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Pension Costs Smothering City
Former Cash Cow Now Carries $1.9 Billion Deficit

By: Dan Janison

Newsday, March 15, 2003

Once they were fat municipal piggy banks, tapped to plump up city spending in the high-living 1990s. But now, recession has transformed the city's pension funds into tax hogs that consume hundreds of millions of extra dollars in these lean years, finance experts say.

The consequences, they say, could include higher taxes, bigger deficits, more borrowing and ultimately deeper cuts in the same city services the pension funds once nourished.

As tax and fare hikes and the latest spending cut plans, including possibly layoffs, were taking center stage at City Hall, fiscal monitors published these glaring findings in recent weeks:

Pensions continue to represent the fastest-rising cost category for the city, exacerbating multibillion dollar deficits.

That cost is now projected to skyrocket from $1.9 billion this fiscal year to $4.7 billion by fiscal 2007, or 247 percent over four years.

That's 11 times faster than the local inflation rate and eight times faster than other city-funded expenditures, according to state Comptroller Alan Hevesi.

City contributions to pension funds threaten to consume 14.4 percent of city funds by fiscal 2007. As recently as 2001, that share was only 4 percent.

"Rising pension costs -- along with Medicaid, health insurance and debt service -- are key elements of the city's expenditure growth, all of which are fixed costs," the city's comptroller, William C. Thompson Jr., told Newsday.

"We can't do anything about them quickly or easily," Thompson said.

Similar problems are afflicting the private sector and other states, noted Allen Brawer, a managing partner for the Policy Research Group, which consults for municipal unions.

As a result, there are proposals on a state level, in both Albany and Trenton, to allow governments to stretch out the payment of investment losses over a longer period than now permitted, Brawer said.

Given the current rules, however, options for Mayor Michael Bloomberg and the City Council are painful: cut more spending, reduce more city jobs, raise more taxes, or resort to a new round of borrowing (a step Bloomberg rejects).

Moreover, to brake pension costs, Bloomberg and his budget office are pushing to enact a new, thinner pension deal for future employees.

The city has taken similar steps in past crises since the state constitution prohibits reducing the benefits to any of its past or current employees.

Politically, the path to shrinking future employees' pensions so far appears unobstructed.

State lawmakers, unions and others are variously focused on resisting broader taxes and higher tolls, employee givebacks, and social entitlements. By contrast, little opposition has been voiced to creating what policy-makers call a "Tier 5" pension, with a lower benefit level, an idea Bloomberg first put on his public agenda in January.

Administration insiders say a new tier, depending how it's enacted, could offer both short-term and long-term relief -- possibly averting some of the other cuts that would have to be considered.

"We're examining changes to the pension system that will produce recurring cost savings to the city," said mayoral spokesman Jordan Barowitz. "It's a very serious issue."

Specific changes have yet to be proposed publicly.

Because of their structure, the municipal retirement funds always stand to make good times better and lean years harder.

That's because the city contributes to pension funds based on the assumption that the funds' huge investments will return 8 percent per year. If not, the city must make up the difference - as it has amid the investment losses of recent years.

So, just as the economy slows and tax revenues sag, pressure to pay into the pension system automatically increases.

In addition, pension costs must rise along with wages as new contracts are settled -- such as last year's substantial salary hike for teachers.

Another current factor is a patchwork of specific pension "sweeteners" enacted over the years by Gov. George Pataki and the state legislature to benefit teachers, police, firefighters and city workers, who all have separate retirement funds.

Overall, the city will be spending $6,954 more in overall compensation per employee in fiscal 2004, which begins July 1, than had been planned in June 2001, the Citizens Budget Commission said in a study issued earlier this month.

The change from piggy bank to tax hog happened quickly.

Three years ago, pension funds were flush with stock-portfolio gains. The city was cutting business and personal tax rates by hundreds of millions of dollars, increasing spending commitments and borrowing, and still chalking up billions of dollars in surplus tax revenues as the Wall Street boom resounded across the local economy.

Even amid those surpluses, the Giuliani administration and the City Council dipped into the bulging pension piggy bank in 2000, leaving less for today. They won authorization to sidestep a process designed to spread out sharp investment gains -- or losses -- over five years.

For city officials, the measure amounted to a fiscal one-shot that gave them an additional $800 million to spend right away, leaving their successors to worry about paying it back.

The mayor and Council leaders explained this would help offset a long-delayed cost-of-living increase for retirees, which the state had just mandated regardless of local fiscal concerns.

This funding advance - called a "pension restart" - would be paid back after most of the elected officials involved left due to term limits at the end of 2001.

So the city today is paying out an extra $80 million a year due to the $800 million one-shot.

"The downside of term limits is that some elected officials will make decisions -- like raiding the city pension fund -- without worrying about what will happen after they leave office," Hevesi, a Democrat from Queens, told Newsday.

For his part, Brawer contests the view of the "restart" as a raid. To use it for cost-of living increases was proper, he said.

"Over a 25-year period, the city brought its contributions down to almost zero, and employees got no benefits from it," he said. "In the New York City Employee Retirement System, there was a substantial amount of overfunding that was available."

Of all the players who sit on the city pension boards, Hevesi, then the city comptroller, alone voted against the restart, with a rationale that now seems prescient. He warned that the city "would need the [$800 million] cushion if the stock market declines." Using it then was "ill advised," he said.

Pension Costs Smothering City Former Cash Cow Now Carries $1.9 Billion Deficit

Pension Costs Smothering City
Former Cash Cow Now Carries $1.9 Billion Deficit