NYSUT peddles a pension gimmick

by E.J. McMahon |  | NY Torch

School districts outside New York City could issue bonds to finance up more than $1 billion in teacher pension contributions over the next two years under a bill promoted by the statewide teachers’ union, the Wall Street Journal reports today.  This proposal may not advance much further — but its mere introduction in the Legislature, for the stated purpose of helping to offset school aid reductions, is a sign of desperation among supporters of the public pension status quo.

The background:

Employer contributions to the New York State Teachers’ Retirement System (NYSTRS) were 6.19 percent of covered payroll  in 2010, but are expected to hit 8.62 percent next fall and 11.11 percent in 2012.  While NYSTRS has not projected its pension rates beyond next year, our recent Empire Center report on “New York’s Exploding Pension Costs” estimated that the contribution could hit 16 percent of payroll in 2014, and 25 percent by 2016.

The pension bonding bill would effectively allow districts to use borrowed money to “cap” their immediate contribution rate at 8.6 percent in each of the next two school years. The Journal says the New York State United Teachers (NYSUT) “helped develop” the bill for its sponsors, the respective legislative civil service committee chairs, Assemblyman Peter Abbate and Senator Martin Golden. NYSUT’s motivation is obvious: its local affiliates are under intense pressure to moderate their wage demands in the face of skyrocketing teacher pension costs and declining state aid.

The proposal also reportedly has the backing of state Comptroller Thomas DiNapoli, who has already shown a fondness for pension funding gimmicks. [UPDATE: Counter to the implication of the Journal report, Comptroller Thomas DiNapoli's office says the comptroller has not taken a position in the bill.] Last year’s budget included a DiNapoli-backed pension “amortization” scheme, under which the state will artificially limit increases in its pension contribution rate to one percentage point a year, converting the excess into a series of 10-year IOUs repayable with interest to the New York State and Local Retirement System (NYSLRS), of which DiNapoli is sole trustee.  The emergence of the pension bonding bill is a sign that the union has not (yet) been able to pressure the independent NYSTRS management into imitating DiNapoli’s IOU approach.

** P.S. — The NYSTRS bill would allow bond terms of up to 15 years.**

Abbate’s sloppy, typo-ridden memorandum in support of the bill certainly isn’t a confidence builder, although it may just be a sign that NYSUT needs to upgrade its speech translation software.  Here, reproduced exactly as posted on the Legislative Retrieval Service, is how the memo presents the core rationale for pension borrowing:

Projections indicate that the current economic downturn Will cause employer contribution to New York State Teachers’ Retirement System (NYSTRS) to spike over the next several years. Even As the market’s rebound, this cost spike will still take place over the next two three years flattening to a more even employer Contribution as has been the historical trend during other such spikes. [sic throughout]

If the rise in NYSTRS contributions was actually just a two-year “spike,” there might be at least a faintly stronger justification for this bill. In fact, however, pension contributions are virtually certain to continue rising after 2013, for as long as it takes to wipe out an enormous unfunded liability created during the financial crisis and stock market crash of 2008-09. During those two years, when NYSTRS’s actuarial assumptions called for gains of nearly 17 percent, the pension fund’s asset values instead plunged by 20 31 percent (-$32 billion).  In 2010, NYSTRS net asset values rose by a modest 4 percent, half the target rate.  Even assuming NYSTRS scored a 25-30 percent snap-back in asset values during the bull market of the past year, the fund will remain deeply in the hole for years to come. That’s why contributions must continue to increase.

In short, the current pension system demands more from taxpayers when they can least afford it.  That’s not a bug, it’s a feature.

So, for the purpose of generating short-term savings, school districts would be invited by this legislation to stick their necks out — or, more accurately, their taxpayers’ necks.  Districts issuing pension bonds would push a growing expense into the middle of the 2020s, gambling (with taxpayers’ money) that NYSTRS contribution rates will fall sharply in the meantime. For that to happen, pension fund asset returns will need to exceed the fund’s already ambitious target over the next five to 10 years.  Meanwhile, the capped contribution level of 8.6 percent is actually below the roughly 11 percent normal pension costs for most teachers (i.e., those in Tiers 3 and 4).  Even if the pension bonds are issued at a favorable interest rate of 4 percent, a school district that goes this route will impose an extra $400,000 in interest costs for every $1 million it chooses to “defer.”

Suppose this bill is enacted, and suppose “New York’s Exploding Pension Costs” is right about the likely path of NYSTRS contributions. There will be enormous pressure from NYSUT to extend the bonding authorization if districts are confronting contribution rates in the neighborhood of 16 percent for 2014 and over 20 percent for 2015.

It’s not surprising to see this measure surface in the Assembly, where Abbate has been rubber-stamping union-backed legislation for years. Its simultaneous introduction in the Senate is a disappointing sign that the Republican Conference in the upper house has not fully broken with its Bruno-era tradition of introducing costly union-backed measures while ignoring pleas from the management (i.e., taxpayers) for collective bargaining reform, such as modification of the Triborough Amendment.

- E.J. McMahon is the President at the Empire Center for Public Policy.