WHAT DO THOSE PENSION ENAHNCEMENTS COST?

Year after year, the New York State legislature passes bills that enrich the pensions of New York’s public employees. The employees who benefit are often already retired or about to retire, and thus offer neither improved work nor gratitude in return. Even this year, with taxes rising and public services being gutted, dozens of such bills were introduced and many were passed, with the Governor already signing a bill to possibly allow tens of thousands of government workers to retire years earlier than they had been promised – and decades earlier that most New Yorkers in younger generations will be able to.

So how much do all these pension deals cost? Most are passed in the dead of night with no analysis, no debate and no announcement. An irrevocable decision that future state legislators cannot reverse, no matter how disastrous, is hidden from public view. But to the extent the state legislature, Governor and/or Mayor do put a price on these deals, it generally falls into one of two categories. Either they claim it costs nothing, or they claim it actually saves money. I beg to differ. As the model in the spreadsheet attached to this post shows, newly re-attached for those who had trouble downloading it, just the recent deals I am aware have vastly increased the cost of New York’s public employee pensions far beyond what had been promised or admitted. Public services and benefits will be devastated to pay for them. This massive, bi-partisan transfer of wealth from those who are worse off to those who were already better off marks the beneficiaries as selfish and the state legislators as despicable. Totally despicable. Particularly when the unions and legislators subsequently have the nerve to pretend to object to service cuts, benefit cuts, and tax increases, staging a hypocritical show of protest.

Download and save the spreadsheet, and read the related blog post to see how it works. Go to the enhanced tab. And understand that what you see is just some of the major pension enhancements I am aware of. There have been, perhaps, hundreds of others, with thousands proposed, many of which have personally benefitted the state legislators or their relatives themselves.

Looking first at Table I, in 1995 then-Mayor Giuliani cut a deal to allow thousands of public employees to retire years earlier, just one of many of these near-annual pension “incentives.” At the same time, the state altered the basic “Tier IV” pension whose cost was calculated in the “promised” worksheet. Future public employees, and those who opted in, would be allowed to retire at age 57 rather than 62, after working 25 years rather than 30, and receiving ultra-expensive retiree health insurance benefits for eight years before Medicare picked up most of the tab rather than three. But they would also be required to contribute 4.85% of their own pay to the pension funds rather than 3.0%. So what was the net effect?

Not even including the cost of retiree health care, the new Tier IV would have required 20.4% of payroll to be deposited into the pension funds rather than 11.8%, and even with the higher share contributed by the employee, the cost to taxpayers rose from 8.8% of payroll to 15.6% of payroll, or nearly double. The specific dollar value in this example is based on the 2008 salary pattern of a NYC teacher. The total taxpayer contribution in dollars for an employee with that pattern rose 46.8% as a result of the deal. I assume, thought I am not sure, that the same deal was provided to local government workers in the rest of the state.

But there was another feature of the deal. Those newly-hired workers were required to contribute even more than 4.85% of their pay to the pension funds in the years through 2001, when Giuliani was to be term-limited out of office. In other words, the cost of his political giveaway was timed to soar when he wouldn’t be around to distribute the pain, and the city was reeling from the devastation of 9/11. Typical Giuliani. Typical of every politician who has been popular in the Generation Greed era.

The biggest single pension enhancement of the recent era was signed in 2000, and is demonstrated in Table #2. In a comment, I’ll put in a web release from the New York State United Teachers crowing about it. There were many aspects of it.

As pushed by Carl McCall, who was planning to run for Governor and seeking public employee union support while also selling out to Wall Street while serving on the board of the New York Stock Exchange, the deal included an inflation adjustment at one-half the consumer price index for the first $18,000 of income. There is a minimum increase of 1.0% in any year, meaning that retirees get a “cost of living” increase even in years when the cost of living – and the wages of the workers paying for the pensions – is falling. The maximum in any year is 3.0%. I didn’t spend the time to figure out how to get a maximum and minimum in the formula inflating the pension for inflation, so it just increases it by one-half the inflation rate times $18,000. That makes the impact of a 1.8% inflation rate, which the model includes, seem less than it actually is.

For those not already in the age 57 pension plan, and with the salary pattern of a NYC teacher in 2008, that automatic “cost of living” increase pushed up the amount of money required to have been set aside at retirement by $30,580 according to the model, compared with the pension that had been promised. If someone had just been hired, that could have been paid for with additional pension contributions over the years, but it was granted retroactively, opening up a huge deficiency in the existing pension fund.

Worse, a huge retroactive cost of living increase was granted to those who were already retired, and in some cases had been for decades. The cost of the retroactive benefit of those who were already retired in 2000, or have retired in the years since, dwarfs the cost of the cost of living adjustment for those just starting their careers. As a result, according to data from the U.S. Census Bureau, the state and city pension funds in New York State went from paying out $10.6 billion in 1999 paying out $13.9 billion in 2002, an increase of 31.1% that no money had been set aside for.

Those who benefitted the most were those who had cashed in to the rich Lindsay-era “Tier I” pensions of the late 1960s. These were the teachers who didn’t teach, the police officers who didn’t protect people, the transit workers who didn’t maintain the transit system, and the sanitation workers who went on strike, after moving the suburbs and before retiring rich and early to Florida, leaving the city bankrupt and in ruins. But there is one deal they didn’t grab – a cost of living adjustment. And as a result, after the inflation of the late 1970s they weren’t so rich anymore – and the city wasn’t quite as bankrupt, since inflation devalued its debts as well. In signing the bill, Governor Pataki noted how much the pensions of the long-retired had shrunk, but not the damage their retroactive deals did to the city and state in the 1970s. Now Mayor Lindsay’s Tier Is had struck again.

The other major aspect of the deal that I attempted to model is that Tier IV workers were no longer required to contribute a cent to the pension plan after they had worked ten years. A three percent contribution was maintained for the first ten years of work, to ensure that newly hired public employees would be no better off, and therefore better workers would not be attracted despite the huge increase in cost. A union-active neighbor who was otherwise thrilled with the deal questioned this aspect of it. If the employees are paying three percent less, he asked, who would make that up? No one, he was told. But that, of course, is impossible. The added cost was merely put off with interest. In reality, the 2000 pension enhancement that “cost nothing” according to Giuliani, McCall and the state legislature, increased the amount the taxpayer should have contributed to the pension funds by 65.0%, while reducing the amount that the employee contributed by 75.0%.

The bottom line is that due to this deal, for regular public employees, New York State and its local governments should have been contributing 14.4% of payroll for those with less than 10 years in and 17.4% of payroll for those with more than ten years, rather than the 8.8% that had been promised. Plus all the additional money required to offset the massive hole that was created when these benefits were awarded retroactively.

So, some regular Tier IV public employees are allowed to retire at age 62 after working 30 years while others are allowed to retire at age 57 after working 25 years, right? Not according to the unions.

They believe they have a right, every year or two, to a pension “incentive” to allow workers to retire years earlier, generally at age 55, without contributing an extra dime. There was once such incentive in 1995, when it was presented as a way to avoid layoffs. NYSUT crowed about having the legislature pass the “traditional early retirement incentive” in 2000, during a nationwide teacher shortage, after the 1995 incentive had devastated the city’s schools and left them filled with uncertified non-teachers grabbed off the street. Another pension incentive was enacted this year. Basically, after hiring workers with the understanding they will work to age 62, and not even setting aside enough money for that, the state legislature in fact lets them retire at age 55. Over and over. What does this cost?

Table 3 shows the cost Mayor Bloomberg’s deal to allow New York City teachers to walk out the door at age 55 in 2008, after not contributing an extra dime to the pension funds. It opened up an immediate 17 percent pension fund shortage for each teacher who took it. If the politicians acknowledged up front that public employees would be allowed to retire at age 55 instead of 62, and including the cost of the 2000 pension enhancement, they would have set aside double the taxpayer dollars compared with the pensions that were promised when Tier IV workers were hired. That’s right, those who get these early retirement incentives are getting twice as much in pension contributions than they were promised. Double. And little of this has been paid for – yet.

The 2008 deal for New York City teachers was passed in Albany in exchange for a promise of political support in a legislative election. “In announcing the agreement with the UFT, the Bloomberg administration said the costs of the benefits for early retirees would be balanced out by savings from the increased contributions and the replacement of more expensive senior teachers with a younger workforce.” So who do you believe, me or Bloomberg? Since that deal, the city’s spending on education has continued to go up – other public services have been cut to allow education spending to go up despite the recession – but public school services have been slashed repeatedly. The reason? Soaring pension costs. In the end, the city will be replacing “expensive senior teachers” with nobody. And those higher contributions were only for new workers, and those with a few years before they could take advantage of the deal. Those 55 and up walked out the door without contributing an extra dime.

I’ll say it again, every one of those pension enhancements opens a 17.7% hole in the pension fund for each worker who gets it. And it is “traditional” for it to be offered year-after year.

Let’s get back to those hired after 1995. As mentioned, under the first Giuliani deal they were required to pay 4.85% of their salaries into the pension fund, in exchange for being allowed to retire at age 57 after working just 25 years. But the 2000 deal cut that contribution to just 1.85% for those with ten year’s seniority.

With the city going bankrupt post-2000 as a result of all the pension sweeteners, the public employee unions have repeatedly (as in the 1970s) agreed to lower pay and benefits for future workers, often in exchange for allowing all current workers to do less work. The pay of most newly hired NYC workers was cut 15.0% in Bloomberg’s first contract. Starting salaries for police officers and firefighters were cut by 40.0%, and as a result a decade later starting pay is still lower than it had been in 2000. The cost of living increased 27.0% in that time. Although the unions would claim their younger members are not cheated, because they are not the same kind of workers. They are less qualified and motivated, and we have no right to expect much from them. “If you are a good worker, then go get another job, but don’t complain if you are here” one union rep told me. So much for trading lower wages for richer pensions, the usual claim. The public employee unions actually do less work, and lower quality work, for lower wages. And then get the richer pensions after the fact anyway.

Another example of the screw the newbie phenomenon is the higher percent of salary future NYC teachers will have to pay into the pensions – back to 4.85% for 27 years – in exchange for existing teachers – who sacrificed nothing – working fewer days. After all, the city can’t afford more days given its soaring pension costs, but it probably cannot afford new teachers either. This is shown in Table #4. This latest deal means future teachers will be paying nearly five times as much into the pension fund as the teachers who got to walk out the door early under the 25/55 deal cut just one year earlier. While the taxpayer contribution will be 24.8% lower than it was for the recent retirees, it will be still be 51.6% higher than the cost of the pensions those recent retirees had been promised when they were hired. The city’s cost for the pensions of new teachers, if there weren’t already an enormous hole to fill, would be 16.2% of payroll, still nearly double the 8.8% recently retiring teachers were promised when hired, if less than the ultimately got. A surprising result, given that all those pension enhancements and incentives allegedly either cost nothing or saved money. This is fraud.

I’m just using a spreadsheet to try to calculate the additional cost of the pension sweeteners to the pension funds. But a cost that may be as great or greater, for those who get to retire early, is the added years taxpayers have to pay for retiree health care before Medicare picks up most of the tab. New Yorkers would have had to pay for that health care even if the early retired were still working? True, with earlier retirement is has to pay twice – for the additional retirees and the workers who replace them. And don’t taxpayers “save money” if the early retirees are not replaced? Only if the remaining beneficiaries agree to do more work so that New Yorkers do not receive less from them in exchange. When does that ever happen? Not this year. Not next year. Transit service is being cut. Classroom teaching is being cut. The PBA is claiming its members won’t do as much to prevent crime. The Uniformed Firefighters are claiming they won’t be as quick to rescue us from fires. All in exchange for higher taxes.

Speaking of police, I’ll continue this analysis in my next post. The NYSUT announcement of the 2000 deal, linked in my first post in this series, is in the comment below. Lest they try to remove their celebration from their website as public education is destroyed to pay for it.

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