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Pension Self-Deception Is A New York State Of Mind

New York borrows from its pension to pay its pension bills. “Amortization” is another word for self-deception.

We’ve all heard the saying “borrowing from Peter to pay Paul.” The people who manage New York government finances, however, created a scheme that recently inspired The New York Times to coin a new phrase: “borrowing from Peter to pay Peter.”

State and local government employers across the state are borrowing from the state pension system to finance the contributions they owe to that same system. The state comptroller’s office, which cooked up this unusual arrangement in 2010 along with then-Gov. David A. Paterson, says it is less a matter of borrowing than it is a form of amortization, in which debts are paid gradually, with interest.

This benign description is an exercise in self-deception. Debt is amortized by paying down the balance. The balances owed to the pension system in New York continue to mount rapidly as cash-strapped budgeters take advantage of the liberties they are being offered.

In the past year, the number of public employers using the borrowing scheme has tripled. This fiscal year, municipalities are handing over IOUs for around $200 million, while the state itself is borrowing $553 million. Next year, borrowing from the pension fund may exceed $1 billion. The only thing being amortized is confidence in the New York pension system’s integrity.

The program’s defenders claim that amortization is necessary to smooth out the effects of market volatility and tax revenues that fluctuate along with economic conditions. “Amortizing pension costs is an option for some local governments to manage cash flow and to budget for long-term pension costs in good times and bad times,” state Comptroller Thomas DiNapoli said in a statement.

But there’s a big problem with this gamble. There’s no way of ensuring that the pension fund’s investment performance will quickly improve, or that public employers will have the cash they don’t have now at some point in the reasonably near future. Given that these municipalities and institutions are already unable to keep current on their existing contribution burdens, it seems overly credulous at best, and just plain dumb at worst, to hope they will soon be able to fund not only the new obligations they rack up, but also the contributions they’re now deferring, plus interest. Meanwhile, it is 100 percent certain that pension costs will ultimately need to be paid.

The underlying problem in New York is the same as in many other cities and states: For years, public employers have made promises they simply can’t afford to keep.

There are a number of ways to postpone dealing with the issue. While New York devised its dubious amortization program, Illinois and New Jersey have issued bonds to push costs into the future. There are, however, only two real solutions to the underlying problem. States and municipalities can cut pension costs by reducing benefits, or they can cut pension costs by reducing their workforces.

In New York, Gov. Andrew M. Cuomo has made a set of proposals for ways to start cutting costs. Under his plan, the retirement age would increase from 62 to 65; new employees would be required to contribute 4 to 6 percent of their salaries to pensions, as opposed to the current standard of 3 percent; and an alternative 401(k)-style retirement plan would be offered to new employees.

While Cuomo’s plan is being treated as a radical call for reform by supporters and critics alike, it actually does not go far enough. To truly fix New York’s pension problems, Cuomo would need to insist on making the new 401(k)-style plans mandatory for new employees, rather than just offering them as a voluntary option. It’s also no longer feasible to maintain the current pension system for existing employees without cutting their numbers; the fact that governments already cannot meet their current obligations is proof of that. The state and its municipalities need to switch current employees over to the new 401(k)-style plans, require them to contribute more of their salaries, or significantly reduce the number of workers accumulating benefits.

Yet even Cuomo’s relatively modest proposals may not get much traction. Public employee unions continue to exert an outsize influence. In New York, they have a strong ally in Comptroller DiNapoli – the man who is supposed to serve as the state’s fiscal watchdog. DiNapoli has essentially promised to do everything in his power to block Cuomo’s plan, telling the state’s Conference of Mayors, “I may not have a vote in this, but I do have a voice in this.”

Meanwhile, public employers in New York continue sinking deeper into debt. “The threat of bankruptcy hangs over every single municipal government in the state because of escalating pension costs,” Maggie Brooks, the county executive of Monroe County, said. That is no exaggeration.

Most municipal officials seem fully aware that borrowing from the pension fund to pay the pension fund is no solution, but they see no other choice. “I don’t think any financial manager likes to see the can kicked down the road,” Tamara Wright, the comptroller of Southampton, told The New York Times. But nevertheless Southampton, on the East End of Long Island, borrowed a fifth of its pension bill this year. As long as municipalities can avoid facing the full costs of the pension obligations they’re incurring, we are unlikely to see any real effort to fix the underlying problems.

As Thomas M. Roach, the mayor of White Plains, put it: “The road to hell is paved in amortizing pensions.”

 

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George C March 13, 2012 at 08:01 PM
If we keep kicking the can down the road, eventually the can falls over the cliff along with everything else. Seems that the only way out of this is bankruptcy. I don't see any other way out of this. Add to the mess, politicians like Alex Gromack giving raises to all employees, only adds to the pension problem. You cannot keep going back to the taxpayers for more money. The high property taxes are having a VERY negative effect on property values. We can't even sell our homes to get get away from this mess we are in. Time to pay the piper.
Thomas N March 14, 2012 at 01:44 AM
Mr. Elkins, thank you. This was probably the best written and most informative contribution on the Patch in a long time. I hope our elected officials take time to read it, as do voters. Not being a public employee, I actually feel bad for them. There is no way our government will be able to keep the promises made to them. It is just a feeling, just a hunch, but I would rather have a 401k and control over my investments than be joining the government workforce now and hoping my pension will be funded when I retire.
jeff meyer March 14, 2012 at 04:45 PM
Thomas, there is really no need to feel bad for the public employee. Let's do a fact check. The NYS Common Retirement Fund is presently valued at approximately 147 BILLION dollars. There are just over one million members if you include employees, retirees and beneficiaries. The average pension recipient within the police/fire fighter fund earns just over $39,000 a year. The average pension recipient within the general employee retirement fund earns just over $19,000 a year. The fund is very well managed. It is very healthy and has always been properly funded. The talk of the NYS Common Retirement Fund going bankrupt is completely absent of fact. It is too bad that Wall Street banks aren't managed in such a manner. Jeff Meyer Tuckahoe, NY
Aidan March 14, 2012 at 10:45 PM
Jeff, with all respect, you're quoting figures from a UNION publication. And they do all in their power to make current pensions appear modest. Here's a more accurate set of statistics ... and they show that recent average pensions for firefighters and policemen with usual lifetime employment is just under $98,000 PER YEAR ... here's the site http://www.empirecenter.org/pb/2012/03/lifetimepensions030912.cfm
jeff meyer March 14, 2012 at 11:06 PM
Aidan, my figures are quoted from the NYS Office of the Comptroller. If the figures are wrong then feel free to go after Mr. DiNapoli for publicizing falsehoods on a NYS government website. BTW, I would hardly consider the Empire Center for Public Policy a unbiased source of information. JM Tuckahoe, NY
Aidan March 14, 2012 at 11:24 PM
"BTW, I would hardly consider the Empire Center for Public Policy a unbiased source of information." Sorry. I disagree ... they enjoy a very solid reputation ... and they've been on the NYS fiscal scene for years and years. Unfair of you to tattoo them as biased ... because their reality doesn't jive with your argument. As for DiNapoli, well, even Cuomo is at odds with him and his figures and projections. I stand by those numbers ... and in your own heart you know those figures are closer to the reality you know when it comes to recent pensions.
jeff meyer March 14, 2012 at 11:29 PM
Aidan, If I am understanding the numbers you site correctly ($98,000 a year) it appears it is based on 35 years of service. I can state from personal observation that the vast majority of police officers that stay for 35 years are BRASS. Their salaries are much higher then patrol officers and will certainly skewer that number of $98,000 a year. The number of patrol officers that I have seen in my career stay for 35 years I could count on one hand. JM Tuckahoe, NY
Aidan March 14, 2012 at 11:46 PM
Jeff ... then do even modest adjustments ... and DiNapoli's numbers still fall apart. I've seen the figures for police officers outside of the city ... and firefighters. And teachers, too. And the numbers cited are a whole lot closer to the truth than DiNapoli's. There's an undeniable call from the public for pension reform. You know my arguments ... that salaries ... once not-so-generous ... were "buoyed" by a public pension. Those salaries have undergone dramatic increases ... that is also an undeniable fact. Yet the pension system that still exists makes believe it's 1980. It ain't. And municipalities and school districts are smothering citizens in taxes because of these obligations. Genuine reform is needed to match today's reality.
jeff meyer March 14, 2012 at 11:58 PM
Aidan, I respect your opinion. My only point to you is the research you site if from a organization that has a agenda that is not pro labor. Am I wrong? Unions have a agenda for their well being too. No surprise, right. That being said I respectfully disagree on the $98,000 figure of an average PFF pension. It is not accurate. Maybe for Lieutenants and Captains who stay for 35 years, not for the patrol officer. Do you personally know any patrol officers who are on the job for 35 years? I would love to meet them and ask what are they thinking. LOL. JM Tuckahoe, NY
Bob Ogden March 15, 2012 at 12:09 AM
The pension funds may need reform and they should start by prohibiting municipalities from borrowing from them. That's part of the death spiral that no one mentions. Pension funds can usually support themselves if the politicians don't use them for a slush fund. That lesson was learned by NYC when Mayor Bloomberg tried to renege on a borrowing arrangement made by a previous mayor that was costing him millions every year in payback. Whatever you do in the end remember it's not us against them. They worked for their pensions and whether you like it or not we are legally and morally bound to pay them. As to future employees, everything is negotiable. .
Thomas N March 15, 2012 at 12:55 AM
Bob, the federal government is legally and morally obligated to pay me my Social Security but I'm not holding my breath, and my point is that neither should state pensioners expect to receive what they were promised. It's not a political argument. It's simple math, as Mr. Elkin has laid out so clearly.
Aidan March 15, 2012 at 01:07 AM
No, I don't know any such people personally, but I do know dozens in the educational filed who have pensions near or in excess of 100k. And that is not a rare thing either. I won't pretend to know what lies beyond my own experience. However, I am certain you know retired colleagues ... or have heard of retired firefighters or police officers ... who do have pensions that are eye-popping. In the case of those professions, remember it's a 20 and out arrangement for a full pension. And, as of now, there is still no prevention to padding the final salary years with substantial overtime ... and that skews the pensions higher. Listen, the issue is simple: can taxpayers continue to fund these sorts of pensions down the line? You know the answer to that. You know that the breaking point is near ... and for some, it's already arrived.
Aidan March 15, 2012 at 01:47 AM
I agree with you. Albany made this deal with the employees. These pensions were not the doings of municipalities and school districts. No, they were to political "tool" legislators used ... against the taxpayer ... to garner financial support from unions and to win re-election. Robbing Peter to pay Paul is nonsense finance. Seal the old pension system shut ... using some humanitarian cut-off point. And then reformulate a pension program that is less burdensome for taxpayers and more in line with the private sector. The recent "tier" additions are almost always tinkered with down the line ... and lose their potency. And the newest tiers are, in fact, band-aids. Of course, the unions won't buy that tag ... but anyone with even a cursory knowledge of the system knows a house of cards when he sees one. And this particular house of cards is about to crumble.
LMF March 15, 2012 at 04:25 PM
The problem is that NOT ONE politician has the guts to say we need "25 ( or 30)-and out" for cops /firemen....or even replace "any age" with a reasonable number.
Mike Hirsch March 15, 2012 at 06:16 PM
I say let's keep on kicking the can down the road and borrowing more money than we can ever pay back. It will give all of us in private enterprise more time to pull up stakes and leave this sorry state to the public employees and politicians.
Jerry March 15, 2012 at 07:33 PM
Correct, no guts politicians. Pander to the Police and Fire unions. The most expensive to maintain pension systems seem to be immune from any bit of modest reform. Why does o/t need to be pensionable (Isn't the o/t dollars enough reward)? Why not "23 and out"? I grew up in a "cop" family. We knew the deal. Modest salary, good benefits, and retire early with a modest pension...and than get another job! We have moved far away from that.
jeff meyer March 15, 2012 at 07:53 PM
Police Officers, Fire Fighters, Teachers and Correction Officers and other public employees need not apologize for their pensions. Each occupation is a profession and is compensated as such. If you chose a 401K as your retirement plan then good luck. Public employees chose a DBP. It is more dependable and reliable then a 401K. If it bothers you that much Jerry then perhaps you should have followed the example of your "cop" family members and had become a police officer. JM Tuckahoe, NY
Bob Ogden March 15, 2012 at 08:25 PM
Thomas I understand your point but don't agree with it. No one in the Federal Government is suggesting that they eliminate paying social security recipiants. Unfortunately, the same raiding that took place at the state level, takes place daily at the federal level. Truth is Social Security is an enourmously successful program that keeps our elderly out of poverty and should never be given up. You probably know this but I'll remind everyone that FICA is only taken out of the first 109K a person makes in a year. Once again we're giving those who can most afford it a break. Why not stop FICA at 109K and then reinstate it for everything over a million in earnings. Just a thought.
Jerry March 15, 2012 at 08:53 PM
We simply cannot afford this. Greater reform is needed.
jeff meyer March 15, 2012 at 09:15 PM
Jerry, for your edification as for Thomas N, Let's do a fact check. The NYS Common Retirement Fund is presently valued at approximately 147 BILLION dollars. There are just over one million members if you include employees, retirees and beneficiaries. The average pension recipient within the police/fire fighter fund earns just over $39,000 a year. The average pension recipient within the general employee retirement fund earns just over $19,000 a year. The fund is very well managed. It is very healthy and has always been properly funded. This information is on the website of the NYS Office of the Comptroller. The talk of the NYS Common Retirement Fund going bankrupt is completely absent of fact. It is too bad that Wall Street banks aren't managed in such a manner. The NYS Pension Fund is certainly one of if not the healthiest pension fund in the nation. It is not even in the realm of insolvency. If Tier VI is not enough then I am sure a Tier VII will be a couple of years away. After all, Tier V is only two years old. Jeff Meyer Tuckahoe, NY
SLJ March 15, 2012 at 09:34 PM
Jeff-I guess you don't know too many police officers. Many start out in their early twenties and put in in their late fifties. That's 35 years, last time I checked.
Aidan March 15, 2012 at 10:07 PM
Jeff, you just don't want to face the reality. It's all unsustainable. Period. And there you go again with DiNapoli's figures ...
jeff meyer March 16, 2012 at 02:21 PM
Yes Aidan, I guess you are right. The NYS Office of the Comptroller and all of the audits that are conducted on said office and funds are lies. It is a convoluted scheme just to deceive the taxpayer. Why let facts get in the way when we wish to form a opinion. Jeff Meyer Tuckahoe, NY
Ephinz March 16, 2012 at 02:24 PM
Interesting, the Fund paid out $7.66 billion last year to 376,000 retirees and beneficiaries. The gov't entities paid in $2.34 billion and its employees $284 million. What is lost is all the money paid in has to be levying upon the taxpayers and even the amount being paid in by the gv't entities alone is causing a reduction in services without any reduction in said tax levies.
JoeStateside March 25, 2012 at 03:07 PM
Government Pension systems could work as originally intended, however the reality of sneaking trinkets into ones pension is the scourge of this system that needs to be fixed. For instance, you come in 30 minutes late and your boss values you enough as a friend or a competent office staff member so he looks the other way when checking your time card. However, "Bill" who is another of your coworkers doesn't fare as well beacuse the boss actually docks him the time and reminds him of his work time obligations. Guess what, this is going on in a stupendous way in Government offices, only it is relating to Pension adders that extract big bucks from you to pay for that favorite one who the boss gives such perks to. Oh, you get the overtime, while Bill isn't given that oppurtunity for the same job, and maybe you are in the "field" or working at the office on a weekend so no one else even is aware of the extra time you are building up toward your retirement. Rid the extra perks, make it a one size pension system for everyone in Government, and you will solve tbe problem. That means uniformed pension systems , regular govenment service employees, etc. Get rid of the vacation days added to the final year end salary as well, because your Boss looked the other way when you took it but didn't show it on your time card. Yes, its a simple thing to correct, but you have to end the Boss and employee fraud of the system.

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