ALBANY, NY — New York’s state and local taxpayers are saving more than $1 billion this year thanks to public pension changes enacted a decade ago, according to a new Empire Center report. However, the report says more fundamental reforms are needed to curb the pension systems’ open-ended financial risks, and to offer more flexible and equitable retirement savings options for all government workers.
“Tiering Up: The Unfinished Business of Public Pension Reform in New York” reviews the impact of pension changes initiated for newly hired workers under former Governor David Paterson in 2010 and expanded under former Governor Andrew Cuomo starting in 2012. Paterson’s Tier 5 plan rolled back costly pension benefit sweeteners approved by the Legislature a decade earlier, while Cuomo’s Tier 6 legislation further restructured benefits, restored and increased employee shares of pension fund contributions, capped “pensionable” overtime, and curbed some other abuses.
Pension costs for the state and for local governments and school districts outside New York City are now about 15 percent lower than they would have been if workers hired since 2010 had all belonged to earlier, more expensive pension plans, according to the report.
The report says the most significant of all the Tier 6 reforms was the expansion of a defined-contribution retirement savings plan previously limited to State University and City University employees. However, the new Voluntary Defined Contribution (VDC) option is limited to a small group of non-union appointees and elected officials making more than $75,000 year, and excludes all public-school teachers.
The Tier 5 and Tier 6 changes came amidst a severe pension crisis that saw New York’s combined tax-supported employer pension contributions rise from under $1 billion in 2000 to a peak of $17 billion in 2015. Contributions have since levelled off at roughly $16 billion, “but under lenient government accounting standards, even that figure conceals the full long-term cost of generous, locked-in pension benefits for generations of retired government employees,” the report says.
Thanks to the stock market’s mid-pandemic rebound, fiscal 2021 produced record returns for investment funds supporting the New York State and Local Retirement System, the New York State Teachers Retirement System and the five New York City pension funds, all of which reported they were fully funded or even over-funded by government accounting standards. However, “Tiering Up” estimates the pension systems still have combined unfunded liabilities totaling nearly $400 billion, when valued using a risk-free discount rate reflecting the current very low yields on U.S. Treasury bonds.
“The Empire State can and should do more to minimize financial risks, volatility and unpredictability of the existing pension system,” said E.J. McMahon, Empire Center’s founder and senior fellow, who wrote the paper. “The necessary next step in pension reform for New York is not to mend the existing system, but to upend it. To offer public employees security in retirement while staying fiscally responsible, state leaders need to get more creative.”
Recommended reforms include following the lead of the federal government by creating new defined-contribution and “hybrid” pension plans for state employees and giving local governments the option of offering these choices to their employees; opening the VDC to all public school teachers; and mandating truth-in-accounting standards for New York pension funds.
Read the full report here.