Comptroller Liu released a report that claimed, media stories based on a press release said, New York City pension expenses have increased due to poor investment returns and not retroactive pension enhancements for NYC public employees. But that isn’t what the report, which contained little more information than a press release and no back-up, actually said. Liu claimed that 48% of the pension hole, which he is apparently prepared to admit exists, is due to low investment returns, and 44% is due to retroactive pension enhancements that were voted for by the state legislature in Albany. The rest is due to the fact pensions have automatically become richer for public employees, as they live longer in retirement relative to the years they have worked. For private sector workers, longer lifespans means living on less each year or running out of money.
Adding it up, 52% of the pension hole according to Liu is due to NYC public employees getting a richer pension deal at the expense of other people, the majority of whom are less well off. And just 48% is due to what he calls low investment returns. This is nearly plausible, but I have five main problems with it.
First, as far as I’m concerned “low investment returns” really means money that past taxpayers should have put into the pension fund but did not – a hidden debt. Liu claims that investment returns from 1985 to 2010 exceeded the 8.0% investment assumption used since 2000, but that is only because stock prices are still too high relative to earnings and dividends, and future earnings will thus be lower. I won’t repeat the argument again, but you can read it here. There are, it seems, few honest people in finance, but two of the most prominent, Warren Buffett and John Bogle, have written recently that they agree with me. The 1985 to 2010 period is no basis for an assumption that could lead to New York City’s destruction due to soaring taxes and collapsing services. Unless that is the plan by those hoping to score and leave it in ruins the way a previous generation did.
Using excess stock prices as an excuse, politicians diverted money that should have gone to the pension funds to become more popular. Those who took advantage, and then died off, left New York, or retired and now have state and local income tax free retirement income benefitted. Anyone who stays here, moves here or opens a business here in the future is a loser. And not just in the case of public employee pensions.
Second, Liu claims that virtually all of the pension hole caused by retroactive pension enhancements is due solely to the massive deal passed in 2000. That year accounts for 40% of our soaring pension costs, he says, with other pension deals passed since responsible for just 4%.
But he begins his analysis in 2000. Many New York City public employees were required to work 30 years with full retirement at age 62 until 1995, when an earlier deal changed that to 25/57. As part of the 1995 deal, the employees were required to pay an extra 1.85% of their own wages into the pension funds, and to do so retroactively for all the years they had worked before then, if they wanted the earlier retirement. Unlike the New York City teacher’s deal of 2008 which had no such requirement for retroactive payments (more on that in a moment). But the cost of that 1995 deal was far in excess of the 1.85% the employees paid. My estimate was a cost of more than 8.0% of payroll, making the taxpayer/service cut share of the pain more than 6.0%. And since the city hadn’t been paying that extra 6.0% during all the years leading up to 1995, a big hole in the pension fund opened up. One of many now being filled by tax increases and service cuts.
Third, Liu only includes permanent pension enhancements, and ignores the cost of all the temporary pension “incentives” to “save money” over the years. Over and over again, New York City public employees have been allowed to retire early without penalty. Pension payments soar, but the city (or state) doesn’t put any money in at first, so it claims to “save money” by having fewer workers on the payroll. But eventually new workers must be hired to provide the public services that retirees used to provide, or public services disappear. And eventually pension (and retiree health care) payments have to soar to cover the hole created by the extra early retirees.
Pension incentives are generally sold as an emergency response to a temporary budget crisis, but a sell is all that is. It is a golden parachute arranged as part of a political deal in Albany or City Hall. Public employees talk about it, expect it, hope to be in the fortunate position to take advantage of an incentive when it comes along. Unions lobby for them, constantly. One just passed a year or two ago. In fact the 2000 pension deal Liu blames for most of the cost of pension enhancements also included an early retirement “incentive” for NYC teachers according to the UFT blog, even though New York City was so desperate for teachers it was hiring them uncertified off the street at the time.
Fourth, Liu gives no description of the effect of retroactive pension enhancements that reduce the retirement age on the cost of retiree health insurance. The biggest cost for that insurance arrives before age 65, when Medicare comes on line to pick up a large share of the cost. At least for now. So when a pension deal or incentive is signed to allow public employees to retire at 57 or 55 instead of 62, that means eight or ten years of retiree health insurance before Medicare helps pick up the tab rather than just three. Of course the city would have had to pay for those people’s health insurance anyway if they were still working. But not their replacements. Unless, again, the idea is for there to be no replacements, as public services are slashed. Very often, however, you find new hires at the desk of those who received many more years of paid leisure under an “incentive” to “save money.”
Finally, Liu claims the 25/55 pension deal for New York City teachers cost a mere $100 million per year. Perhaps because the state legislation, a newspaper reported at the time, required New York City to put an extra $100 million into the pension fund as part of the deal. Even though Mayor Bloomberg and the United Federation of Teachers claimed a deal to have NYC teachers retire five to seven years earlier would cost nothing.
Now it may be true that the city has thus far put in just $100 million more, but there is no way the real cost was just $100 million extra per year. No way. Particularly since, unlike in 1995, there was no requirement for the teachers to buy back all the years they didn’t pay the extra 1.85%. And as a result, both independent actuary John Bury and the Center for Retirement Research at Boston College find the New York City Teachers’s Retirement fund is one of the handful of most disastrously underfunded pension plans in the U.S.
Speaking of reports, the New York City Teacher’s Retirement System has for some reason not published its latest financial report, or at least not made it available. The latest report on its website is for the year ending June 30, 2009, and was published in December 2009. Looks like the next report is more than three months late. For some reason.
Does anyone really think it matters who is NYC Schools Chancellor given how much extra money will be going to the retired rather than the classroom? How can the UFT dis Bloomberg so much when he sold out the future of NYC children for a decade or more to given them the only thing they really care about? They just want to avoid their share of the blame.
But let’s ignore all these omissions and ask Comptroller Liu this question. If the public employee unions who backed your campaign received retroactive benefits, based on fraudulent assumptions, that account for just half of he cost of the pension disaster we face, when will their member and retirees pay half of the cost of that disaster?