Pensions, Sunny-side Down
Mayor Bloomberg’s economic capo, Deputy Mayor Robert Steel, presented the administration’s case for pension reform this morning at a breakfast put on by the Citizen’s Budget Commission. Considering CBC and the mayor’s stance on city pensions, the gist of the forty-minute talk wasn’t a surprise.
The city’s pensions were unsustainable. Their costs had risen seven fold and now represent nearly 13 percent of the city’s budget. Only education spending costs the city more. And the big problem, said Steel, isn’t that the fund hasn’t performing well enough—it’s that we’ve promised more than we can cover.
“Pensions are to the City of New York what entitlement reform is to the federal government,” Steel said. “These are difficult, hard issues that require political risks to be taken to make the hard choices that we need.”
A New Tier
If these hard choices aren’t made, he warned, pension costs will continue to eat up city dollars, future mayors to make choices between pension payments and, say, hiring new teachers or paving roads. The solution Steel offered up was the same pension reform plan Governor Cuomo laid out last month—a raise in retirement age, a higher level of individual contributions, and no padding of salary with overtime, among many things. These changes, though, would only apply to newly hired workers through the creation of a new pension level, Tier VI.
Mayor Bloomberg had initially soughtto return to the city its ability to negotiate future pension benefits, as it does salaries, to forge the new tier benefit on its own. During the city’s dark days in the 1970s, the state took control of the then-bankrupt city’s negotiation with unions over pension benefits. The mayor, based on Steel’s speech, appears to have decided to fight that fight another day.
While Steel cast the situation as dire and urgent, not all city officials are ringing the pension alarm. In fact, the city’s comptroller, John Liu, put out a report last month that projected the city’s pension costs to slow down drastically. Steel’s talk was in many ways a rebuttal to the comptroller’s math. In fact, Steel directly cautioned against Liu’s suggestions, saying it was a “bad strategy to look at the return of one year” as proof that the future was bright for the city’s pension costs.
The Mayor Vs. The Comptroller
While the comptroller’s report does rely on better investment returns than we’ve seen recently—hard to be worse than the off-the-cliff drop during the recession—it also factors in something the deputy mayor spoke little about: the recently created Tier V pensioners. This tier, which raised the minimum retirement age and increased the amount of personal contributions, was passed in 2009 and became the pension system for new hires at the beginning of 2010.
According to Liu, by 2040 pensions will make up, at most, about 6 percent of the city’s budget—half as much as it does right now. This is a big assumption, considering how far out the projection goes (think back to the years before 2007—who saw the problems in store?) For a short-term analysis, suggested the Independent Budget Commission’s Doug Turetsky, take a look at the mayor’s own fiscal five-year fiscal plan. The pension costs, are marked for this year—fiscal year 2012—at $8.4 billion, as mentioned. The report projects pension costs to rise three percent by 2015, representing a slightly smaller portion of the budget than it does now (see the chart below).
A thirty-year projection it’s not, but Liu’s projections and the mayor’s, at least up to that point, are roughly on the same page. If pensions are to be the bane of the city's existence, Liu and Bloomberg are agreed it won't be in the next three years.
Hedging the Future and Cuomo's Target
That doesn’t mean that Steel’s calls for reform are unfounded. Even as pension costs plateau, Turetsky warned of the relatively high percentage of the budget being gobbled up. This, he warned, was the real rub. “The city's pension contributions are taking up a large portion of city resources. The question is, is it crowding out other things?"
From the mayor’s perspective, it would seem hedging against a future where pension payments could come at the cost of essential city services and development is worth whatever future union members will be giving up in benefits. How that will sit with the state’s powerful public employee unions remains to be seen. But if Governor Cuomo’s interview appearing in the New York Times this morning is indication, the governor is expecting pension reform to be the next legislative trophy he hangs on his office wall.
Office of Management and Budget's June 2011 "Five Year Financial Plan Revenues and Expenditures"