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Cost of Pensions Hurts N.Y. Communities
By Jay Gallagher, Albany Bureau
October 10, 2004
![[ photo ]](nycomm3.jpg)
Lisa Sargent of Ogdensburg says that because services in the city had to be cut back to help offset the pension costs, neighborhood vandalism has been more of a problem than usual.
Breen has given birth to four children and has adopted four others while serving as a foster parent for still more.
For the past eight years, her brood has participated in the city's daylong recreational program, which she said kept them busy and entertained for much of the summer.
"Day camp was wonderful for my kids," she said. "It gave them structure and fun. Some of the counselors were like big brothers and sisters to them."
But the city, facing a steep increase in pension costs this year, cut the program, and Breen had to struggle daily to keep her children busy.
"Nothing has hurt us more than the crunch on the retirement system,'' said city parks director Tim Irvine, who also complained that he couldn't buy new equipment needed to maintain the city's green space and baseball diamonds.
Ogdensburg is typical of other communities across the state that are struggling to hold down taxes, maintain services and pay skyrocketing pension bills.
"The explosion in pension costs is by far the most serious issue facing local governments," said Edward Farrell, executive director of the state Conference of Mayors. "It dwarfs everything else."
'Every department was hit'
New York taxpayers may not realize it, but in terms of paying for the retirement benefits of government and education workers, for the past decade or so, they never had it so good.
Although they were paying the highest taxes of any Americans, they were contributing almost nothing toward public-worker pensions. That's about to change: The bill this year and next will grow by more than $2.7 billion.
The pension increases are helping to force cuts in police, parks, health, preschool and other services around the state, as well as raising taxes to the point where some local officials say it's scaring away potential developers who could help revitalize their communities.
"Every department was hit," said Ogdensburg City Manager John Krol, who cut about $242,000 in spending to balance the budget to help offset pension costs that grew from about $29,000 in 2002 to $637,000 next year. "We dipped into reserve funds, cut police and fire. We're cutting back across the board." The city eliminated three of its 32 firefighter positions and two of its 20 police posts along with the recreation cuts.
The police cutbacks mean that in Lisa Sargent's neighborhood near downtown Ogdensburg, vandalism has been more of a problem than usual.
"There have been tire slashings several times a week, broken side mirrors, things like that," the 33-year-old fifth-grade teacher and mother of three said. "A couple of weeks ago, someone stole a wicker chair right off a front porch."
Krol said that in previous years the city would send out police "impact teams" to handle spikes in vandalism, but the budget cutbacks this year made that impossible.
Spelling it out
The pension funds support the state's 432,000 retired public workers outside New York City and 898,000 teachers, firefighters, police officers and other government workers. They guarantee that those who make public service a career will have comfortable incomes when they retire after as little as 20 years on the job. The booming stock market was paying the tab until it tanked.
The Legislature granted extra benefits four years ago when the market was flush. It also cut what workers have to pitch into their retirement accounts.
While last year taxpayers had to kick in the equivalent of 4.5 cents for every dollar a government worker earned, this year it is 12 cents for most workers and 17 cents for police and firefighters. It is due to dip slightly next year because of the stock-market rebound, but it is expected to rise again in later years.
The Legislature tried to ease the pain this year by delaying the payments due from counties and some small cities and towns and allowing them to borrow to put off some of the extra burden as well, temporarily saving them $1.2 billion. But eventually, the costs have to be paid.
The costs are such a burden in part because almost every local government and school district in the state is part of the 83-year-old pension system. (New York City has separate systems.) So taxpayers feel the pinch in their school, town or city, village and county property taxes — in most cases, a triple hit for property owners.
The funds pay out about $8.5 billion annually. The benefits, while large compared to those offered by many private-sector employers, are in line with what other states pay out. All benefits are exempt from both payroll and state income taxes.
The most generous are to police and firefighters, who get half pay (figured on the average of their three highest-earning years) for a minimum of 20 years of service, regardless of their age. The average benefit for police and firefighters who retired last year was $54,330 annually. But half of pensioners, many of whom retired more than a decade ago, get less than $10,000 annually.
Workers other than police and firefighters get 40 percent of their annual pay if they retire after 20 years and are at least 62 years old (55 for the longest-tenured workers). Those retiring last year, many of whom worked more than 20 years, are getting an average of $31,154 as an annual benefit. For teachers, the figure was $47,365 a year.
Workers with 30 years on the public payroll can retire and get 60 percent of their pay at any age.
'A cost of doing business'
A few people collect more than one public pension. For example, 64-year-old state Comptroller Alan Hevesi, who runs the pension system, gets two: one for his years of service in the Legislature and as New York City comptroller, and another for his years as a City University of New York teacher. His total pension benefits, $160,000, are greater than the $151,500 a year he earns as comptroller.
Until the Legislature and Gov. George Pataki in 2000 instituted annual cost-of-living increases (pegged at half the inflation rate, with a maximum of 3 percent and a minimum of 1 percent) the pensions were increased only sporadically by the Legislature.
Pataki and lawmakers also eliminated the 3 percent payment into the fund for employees with more than 10 years of service, saving them (and costing taxpayers) about $200 million a year.
Hevesi is the sole trustee of the employee and police-and-fire pension funds, now worth about $115 billion. He is the country's largest individual investor. The $80 billion state teacher fund is administered by a 10-member unpaid board.
Both funds, like most large pension systems, are invested predominantly in a mix of stocks and bonds, with lesser amounts tied up in real estate, treasury bills and other securities. Their returns generally have followed, or slightly bettered, the performance of the overall market.
The funds have so much money because they are designed to meet all future obligations, rather than just providing money on a pay-as-you-go basis. They are in better financial shape than those funds in some other states, such as Illinois and New Jersey, where the funds have been raided to balance state budgets.
Until the recent stock downturn, the system of pre-funding the pension benefits was a spectacular success for the prior decade.
But now, with the market down and interest rates also low, the funds need more taxpayer cash at what local-government officials say could hardly be a worse time.
"We will experience a whopping 75 percent increase in the amount the town is required to pay as a contribution to the New York State Retirement System — that is an added expense of $575,000, or more than a 6 percent increase in our tax rate,'' upstate Webster Supervisor Cathryn Thomas said in her budget message this year. Borrowing part of the money will delay some of the bite, but the bill is accumulating.
And it's not going to get better soon. Hevesi and teacher-system officials warn that contributions from taxpayers will stay high indefinitely, probably staying about 12 percent of payroll costs.
"It was the result of an anomaly of the past 14 years that the state and local governments paid almost nothing into the fund," Hevesi said, pointing out how high payments were before the stock-market boom: 16.4 percent of payroll for most workers and 30 percent for police and firefighters.
"I'm not minimizing the budget problems of local governments,'' he said. He said the mind-set of local officials should be: "This is a cost of doing business."
Some control
And local officials can control their pension costs to some extent by holding down the number of employees they have and how much they pay them, Hevesi spokesman David Neustadt said.
The local governments and taxpayers who support them also didn't get much sympathy from Charles Peritorie, a 79-year-old resident of Sonyea, Livingston County, who retired in 1980 after 38 years as a state worker, for much of the time as an attendant at the former Craig Developmental Center, which cared for mentally retarded and other developmentally disabled people. He gets a pension of about $1,000 a month.
"All of these years they have been contributing nothing because the investments were so outstanding," he said. "They should have had the foresight of saying, 'Someday, we're going to have to contribute.' "
Pension benefits for existing workers and retirees can't be touched without amending the state constitution. The Legislature and the governor can change them for future employees, but the idea has almost no support at the Capitol.
One idea would require newly hired workers to pay into the system for their whole careers, as government workers did before the rules were changed three years ago.
"We don't need to do that," Pataki said, pointing out that such a change would save little money in the short run. He said he expected the stock market to rebound so the cost to taxpayers could be stabilized without benefit cuts.
Pataki pointed out that he and lawmakers last year passed a bill setting a floor on contributions at 4.5 percent of payroll, which he said should help smooth out future rate shocks.
Another option that some analysts like — but that also has virtually no political support — would have the state follow the lead of many private employers and have taxpayers give workers a set amount of money every year to set aside for their retirements, shifting the risk of volatile financial markets from taxpayers to the employees.
"The state has managed the fund literally like there was no tomorrow," said E.J. McMahon of the Manhattan Institute, a business-backed think tank, who advocates the switch to 401(k)-style funds for public workers. "They managed it like the greatest stock-market boom in history would continue eternally."
New York City Mayor Michael Bloomberg proposed this year that new city workers get a 401(k)-style pension, but the City Council blocked it.
'It takes guts'
There is a precedent for rolling back benefits. With the state and New York City both on the brink of financial collapse in the 1970s, the Legislature established the tier system, which for the first time required payments into the fund by workers and cut benefits for workers retiring before age 62.
"With the New York City fiscal crisis and the city staring at bankruptcy, people knew we had to do something dramatic," said former state Sen. Fred Eckert of Greece, Monroe County, an architect of the tier plan.
Lawmakers could do the same thing now, he said, and only "cowardice" is stopping them.
"It takes guts to do something that will be harmful to the comparatively few, because they'll remember it to their dying day," he said. "So what usually happens is the noisy few buy everyone off, and everyone else gets shafted."
Although specific proposals for cutting benefits have little support, there is some realization that with state and local taxes already the highest in the nation and other costs continuing to escalate, something has to give.
"For anybody not whistling past the graveyard, since we're not going to raise taxes, we need at some point to look at costs," said Senate Social Services Committee chairman Raymond Meier, R-Western, Oneida County.
A struggle
In the meantime, school districts and local governments around the state are struggling to make ends meet:
• In the Whitney Point School District in Broome County, the district eliminated tutors for some students with special needs after voters twice rejected a pricier spending plan. The district's pension bill is going from $217,169 this year to $485,183 next year.
• In Monroe County, mental-health, anti-smoking, prenatal and foster-care programs were among the victims of more than $2 million in budget cuts. And still the county's fiscal condition was precarious enough that the Standard and Poor's ratings agency lowered Monroe's credit rating, which could make borrowing money more expensive. The county's pension bill is going from $13 million last year to $32 million next year.
• In Elmira, a popular pre-kindergarten program has been cut from a full day to a half day.
Despite the cuts, Elmira residents still had to pay more than 9 percent more in school taxes this year. The need to both cut programs and raise taxes has proved frustrating to the school district's financial chief, Robert Gosden.
"People are standing behind their schools, but there is going to be a revolt if there's another 9.35 percent tax hike," he said. A major culprit: pension bills for school employees that were less than $200,000 two years ago but will be almost $2.9 million next year.
• In Amsterdam, a struggling former mill city in the Mohawk Valley about 30 miles west of Albany, Mayor Joseph Emanuele decided he wouldn't borrow any of the money needed for the pension payments — "we'd just have to pay it back with interest," he said. That means paying $1.36 million into the fund next year, compared with about $60,000 last year.
"The only place to cut is personnel," he said. But the City Council rejected his bid to trim the Fire Department. Early delivery of $350,000 in state aid will help, but otherwise the rest will have to be made up through higher property taxes.
And that carries a price even beyond the extra dollars residents have to pay: scaring off potential developers who could help revitalize the city.
"I was talking to a developer recently who was interested in putting in some houses," Emanuele said. The plan seemed to make sense, because the Target Corp. is planning to build a distribution center in the nearby town of Florida, which is expected to generate about 1,000 new jobs.
"Then he asked me what the taxes would be and he said to me, 'You people have to be crazy. The taxes are out of control.' I had to agree with him.''
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