New York taxpayers will be hit with a higher bill for state and local employee pensions starting in 2025, state Comptroller Thomas DiNapoli just announced.
The pension cost hikes should come as no surprise, following a 2023 fiscal year in which the state’s Common Retirement Fund sustained its biggest investment loss since 2009. With assets of about $250 billion, the Fund—of which the comptroller is sole trustee—supports pensions paid to members of the New York State and Local Employee Retirement System (ERS) and the Police and Fire Retirement System (PFRS), which DiNapoli administers.
For pension billings in state fiscal year 2024-25, DiNapoli said employer contribution rates for the ERS will rise from 131 percent to 15.2 percent of covered payrolls. Based on total payrolls as reported in the pension system’s 2022 annual comprehensive financial report, this will add about $350 million to the 2024 pension costs of local government and miscellaneous public authorities.
While that increase is significant in the short term—up
25 16 percent in just a year, and 30 percent since 2022—it represents a return of ERS rates to roughly the average level between 2018 to 2022, and is below the rate in effect as recently as 2021. Even after the increase, the relative cost of ERS pensions will be well below the peak highs in the wake of the financial crisis, when the ERS rate reached 21 percent.
DiNapoli said the PFRS rate will rise from 27.8 percent to 31.2 percent—its highest level since 1981, as shown in the chart below from the Annual Report on Actuarial Assumptions also released today by the comptroller.
PFRS pensions cost taxpayers more because police officers and firefighters can retire after as little as 20 years of service, with full pensions equal to half or more of their final average salaries, including (subject to limits) overtime and other added pay. The total PFRS pension burden is higher because police officers and firefighters also generally earn much higher average salaries than other government workers.
The combined ERS and PFRS rate increases will cost the state government about $500 million, most of which is already covered by pension estimates in Governor Hochul’s Enacted Budget Financial Plan.
Paying the piper
Next year’s pension cost increases necessarily were compounded by a pair of actuarial changes DiNapoli announced two years ago: a reduction in the Common Retirement Fund’s assumed rate of return (RoR), and a big boost in the crucial actuarial measure of the retirement fund’s assets.
A lower rate of return typically requires a higher level of current savings, backed by tax-funded contributions, to cover promised benefits in the long term. In reducing the rate to 5.9 percent—the lowest RoR of any major public pension system—DiNapoli was prudently bringing the cost of funding New York’s guaranteed public pensions (essentially a risk-free proposition for beneficiaries) to an RoR level closer to the yield on ultra low-risk 30-year U.S. Treasury bills (currently 4.35 percent). This is a major reason why DiNapoli can truthfully boast that New York’s pension system “remains one of the strongest pension funds… in the nation, and the rates announced today will help ensure that public workers and their families can rely upon the retirement benefits promised to them.”
DiNapoli’s second 2021 actuarial adjustment was a calculated risk. As explained in this space a few weeks ago:
[G]iven the reduced RoR assumption, sticking with smoothing would have minimized if not eliminated DiNapoli’s ability to announce a reduction in taxpayer-funded employer contributions starting in 2022 … And so the comptroller approved a second tweak to the actuarial rules: pension contributions starting in FY 2022 weren’t based on “smoothed” returns over the past five years (which averaged 7.5 percent) but on a “restart” of actuarial asset measures based on that all-time record gain of 33.55 percent in fiscal 2021.
The risk hasn’t paid off because the Common Retirement Fund’s returns over the past two years fell below the reduced rate of return assumption.
Bad news is good news
Yet despite the short-term pain for taxpayers, DiNapoli’s latest pension rate hikes also can be seen as a positive development, to the extent that they more accurately reflect and confront the truly high cost of New York’s exceedingly generous public pensions.
Those costs would now be even higher—at least $755 million a year higher for NYSLERS and PFRS alone—if not for the Tier 5 and Tier 6 pension reforms enacted under Governors Paterson and Andrew Cuomo, respectively, in 2009 and 2012. As further explained and documented in the Empire Center’s 2021 report, Tiering Up: The Unfinished Business of Pension Reform in New York, the Paterson and Cuomo reforms also produced substantial savings for New York City and for school districts throughout the state.
Previous pension reform laws in New York were rolled back under relentless lobbying pressure from New York’s politically powerful government unions, starting with the enactment in 1983 of Tier 4 and capped by a wave of 2000 pension sweeteners that added billions to pension costs just in time for a market downturn and recession.
Using slogans such as “tier equity” and “FixTier6,” public employee unions are once again gearing up to push for another rollback of pension reform in advance of the 2024 legislative elections. DiNapoli’s employer rate hikes are a reminder of just how costly such sweeteners would be.