New York Governor Andrew Cuomo, pressed by critics including Comptroller Thomas DiNapoli, dropped a plan meant to give pension-cost certainty to local officials that may have left the system unable to pay benefits.
An alternative measure agreed to by Cuomo, DiNapoli and lawmakers supplements a way that pensions can choose to defer some payments, allowed by the comptroller since 2010. The new method was included in an accord reached March 20 on a $136.5 billion budget. Lawmakers may begin voting on the spending plan as soon as March 24.
“It is my job to protect the 1 million members of the retirement system, and all New York taxpayers, from irresponsible actions and fiscal gimmicks,” DiNapoli, a Democrat, said yesterday in a statement. He had said that Cuomo’s plan could have left the $150.6 billion system unable to pay benefits because of limits on his ability to raise payment rates should market outcomes fall short of predictions.
Local elected officials, including Syracuse Mayor Stephanie Miner, attacked fellow Democrat Cuomo, 55, after he introduced his January budget proposal with a so-called pension smoothing plan. It also would’ve provided lower employer costs for the first five years. Miner said the changes would only put off dealing with rising retiree costs confronting cities like hers.
Municipalities from Providence, Rhode Island, to San Diego have worked to rein in escalating pension costs. The new measure in the New York budget accord, coupled with the previously permitted deferral mechanism, is meant to ease the effects of increasing retirement obligations as well as a 2 percent annual cap on property-tax increases, DiNapoli said.
“Many cities in the state are desperate to relieve some of this pressure and it appears they have a choice of picking which plan suits them,” Howard Cure, director of municipal-bond research in New York at Evercore Wealth Management LLC, said by e-mail. His firm oversees about $4.5 billion.
The added mechanism lets participants defer part of their payments, making them over a longer time and at a different interest rate than the current system allows. It would be available to local governments outside New York City, as well as school districts and cooperative educational services. It also would be open to public hospitals in Erie, Nassau and Westchester counties.
Participants in the new program can defer part of their annual pension contributions and pay the amount plus interest over 12 years, according to DiNapoli’s office. The borrowing cost would be the equivalent of the yield on 10-year U.S. Treasury notes plus 1 percentage point.
“It seems that they are getting some relief by delaying the payments and assuming a rate of return that may not materialize,” Cure said.
The new system is notable for its addition of schools, which pay their contributions to a separate fund than the one DiNapoli runs, said Bob Megna, Cuomo’s budget director.
“We believe it represents what we were trying to achieve, which was savings for local governments and school districts with some stability while ensuring the fund is protected,” Megna said today by telephone.
Once in the new program, public employers won’t be allowed to leave, under the agreement.
“Local governments must fully weigh the long-term consequences of this new program before electing to participate,” DiNapoli said in the statement.
Under the existing method, deferred payments are spread over 10 years with interest at a rate set by the comptroller, currently 3 percent. In fiscal 2013, 137 local governments deferred $368 million through the program, according to Eric Sumberg, a DiNapoli spokesman, and state budget documents.
The comptroller sets the rates paid into pension funds by local public employers in New York. From fiscal 2010 to 2014, the average of what they owe on every dollar that police and fire department employees earn rose to almost 29 percent from 15 percent, and to 21 percent from 7.4 percent for other workers, according to statements on DiNapoli’s website.
Employer payments have climbed to offset pension investment losses during the worst financial crisis since the Depression. The deferral programs are designed to make the payment amounts more consistent over time and to lower costs in the short-term. Recovering markets are expected to ease fiscal pressures, leading to a leveling off or reduction in payment rates.
The state has one of the nation’s best-funded retirement plans, with about 94 percent of assets needed to pay projected obligations in 2011, fourth-highest, according to Bloomberg Rankings data.
Cuomo wanted to let cities and towns restrain growth in the pension contributions they make for most employees for 25 years, starting at 12 percent of wages.
The governor’s January proposal also would have let governments cash in on savings from a pension overhaul he pushed through last year, raising to 63 from 62 the age at which a new employee can retire with full benefits. Yet those cost reductions won’t show up until the next generation of public workers are hired.
With Cuomo’s proposal dropped, the new mechanism “looks more like what they’re doing right now,” David Hitchcock, the primary New York analyst for Standard & Poor’s, said by telephone. “They’re already amortizing investment losses from during the financial crisis and this is similar.”
The new program wouldn’t be open to the state, and localities that join it wouldn’t be allowed to take part in the 2010 system. The 2010 option requires them to choose to stay in each year.
The new option doesn’t pass muster with Syracuse Mayor Miner.
“We cannot solve the fiscal crisis facing the local governments of New York by borrowing,” Miner said today by e-mail, calling the new plan another form of getting loans to pay current obligations.
“We need the governor to bring all parties to the table and lead a discussion on solving the long-term fiscal health of our municipalities and our state,” she said.