 1972. Lawmakers achieved that goal this year with their fourth straight timely spending plan. Both rating companies give New York their third highest rating.
“The fact that they aren’t making the full pension payment is somewhat concerning,” said Guy Davidson, who helps manage $30 billion of local debt as director of munis at AllianceBernstein Holding LP in New York. “But helping offset that is the fact that they have high funding ratios.”
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