Welcome to New York State's pension reform war.
It began in January, when Governor Andrew Cuomo rolled out a so-called Tier 6 pension plan as part of his 2012-13 budget proposal. The plan would retain the existing defined-benefit system while raising the retirement age, increasing employee pension contributions and reducing the benefit level for new employees only.
Sound familiar? It's the kind of thing we've already seen enacted in Illinois, and for much the same reason: New York has a constitutional provision (replicated in Illinois) that treats pension benefits as a contractual obligation that cannot be diminished or impaired, which is widely (if not authoritatively) interpreted to prevent even prospective pension changes for current employees.
New York's statewide pension systems are relatively well funded, by government accounting standards -- which only means they are in shallower deep holes than comparable pension funds in other states. But back-filling the pension funds' investment losses has been very, very expensive for taxpayers. From 2001 through 2011, taxpayer-funded pension contributions statewide have risen $12 billion, including $7 billion in New York City alone--eye-popping numbers even by Gotham standards. And costs will continue rising for several more years, at a minimum, increasingly crowding out basic services on the local level.
In Albany, perhaps to an even greater extent than in Springfield, the unions pretty much run the show. The Empire State has no political equivalent of Gina Raimondo, the Democratic general treasurer who spearheaded fundamental pension reform in Rhode Island. New York Comptroller Thomas DiNapoli, sole trustee of the state and local pension fund, generally has sided with unions and has led the charge against any suggestion of a DC option.
To his credit, Cuomo has at least made two strong gestures in the direction of fundamental reform: the creation of a defined-contribution option for all employees and a "risk-reward" provision that would require employees to pay half of contributions above a capped amount if and when it's necessary.
New York's powerful employee unions responded predictably, denying the pension problem is serious, blaming rising costs on Wall Street, and saying any pension shortfalls they should be subsidized by higher taxes on the wealthy--even higher, that is, than the tax increase just enacted by Cuomo and the Legislature. The unions recently have mounted a well-funded statewide ad campaign around the spurious claim that Cuomo is seeking to reduce pension benefits by 40 percent.
It hasn't helped matters that Cuomo's own DC option features sort of a teaser rate for the shortsighted -- offering an employer contribution of 4 percent of salary with no required employee contribution. This would certainly be cheap, but it's also no one's idea of adequate retirement planning. To be sure, Cuomo's plan would also allow for an employer match of voluntary 3 percent employee contributions, which would take the annual savings to a still barely adequate 10 percent -- better, but still short of the 113 percent total savings employees accumulate under the 48-year-old optional DC program for employees of the State University of New York and City University of New York. A report by the Empire Center reviewed the success of those plans, freely chosen by nearly three-quarters of professors and other university professionals, and suggested how Cuomo and the Legislature could emulate them.
In the face of continuing union salvos, Cuomo seemingly began to waver a couple of weeks ago. He did not deny reports he was withdrawing the DC option, for example, and he stressed his willingness to be flexible on details. The governor insisted that any plan approved by the Legislature must save something close to the $113 billion he claimed his proposal would save over 30 years--but almost in the same breath, he suggested that pension benefits could be increased again in as few as three years if the economy improves, which would reduce or eliminate those savings. Cuomo hasn't said a word about New York municipalities and counties effectively borrowing from the pension system to make a portion of their pension contributions, if only because the state under his leadership is doing the same thing.
While Cuomo has run hot and cold on pension reform, the Legislature simply has been running--in the opposite direction. Assembly Speaker Sheldon Silver, the most powerful Democrat in the Legislature, said last week he'd prefer to have any pension changes cleared with unions. A senior Senate Republican said pretty much the same thing. The Senate GOP, like Assembly Democrats, this week offered a one-house budget resolution offering no pension reform at all, even while senior Republican members insist they are open to reform and know something needs to be done to curb future pension costs.
News reports suggest pension reform is being repackaged or negotiated behind the scenes, even as the governor this week struck a more belligerent tone, insisting no budget will be done without it. The state fiscal year ends in just two weeks, on March 31. The outlook for pension reform in New York at the moment: cloudy and uncertain.