Cities and towns throughout New York State continue to cut local budgets in order to prevent becoming insolvent amid declining revenues. In hopes of temporarily offsetting the problem while municipalities attempt to rebuild their tax base following the downfall of the economy nationally, Andrew Cuomo has proposed local governments enter into what he calls the “Deferment Payment Plan.” The plan is to allow local town and cities the option to defer a portion of their pension payments to the State and pay the outstanding unpaid balance at a later time or up to twenty five years later. For some municipalities they view the plan as an extended mortgage payment such as that on a home, except you have the added use of the money that is normally due now, deferring the interest and principal to a later date. The thinking in Albany is to inject cash into the system now and to insure municipalities will remain solvent. To help balance out what is deferred it is hoped that through the course of time the amount deferred will be adjusted down as inflation devalues the overall balance due.
In theory it sounds ideal, but very much like the deregulation's of banks that Andrew Cuomo had endorsed in years prior to insure everyone was able to buy a home, the money which was borrowed eventually became due which lead to one Americas greatest recessions. The reality is although today's debt will depreciate overtime, inflation will consume any possible appreciable gains made, in the form of increased wages, insurances and costs of goods.
More concerning however is the overall cost of today’s pensions will not have the same dollar value placed on them tomorrow. To put it perspective Syracuse a small upstate city known for its college town has seen its pension costs rise as much as 729% since the year of 2000. What was once thought to manageable in the year of 2000 with a combined total of pension invoices to be paid out at $2.4 million now has grown to nearly $20 million of today’s Syracuse over yearly expenses. That’s an increase in cost to the average taxpayer in Syracuse of nearly 66% per year, at today's present calculations the reality is Syracuse can expect its overall pension costs to exceed $60 million per year in less than a generation away. What would be the saving to Syracuse alone if they elected to go with the Cuomo plan over the next ten years? Nearly $100 million, but don’t forget that amount money is still due and owing to the pension fund at a later time and when it comes due it will be combined with the adjusted pension payments of the day.
Although no one can accurately predict the future the deferment plan by all accounts seems to highly speculative at best, particularly taking into account that the majority of municipalities that would use it are already struggling to pay their debts today. For an already cash strapped city such as Syracuse and other municipalities throughout the State whose infrastructure shows obvious scars of a declining economy the deferment payments should not be considered an option.
On the flip side of the coin Rochester is considering the plan favorably. The present administration under Mayor Thomas Richards estimate’s he can save the city $76.4 million in the first five years. For clarifications purposes only there is a big difference between a savings plan and a deferment plan which is actually a payment plan. Nevertheless, based upon the Cuomo plan he could defer payments for up to twenty five years, bringing the overall estimated deferment to $382 million. However the deferred balance would still be due and owing as well as the pensions due and with Rochester’s present overall budget of $488 million per year presently, Rochester would need to expand its tax base by over a 100% to fulfill its obligation to the State in the future. Historical Rochester’s and Syracuse’s growth rate in this example over the past decades do not reflect a dramatic population shift in their favor to suggest a rapid increase in future revenue to justify the deferment plan. Instead of trying to save for tomorrow were already spending away tomorrow.
Simply put if you can’t pay for it today what makes you believe you will able to pay for it tomorrow as well as make up the difference owed over a period of twenty or twenty five years later. Unfortunately this thought process fails to address the problem, but only exasperates the problem for future administrations to address and leaves them with little or no options on the table in the future as well as cash. The deferment solution as offered by the Cuomo administration is exactly what it implies, a political opportunity to make short term gains for an administration while in office at the expense of future administrations. More concerning however it gives the current administrations the opportunity to skew today's actual numbers, table them for a much later date and report to the public they are winning the war on present day expenditure’s while at the same time balancing the deficit at the cost of future administrations. It almost seems as if the Cuomo Administration is running out of options to turn New York State around and has target one of the strongest Retirement Funds in America to loan him the money he needs to bolster his sagging polls.
What the Governor has found is that New York State Common Retirement Fund is presently worth over $153 billion and by law they can invest up to 70% of their portfolio. The annual pay out of New York State Common Retirement Fund is $8.86 billion per year, with an average benefit paid to PFRS retires of $42,259 per year in 2012. Obviously the NYSCRF can afford to loan some money out to help rebuild the communities that support it, but once again can the communities afford to pay the money back to NYSCRF in the future when present day they continue to struggle with their present obligations? It’s a gamble for local governments as well as NYSCRF, but if Cuomo can pull it off it will be a long term coup for his administration without addressing the problem.
So what is the problem with government today and why are they faced with what seems a constant budget deficit. Remember that average benefit paid to PFRS retires of $42,259 per year in 2012, that takes money to maintain and with an annual expenditure of is $8.86 billion per year that represents a fair chunk of New York States overall projected budget of $142.6 billion in 2013. The problem is the system has grown faster than it can take in the needed revenue to sustain itself over the long haul, this is reflected in the increased cost curve demonstrated by Syracuse as previously noted. Although NYSCRF has invested well in the finical markets it is not a bottomless pit and as such it must be replenished to meet its present obligations at the tax payers’ expense. As more State employees retire at an early age and people live longer the costs to maintain the system increase. So that one employee who earns $42,259 per year in 2012 on their pension that retired at the age of 50 has the potential to earn an additional $1,267,770 over 30 years. Are they entitled to it, yes; however the administration should look at what age future employees would be eligible to collect their pensions very much like social security does. In addition make reasonable adjustments to the tier systems to accurately reflect what municipalities can afford to offer their future employees in the form of pensions in the public sector. In all fairness to those in the private sector there are very few that will ever see a pension check, only a social security check which is nominal at best.
Edmund M. Dunn, Reporting
The following is from the office of The Comptroller
Snapshot of the New York State Common Retirement Fund
· Audited net assets held in trust for pension benefits (as of March 31, 2012): $153.3 billion, third largest pension plan in the United States
· 3,040 state and local government employers participate in the pension system.
· More than one million members, retirees and beneficiaries.
· $8.86 billion paid out in benefits in fiscal year 2011-12.
· There are two different systems that constitute the New York State & Local Retirement System (NYSLRS). They are the Police and Fire Retirement System (PFRS) with 65,823 members, retirees and beneficiaries and the Employees' Retirement System (ERS) with 993,575 members, retirees and beneficiaries.
Common Retirement Fund:
· As of March 31, 2012, the invested assets of the CRF were $150.6 billion.
· Equity investments (70 percent of portfolio): Under state law, the CRF may invest up to 70 percent of its assets in equities. Ten percent of the CRF's total investments can be in international equities; 5 percent in real estate; and up to 25 percent in any investment that meets prudent investor standards. The CRF's investments in private equity, real estate in excess of 5 percent, international equities in excess of 10 percent, and absolute return strategies (hedge funds) are authorized for the fund as long as they meet the prudent investor standard.
· Fixed income (30 percent of portfolio): There is no limit on the amount of investment grade, dollar-denominated bonds the CRF may invest in.
Employer Contribution Rates:
· FY 2014 average contribution rates: 20.9 percent of payroll for ERS; 28.9 percent of payroll for PFRS.
· Employers contributed roughly $4.59 billion to the Retirement System in FY 2012.
· Employees contributed $273.2 million in FY 2012.
· Employer and employee contributions have helped the Fund remain well funded.
· Overall membership in NYSLRS: 1,059,398
o 656,224 members (active or vested)
o 403,174 retirees and beneficiaries
o 95% are members of ERS; 5% are members of PFRS
· Average pension for all ERS retirees in FY 2012: $20,241
· Average pension for all PFRS retirees in FY 2012: $42,259