The New York State Teachers’ Retirement System (NYSTRS) has just informed school districts across the state that their teacher pension contribution rates for the 2013-14 school year will rise from the current 11.84 percent to between 15.5 and 16.5 percent of salaries — which would translate into an additional taxpayer costs totaling $539 million to $686 million, based on the latest available teacher payroll figures.*

pension-explosion-300x300-8988629The higher contribution is payable in the fall of 2014. Depending on the final rate, up to 2.6 percentage points of the projected increase — or roughly $390 million — would not be subject to the base property tax levy cap of 2 percent for 2014-15 school budget years.

Here’s another way of looking at it: the next increase in teacher pensions could be enough, all by itself, to drive up property tax levies by up to 1.8 percent, in addition to the cap.

The jump in teacher pension costs should come as no surprise, for reasons explained last July inthis blog post. In fact, nearly two years ago, the Empire Center’s “Pension Bomb” report predicted NYSTRS would bill a 16 percent rate in 2014, due to its huge losses in 2008 and 2009.   At 11.84 percent, the current contribution rate is just above the “normal” cost, but significant increases in taxpayer contributions will be needed to dig out of the fund’s losses in 2008-09.

NYSTRS also has just disclosed that its return on assets in fiscal 2012 was 2.8 percent, well below its target rate of 8 percent. By assuming it will earn more, NYSTRS holds down its contribution rate — but this produces a bigger hole to fill when the fund underperforms for a period of several years.  Teacher pension costs have nearly doubled since 2009-10, although the last increase in the pension contribution rates was a comparatively slight 0.63 percent, thanks to a conveniently timed change in actuarial assumptions last year. Again, it’s all explained in detail here.

Although NYSTRS is willing to make rate of return assumptions covering decades, it refuses to predictits future contribution rates more than a year in advance. However, calculations by Josh Barro in connection with our 2010 report, adjusted for subsequent earnings, would suggest the rate will rise by at least another point or two in 2015-16.

Contribution rates would be flat and predictable under a defined-contribution retirement system like the one available to public university faculty, an option most teachers say they would prefer to have the ability to choose. Don’t hold your breath waiting for Governor Cuomo or anyone in the Legislature to propose one — although Cuomo’s Tier 6 plan did create a DC option for higher-salaried non-union appointees only.

* The NYSTRS base member payroll was $14.732 billion in 2010-11. Unfortunately, NYSTRS still has not gotten around to releasing its 2011-12 annual financial report, which would include an updated payroll figure.

About the Author

E.J. McMahon

Edmund J. McMahon is a senior fellow at the Empire Center.

Read more by E.J. McMahon

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