What is new, of course, is the context. Now that Governor Andrew Cuomo is backing some meaningful pension reforms, DiNapoli will be more visible as head cheerleader for the public pension status quo. (City Comptroller John Liuhas been waving his poms-poms furiously, too.)
At a National Press Club event organized by pension reform opponents, DiNapoli essentially redelivered the same speech he gave at the New School in Manhattan a month ago. See Nicole’s take on the proceedings here.
As I first wrote last month at PublicSectorInc, DiNapoli continues to ignore the principal criticisms of public pensions from a financial perspective. Consider the issue of the discount rate used to estimate future pension liabilities, which has been discussed extensively on this site and in many other public and online forums across the country.
Private and public sector pension plans both invest heavily in equities in hopes of realizing high long-term returns, typically 7.5 to 8 percent (or 7.75 7.5 percent in DiNapoli’s fund). Private plans, however, discount their liabilities using the interest rate on low-risk investments, such as AAA-rated corporate bonds, which means they must put more money aside to fully fund their future obligations. Public plans discount their liabilities based on what they hope their assets will earn, reducing the amount taxpayers must pay into the funds. When asset returns are lousy — as they have been for the past decade — taxpayers must pick up the slack with much higher contributions.
A growing number of independent academics, actuaries, economists and other analysts who have studied this issue (including the Congressional Budget Office) have concluded that public funds are doing it the wrong way. This means DiNapoli and other trustees are systematically undervaluing their liabilities — which, in turn, undermines the comptroller’s contention that public pensions are inexpensive for employers. The Government Accounting Standards Board(GASB) recently issued new proposed rules to address some of the criticisms of the current approach, but GASB’s approach in turn has been criticized by both sides in the debate.
So, what what does the trustee of the nation’s third largest public pension fund have to say about this controversy?
Then there’s his attack on 401(k)-style defined contribution retirement plans. He calls them “unacceptable” —which also not surprising. After all, if government follows the private sector into the defined-contribution world, the comptroller’s main source of clout—that $150 billion pension fund— will eventually be diminished.
Cuomo’s proposal would give public employees the option of a defined contribution plan such as those offered for 48 years by SUNY and CUNY. A large majority of the unionized university faculty choose such plans, predominantly those offered by TIAA-CREF.
“401k’s were never intended to take the place of pensions,” DiNapoli said. But the SUNY and CUNY plans are designed to take the place of pensions, by providing lifetime annuities after retirement.
DiNapoli keeps stressing that public pensions provide “retirement security.” So what else is new? No one questions that public pension are secure—hyper-secure, in fact, since they are guaranteed by the state Constitution. But that security comes at a high cost. The issue is whether New Yorkers should continue to bear 100 percent of the financial risk involved in offering guaranteed “retirement security” to public employees—at income replacement levels far beyond those found among private-sector retirees, to boot.
“Security” also involves a trade-off. The traditional pension system favors career employees at the expense of those who work for only a few years. Why should we continue to penalize people who would be willing to trade some security for the greater control and flexibility offered by a defined-contribution account? Under current law, a state or local employee has to wait 10 years to vest in a benefit, and Cuomo would extend that to 12 years. Under the SUNY-CUNY type of plan, employees own their nest eggs after a year.
The debate has just begun, of course. So far, however, the comptroller is playing to the union galleries, not engaging in a serious discussion of these issues.