The Empire State's Looming Public Pension Explosion

Local pension costs may triple in New York State, meaning costs will outrun revenues, even when the recession ends.
July 23, 2009 AT 3:00 AM
Girard Miller
By Girard Miller  |  columnist
Girard Miller is the Public Money columnist for GOVERNING and a senior strategist at the PFM Group.

The most sobering and scary official report so far on the status of public pension plans is a recent analysis published by the New York State comptroller's office. It expects local governments in the Empire State to face a tripling of employer pension costs in the next six years. The impact of the 2007-09 bear market will compel the state's pension plan to bill employers as much as 30 to 40 percent of their payrolls in order to cover pension costs actuarially.

What's worse, the report doesn't say anything about retiree medical costs, otherwise known as OPEB for "other post-employment benefits." Nationally, these have a funding deficit even larger than the pension funds. In fact, New York has not even passed the legislation necessary for local governments to create a proper trust fund to finance their OPEB liabilities.

For eight months now, I have been alerting public officials that this day is coming. The 40 percent market losses in the stock market since 2007 have cost most pension funds a 25 percent loss in total assets in their diversified multi-asset portfolios. When that gets translated into higher contribution rates needed to amortize their deficits, the numbers get really big really quickly.

In some states, like California, the actuaries and boards are now taking extraordinary measures to delay the bitter medicine now required to properly fund their plans. In the case of CalPERS, the largest state public pension fund, the actuary and the board decided that they could stall for time with 30-year "smoothing" and a three-year delay in employer payments.

Talk about a delay in game! Governor Arnold Schwarzenegger blasted them for deferring costs to the next generation, and he's got it right on this one. You can't sweep a half-trillion dollar market loss under a 30-year rug when half of your workforce will retire in 10-15 years and only a minority actually work for 30 years.

As municipal officials observed in the New York Times article cited above, the rapidly rising costs of retirement plans will now force local governments throughout the nation to make deeper cuts in their budgets or else raise taxes. In states like California, tax increases are almost impossible to obtain without voter approval, so the sad reality now is that retirement plan costs will compel layoffs even deeper than those already underway.

In many states, retirement plan reforms are desperately needed--now and not in 2015. My columns earlier this month provided labor-relations strategies that public officials can follow, as well as a pension-reform ballot initiative that could be presented to voters either statewide or locally.

I hadn't intended the ballot language I suggested in last week's column to be used at a local level, but the more I reflect on this, the more sensible it seems for city councils, county commissions and school boards to take the initiative themselves and present their voters a retirement reform package. This would enable them to retain vital public services while paying off their pension and OPEB debts in a responsible manner that assures taxpayers this will be the last time -- because they include cost-cutting reforms in their ballot proposal as a condition for voter approval. In some cases it may require some hard-nosed pre-ballot bargaining with local labor organizations. Negotiators need to deliver a clear message that public employees will be left out in the cold if they don't help build popular support for their retirement benefits, accept some concessions and contribute equally to the costs as true partners.

A future column will address this possibility in more detail, but in the meantime, I'm happy to help any public official who's interested in this concept and wishes to e-mail me.