A Way Out for the MTA: Who Should Pay for the Pensions?

In my previous posts on the MTA, I suggested that the subway and commuter rail systems should break even on an “auto equivalent basis.” That is, fares and other operating revenues (from advertising in the cars for example) should cover the cost of buying, maintaining, and operating the subway and railcars, and collecting the fares. I also suggested that “rent” paid by drivers, in the form of tolls, in exchange for transit riders giving up their share of the street should cover the cost of the rail infrastructure. And local government contributions and station operating revenues (in store rents and station advertising) should cover most of the cost of the stations.

But what should be included in the costs to be covered as described? In particular, pension contributions, according to MTA consolidated budget documents, are expected to equal 20.7% of payroll (including overtime) in FY 2011, rising to 22.7% (and probably more (in FY 2014). Is that part of the cost of transportation today? And what about retiree health care? Yes and no.

The soaring cost of government worker retirement may be divided into two parts. The future pension and retiree health benefits workers are earning today while they are working. And the pension benefits and retiree health benefits that were earned (or granted) in exchange for work (or political support) in the past, but which were not paid for in the past. The former is part of the cost of today’s transportation, and the cost of today’s public services in general. The later is simply a back door debt shifted onto the backs of future taxpayers and service recipients by those who came before.

There were many such shifts. One of my frustrations with the public employee pension disaster is the unwillingness of anyone in politics or the media to fairly assign blame for the problem, and to propose partitioning the cost of the solution among the beneficiaries in proportion to their guilt. That disaster is due to three factors: underfunding by taxpayers, underfunding by public employees, and retroactive pension enhancements for public employees that provide far richer retirement benefits than those now approaching retirement had been promised when they were hired.

The extent of the damage from each factor varies from place to place. From New Jersey – where taxes were below the U.S. average until recently and taxpayers put nothing into the pensions for years, while public employees put in quite a bit. To New York City, where the public employees put in little and received one retroactive pension enhancement after another, with some deals taking place years after the stock market bubble burst, and taxes and taxpayer pension contributions are just about the highest in the country.

Faced with this diverse level of guilt, unions and the politicians they control – mostly Democrats – have tended to simply deny there is a problem, while pretending all the retroactive pension deals didn’t happen. With a goal of getting everyone in their generation safely into retirement, and then raising taxes on workers (but not the retired) to “help the children” (not to pay for retroactive pension enrichments), and drastically reducing the pay and benefits of new hires in public service, due to “circumstances beyond our control.” Which is exactly like the Democratic Party strategy on Social Security. Deny there is a problem, get the 1960s generation fully into the program, and then drastically cut benefits for those coming after due to “circumstances beyond our control,” consigning many of them to severe hardship when they reach old age themselves.

The desperation to avoid blame for other’s sacrifices, having already grabbed the related benefits, has become more apparent recently. You have NYC Comptroller Liu releasing a report that claimed pensions cost only around 5.0% of payroll, even as the pensions he oversees are expected to demand 40.0% of payroll next fiscal year. And claiming there is no pension evidence of spiking, while misleadingly avoiding a comparison of overtime worked in the last year before retirement with earlier years, and not providing any data. You have the Independent Budget office releasing a report that claimed that Charter Schools get more money than regular schools, but then excluding pension costs from the spending on regular schools.

The “starve the beast” Republican crowd, meanwhile, simply asserts that public employee pension benefits are too generous, giving no legitimacy whatever to the fact that workers were promised a certain level of retirement benefits when they were hired. And simply ignoring the fact that in many cases the taxpayer didn’t even put in enough to keep the original promises (let alone the subsequent enhancements). The failure of taxpayers to make required contributions is simply dismissed as irrelevant “because there is no money,” as New Jersey Governor Chris Christie put it.

Which is exactly like the Republican strategy for Social Security. They don’t want to talk about how the 1983 Republican plan to “Save Social Security” has already required higher regressive payroll taxes on workers, but the resulting surplus was used to offset lower progressive income taxes on the rich, leaving no real money in the “lock box,” just IOUs. And they wouldn’t dare suggest that those over 55 make any sacrifices. But younger generations? The Tea Party, which is senior citizen-based, is “fighting for young people’s futures” by trying to consign them to poverty when they reach old age themselves, rather than raising their taxes more while they are working.

The only more or less “right wing” commentator I’ve read who even acknowledged taxpayer underfunding, in Illinois, put it this way. It was the public employee unions’ obligation to use their political muscle to ensure that taxpayer money was set aside for their pensions, he claimed, and if that didn’t happen the consequences are therefore the unions’ fault and their problem, and not the problem of future taxpayers. But in fact future taxpayers will be socked, because Illinois drastically increased its state income tax. But Illinois’ state and local tax burden was low to begin with. Not so in New York.

When tabulating the real cost of today’s public services I would only include the cost of pension benefits earned today, not funding shortfalls from the past, and not including all the retroactive pension enhancements of the past 16 years. The benefits those workers now approaching retirement were originally promised at the time of hire, for those in “physically demanding” positions, included a full pension at age 55 after 25 years of work, with a 3.0% employee contribution throughout their careers, no inflation adjustment when retired, and less pension spiking through overtime or last minute promotion – because the pension was based on the last three years of work rather than the last one year. And for those not in physically demanding positions, a full pension was promised at age 62 after 30 years of work, also with no inflation adjustment, less pension spiking through overtime or a gift promotion, and a 3.0% employee contribution. All the subsequent enhancements were described as costly nothing, or simply passed in deals that the general public never knew about – and has no moral obligation to pay for.

Many New York City Transit workers fall into the “physically demanding” category; most if you don’t want those over 55 operating your subways, trains and buses – a stipulation the Federal Aviation Administration just dropped for airline pilots. Of course pilots had been required to retire at 55, and transit workers are not.

I have calculated, based on reasonable assumptions and what was originally promised before all the deals in Albany, that the taxpayer cost of the promised pensions was 13.2% of payroll for those with a 25/55 pension, and 8.8% of payroll for those with a 30/62 pension – with an additional 3.0% from the employees in either case. And that, as far as I’m concerned, is the pension cost that should be borne by today’s farepayers, tollpayers, and local taxpayers for MTA transportation services.

But thanks to those guilty factors – taxpayer underfunding, employee underfunding (the 3.0% employee contributions was eliminated after ten years in the 2000 pension deal), pension spiking through massive overtime in the last year of work, the retroactive inflation adjustment that drastically increased the pensions of those long retired, etc. – the MTA is actually paying far more for pensions than 8.8% or 13.3% of payroll. According to MTA budget documents, pension contributions as a percentage of payroll (including overtime) for FY 2011 are expected to equal 25.9% at New York City Transit, 31.1% at the Long Island Railroad (where there is massive overtime by the way), and 10.15% (?) at Metro North.

Over and above the pension contributions that would have been earned today without the pension deals of the past, taxpayers have an additional obligation to correct their own past underfunding. That additional obligation is easy to calculate. Just go back to the mid-1990s, before the pension raids started, and find out what the taxpayer contribution was at the MTA each year. Every year of taxpayer pension contributions at less than 13.3% of payroll for those in physically demanding positions, and 8.8% of payroll for those in other positions, would be considered is a “debt” that had to be paid back. With interest at a reasonable rate, not the 8.0% expected pension rate of return that has been asserted. And any year with a pension contribution in excess of those levels would be considered a repayment of that debt.

In New York City, taxpayers have already been paying money back, as the much higher recent contribution levels at New York City Transit show. But it is possible that taxpayers owe more. That additional money could be paid back with interest over the next 12 years. I will discuss which taxpayers owe that pension debt, and how it should be paid, at the MTA and elsewhere, in a later post on the “Generation Greed surcharge” and the exemption from state and local income taxes for retirement income.

It is unlikely, however, that given all the retroactive pension enhancements of the past 15 years, pension spiking, and the cut in public employee contributions, that merely having tomorrow’s taxpayers fund the moral obligations of yesterday’s taxpayers would be enough to get the pension funds out of the hole, and keep them there. For that I have another solution. Make the public employees whose unions foisted those deals on the general public pay for the balance of the pension hole, also over the next 12 years.

Simply put, realistic rather than fraudulent assumptions about the expected rate of return, lifespans, pension spiking, etc. would be used to calculate the total pension contributions required. The actual money in the funds, rather than hypothetical money that doesn’t’ really exist, would be used to calculate pension assets. The taxpayers/farepayers/ tollpayers would put in their share. And then the public employees would be required to put in the rest, through higher contributions out of their own pay. Like the taxpayers, they would be given 12 years to get the pension funds out of the hole.

When word of the various pension deals in Albany leaked out, the unions and politicians always claimed their cost would be zero. Well guess what? Jack up the employee pension contribution to cover the resulting shortfalls, and the general public cost would in fact be zero after all! The lie would cease to be a lie. The fraud would cease to be a fraud. What could be more fair than that?

And if future public employees were granted less generous pensions, as has already happened in some cases, they should also be required to put less into the pension funds, terminating the “screw the newbie, flee to Florida” cycle once and for all. In fact, new public employees should not be in new pension “tiers.” They should be in entirely new pension funds that their elders, and their unions, and the politicians had no say in and could not divert money from to cover their own retroactive deals. And if future employees, at the time of hire, wanted into the richer pension deals with more money taken out of their paycheck, that should be allowed. Perhaps if some existing employees a long way from retirement wanted into the less rich pension deals with less money taken out of their paycheck, that should be allowed too.

Is there any limit to the percent of their pay that MTA employees – and New York’s state and local government workers in general – should be required to put into the pension plans to cover the cost of their retroactive pension deals? Consider that many public employees in the United States were already contributing close to 10.0% of their pay to their pensions, and that many states have proposed increasing employee pension contributions further as one way out of the disaster. And consider that I have calculated that if, like virtually all workers, you don’t get a pension and you want to put enough into your 401K during the main part of your career to fund a retirement at age 70 (not 62 or 55), savings at 10.0% (for your whole career if things go well) to 20.0% (in case returns are low and in case you get downsized) of pay are required. So I wouldn’t’ consider it unfair in any way if New York’s public employees were required to contribute 20.0% or more of their pay to the pensions during the 12 years until the pension plans were out of the hole. That is just equity with those who get far less extravagant retirement deals because the public employees, as consumers making choices in the marketplace, will not pay more for them. If any private sector worker had the equivalent of a government pension, the government workers would shop elsewhere to save money. 

I don’t see this proposal as an intermediate term solution to a crisis. I see it as a long-term way to avoid the pension scams of the past 16 years. The taxpayer pension contribution would be permanent and contractual, set at 8.8% or 13.3% of payroll, year after year regardless of how “overfunded” actuaries hired by politicians claimed the pension funds were. The public employee share would vary from zero to infinity.

This would change everyone’s incentives. Pension fund managers would no longer have an incentive to invest in risky assets at the peak of a bubble, because the taxpayer share would be fixed. Pushed by public employees worried about having their own contributions spike later, they would shift to more stable assets. Politicians could no longer trade big, permanent pension deals for temporary funding relief to free up money during election years. Taxpayers would no longer be allowed to short the pension plans. Unions would have less incentive to do political deals for retroactive pension enhancements, and less reason to organize or tolerate pension scams, because their own members would pay for them. And public employees would see their take home pay fall in recessions when other workers were suffering and they were lucky to have a job, and rise when other workers were getting raises and they might otherwise feel underpaid.

But it isn’t just current public employees who benefitted from the retroactive pension deals of the past 16 years. Past public employees now retired, and even those already retired at the time the deals were cut, also benefitted. Shouldn’t they be made to sacrifice too? Yes, if that is what the unions want. I propose that any increase in the percentage their health insurance premiums that New York’s retired public employees are required to cover as part of future union contracts, during the 12 years during which current workers are making additional make-up contributions to get the pension funds out of the hole, would count as part of the current employees share of those make up payments. The more retired public employees paid for health insurance, the less current employees would be required to pay into the pension funds out of their salaries.

This, however, brings up the question of retiree health insurance in general. Is that a current cost of public services, or a cost inherited from the past? After all, in most cases no money was set aside for retiree health insurance in the past. In fact, I believe that you can be hired by New York City Transit (or some other New York City agency) at age 52, hide in an office for five years, “retire” at age 57 with a small pension, and get a fully-funded retiree health insurance plan for the rest of your life. Then get a private sector job, because you could tell the prospective employer that they wouldn’t have to pay for your health insurance, unlike that older private sector worker who is unemployed (and thus unemployable).

There are few cases of local governments pre-funding retiree health care, one reason that many honest actuaries believe that OPERB (other than pension retirement benefits) are going to destroy public services over and above their destruction by pension underfunding. One local government that did pre-fund retiree health insurance was the City of New York during the Bloomberg Administration, but it turns out that “retiree health care fund” was not real. When the recession hit, the money was simply taken out of it and used to cover general budget shortfalls, and no one said a word about it. Not the unions. Not the retirees. Not the Comptrollers. Not the Control Board. And now it is mostly gone.

It is simply not practical to move from a “pay as you go” retiree health insurance system to a pre-funded system, because that would mean that one generation of taxpayers and public employees would have to pay twice. On the other hand, there are risks to not pre-funding. With the wages of most U.S. workers going down, with the cost of health insurance going ever upward, and with perpetual union deals in place that do not allow any limits – the cost of retiree health care that past taxpayers didn’t pay for when todays’ retirees were working would have been much lower and less burdensome than the cost to future taxpayers when those benefits are finally paid. This raises the risk of a downward spiral for a community, as taxes soar and services collapse, and the loss of retiree health insurance in bankruptcy. Neither public employee unions and the politicians they control nor the general public, should want that. Unless they are looking to make a score and then move out of New York, as many are.

Therefore I propose the following. Retiree health insurance should be contracted for separately from current employee health insurance, so it is easy to tell the cost of each. A real retiree health insurance benefit fund should be set up, not to cover not 100 percent of the cost of future premium payments, but to sufficient to cover the possibility of rising costs and/or a shrinking tax base in particular place. Each year, taxpayers should put the equivalent of 25 percent of the cost of that year’s retiree health insurance into the funds, irrevocably. This is the amount that would be charged to MTA farepayers, tollpayers and local governments as part of the cost of transportation. The money would not be touched for 12 years, and allowed to build up. After that, a reasonable share of the fund could be removed each year to pay retiree health insurance premiums, say 4.0% of assets. The retirees would pay their share. And then future taxpayers would pay for the rest.

During the initial 12-year build up period the entire taxpayer cost of retiree health insurance would be considered a debt inherited from the past, rather than the cost of current services. After that point, only the cost net of the proceeds from the retire health care funds would be considered such a debt. If the tax base does not collapse (because the unions have repeated their achievement of the 1970s) and health insurance inflation slows, perhaps that debt will begin to shrink rather than grow.

No doubt New York’s public employee unions would consider it an outrage that members with seniority and retirees could be required to pay for a share of their own selfishness. They would probably demand that benefits be “negotiated.” But most current New Yorkers, and all future New Yorkers, were never a part of any negotiations, were not represented, and have simply been cheated. If no one is willing to say so, then public services will be destroyed – save for special services and benefits for the politically connected. The political class drives everywhere, gets parking placards for free parking, sends its kids to private, suburban and special deal schools, and generally is not subject to the tax burden and service quality it creates. And they don’t give a damn.

What I have proposed isn’t what will happen. It is what should happen. It is a proposal for a way out for the MTA. But it works for New York’s state and local government in general. What will happen? The soaring taxes and collapsing public services observed in NYC in the 1970s. It is already happening, and they won’t settle for anything less. They have been evil, predatory and selfish, and it is frustrating that no one else will say so.

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