Tax-funded contributions to the New York State Employee Retirement System (ERS) will have to jump by 61 percent between 2010 and 2011, state Comptroller Thomas DiNapoli announced today.  Contributions for members of the Police and Fire Retirement System (PFRS)–already higher to begin with–will rise by 21 percent during the same period.  Extrapolating from currently available payroll information, these increases will translate into added costs of at least $400 million for the state and roughly $750 million for local governments and public authorities.

But it won’t stop there. To make up for the system’s investment losses in 2007-08, pension contribution rates will continue rising well into the next decade.  For example, under one scenario modeled by DiNapoli’s office, contribution rates for the ERS and PFRS will rise from their 2011 levels of 11.9 percent and 18.2 percent of payroll, respectively, to 30.3 percent and 41.1 percent by 2015.  The increases in the first three years of the period are consistent with the forecast in the latest financial plan update from the Division of the Budget (DOB).

That scenario–developed, the comptroller’s staff emphasizes, solely for illustrative purposes–assumes that the pension fund’s investment gains will roughly duplicate its actual experience during the 20 years following the 1987 market crash, starting with an average annual return of 10 percent over the next five years.  This is optimistic, to say the least.

New York’s other pension time bomb is ticking over at the New York State Teachers Retirement System (NYSTRS).   The teachers’ fund–which has a separate board of trustees and is not overseen by DiNapoli–is roughly two-thirds the size of the state system.  In most New York communities outside New York City, teacher pension costs alone have at least as great an impact on local property taxes as pension contributions for all other local employees combined.

The NYSTRS runs on a different fiscal year than the state pension system, and won’t announce a preliminary 2010-11 pension contribution rate until November.  Meanwhile, it has warned school districts to expect a “significant increase” next year.  Since the TRS is affected by the same market trends as DiNapoli’s system, its costs can also be expected to roughly triple over the next five years.  Including schools, the combined annual pension cost increase for New York state and local taxpayers (excluding New York City) could increase $9 billion by 2015.  Or maybe even more.  Or maybe somewhat less.  No one can say for sure.

So, what can be done about all this?  DiNapoli has proposed capping pension costs by allowing employers to “amortize” a portion of their added annual contribution for up to 10 years at a time.  However, as explained here (and here), amortization would simply shove costs into the future by allowing employers to borrow from the pension fund—and at an interest rate below the fund’s 8 percent target rate of return, to boot.

The governor’s proposal to scale back pension benefits by creating a fifth “tier” of benefits for newly hired workers is a small step in the right direction, but it falls well short of the more fundamental reform the system needs, as explained here.  For newly ERS members, it would reduce long-term pension contribution costs by 19 percent, according to DiNapoli; reducing, for example, a billed rate of 30 percent to 24 percent, which would still be more than triple the projected 2010 level.  Even if Tier 5 is enacted, the traditional defined-benefit pension system would remain a source of extraordinary financial risk for New York taxpayers, who must ultimately deliver constitutionally guaranteed future benefits to current employees no matter how poorly the pension fund investments perform.

Keep in mind, also, that the accounting standards for public pensions are fundamentally misleading–allowing all state and local retirement systems (not just New York’s) to cook their books.  The Government Accounting Standards Board (GASB) heard testimony on the issue earlier this week and is slowly moving toward a tweak of its reporting rules to improve transparency.

This much is certain: if New York State’s pension funds were subject to the same accounting rules as a private corporation, their pension shortfalls would be significantly larger than they appear under current rules.   New York City’s actuary, Robert North, has already acknowledged as much for the systems that rely on his calculations.

The chief actuary of the giant California Employee Retirement System recently acknowledged that California’s pension costs have risen to “unsustainable” levels. The same is true of the Empire State–and nothing yet proposed in Albany would change the situation.

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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