New York’s new “stable option” pension gimmick for local governments and school districts is “a stopgap with long-term risks,” Moody’s Investor Service warned this week.
The pension funding changes, approved as part of the 2013-14 state budget as alternatives to an even more questionable proposal by Governor Andrew Cuomo, were the focus of a two-page analysis in Moody’s latest biweekly Credit Outlook report (subscription-only).
“The deferral of pension contributions would increase the unfunded pension liabilities of participating local governments, a credit negative,” Moody’s said [emphasis added].
The new state budget provisions give localities and school districts the ability to avoid coming increases in pension costs by pushing a portion of these increases into the future. For workers in the New York State Employee Retirement System (ERS) and Police and Fire Retirement System (PFRS), Comptroller Thomas DiNapoli agreed to modify his existing “amortization” plan in a way that will allow employers to defer even more of their required contributions —which means they will owe even more and will be more vulnerable to financial risks in the longer term.
The New York State Teachers Retirement System (NYSTRS) will offer school districts a different optional plan that will hold the contribution levels to between 14 and 18 percent over the next seven year, with the requirement that any deferred amounts be fully repaid within 12 years. The NYSTRS approach, like DiNapoli’s, requires repayment with added interest pegged to the currently low Treasury bill rate. At a special meeting this morning, the NYSTRS board voted unanimously to approve the option (not a surprise, since TRS staff negotiated the changes with Cuomo’s office and Legislature).
The positive short-term budgetary relief will outweigh the cost of increasing unfunded pension liabilities for only the most financially stressed local governments. Cash-strapped localities such as Nassau County (A2 stable), Rockland County (Baa3 negative) and the City of Glen Cove (Baa3 negative) may benefit from this tradeoff given their significantly strained cash positions.
This point bears repeating: the deferral option may be worth it only for localities so “strapped” that they have no other ready source of cash to pay their bills in the short term. But even these sick puppies will be adding to and compounding their existing unfunded pension liabilities, not to mention other debts and unfunded liabilities for retiree health insurance.
On the other hand, local governments and school districts not on the brink of insolvency really need to think twice about this. Moody’s again:
For example, a local government with $100 million in ERS salaries would have to pay $20.9 million in pension contributions for 2014. If the local government opts into the plan, it will gain $8.9 million in budgetary relief, but also create an unfunded liability of the same amount. This unfunded liability will grow in each successive year that the local government is part of the new deferral program, which will have to be met with future contributions.
Participating local governments exacerbate their risks if investment returns are below projections …
A similar point was made at this morning’s NYSTRS board meeting by Nicholas Smirensky, a former senior investment officer for ERS and PFRS who is the comptroller’s appointee to the NYSTRS board. ”There are some risks associated with this,” Smirensky said, citing the Moody’s analysis.