Finance

Moody’s: New York’s Pension-Deferment Plan Has Long-Term Risks

New York’s new law to allow some cities to defer pension payments would increase their unfunded pension liabilities and could hurt their credit outlook.
April 9, 2013

New York’s new plan to allow financially strained municipalities to partially defer their pension payments carries a long-term risk that won’t outweigh the short-term relief, a national ratings agency said Monday.

Such a move would increase the unfunded pension liabilities of participating local governments and could hurt their credit outlook, according to Robert Weber, a Moody’s credit analyst.

“The positive short-term budgetary relief will outweigh the cost of increasing unfunded pension liabilities for only the most financially stressed local governments,” Weber wrote in his assessment. “Cash-strapped localities such as Nassau County (A2 stable), Rockland County (Baa3 negative) and the City of Glen Cove (Baa3 negative) may benefit from this tradeoff given their significantly strained cash positions.”

Last week, Gov. Andrew Cuomo signed into law New York’s $137 billion budget that includes a plan to allow municipalities to defer part of their Actuarially Required Contributions (ARC) in the coming years as long as they pay the outstanding amount plus interest over 12 years. The interest rate would be calculated by adding one percentage point to whatever the 10-year yield is on a U.S. Treasury note at the time of the deferral. The proposal allows for a longer payback time with a presumably lower interest rate than the current deferral system. Cuomo inserted it into the 2014 budget after his so-called pension-smoothing plan that sought to guarantee lower pension payments for governments was panned by the state comptroller and other fellow Democrats.

Although New York’s state pensions have been among the country’s best-funded systems, costs for local governments have escalated in recent years. According to Bloomberg News, average government payments for the Police and Fire Retirement System (PFRS) nearly doubled (from 15 percent to 28 percent of salaries), and payment tripled for the Employee Retirement System (ERS).

Without the legislation, local governments would have had to contribute an average 20.9 percent of salaries for ERS, 28.9 percent for PFRS and 16.5 percent for the Teachers Retirement System (TRS) in fiscal 2014. The new law will allow localities in fiscal years 2014 and 2015 to pay a fixed rate of 12 percent for ERS, 20 percent for PFRS and 14 percent for TRS.

Starting in fiscal 2016, the state comptroller can increase the contribution rate for ERS and PFRS by 0.5 percentage points up to the full ARC. For TRS, the board can increase the rate by up to two percentage points in fiscal 2016, however the contribution rate for TRS must stay between 14 percent and 18 percent.

Weber notes that deferring payments relies on assumptions about investment returns that might not play out.

“Participating local governments exacerbate their risks if investment returns are below projections,” he wrote. “In addition, unfunded liabilities could increase above expectations if more local governments participate than the state currently anticipates.”

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