In a deal done in the dead of night last week, New York became the latest state to drastically overhaul its pension plan against the wishes of its public employees. After months of political arm-twisting, the state legislature passed on Thursday a slate of measures expected to save the state $80 billion over 30 years while cutting retirement payments guaranteed to state workers.
The political drama that played out in New York -– a state that runs one of the county's largest public pension plans -- places the Empire State at the center of a national fiscal trend, according to a General Accounting Office report released earlier this month. The report found that while most states have the money in place to cover pension benefits for the next decade, many have failed to fund legally guaranteed pension promises made to people who retire after that period. When the market collapsed in 2008, state pension fund balances declined, obligating state governments to raise more money in the future. States interested in fixing their problem have three options: pay larger sums into their pension funds, raise taxes or trim benefits. Most have opted for the latter.
Since 2008, 43 states have reduced pension benefits for new employees, according to a report issued earlier this month by the National Conference of State Legislatures (NCSL). Pensions obligations eat up, on average, about 3 percent of state budgets. But with widespread underfunding and the baby boom generation just beginning to retire, state pension analysts expect pension financing to consume as much as 13 percent of public funds in the worst-off states within a few years. Public employee unions and even many pension analysts insist that while some reforms may be needed, post-recession budget woes in many states are being used as the grounds for securing long-desired cuts in public worker benefits. These cuts jeopardize the long-term public interest of ensuring that as many people as possible can retire with some level of financial security, they say. The fact that a Democratic governor in a strong union state like New York would push for reforms highlights just how big of a fiscal flashpoint public pensions have become.
The most common reforms approved by states include raising the retirement age for state and local government workers, requiring larger employee contributions and extending the number of years a person must work in order to leave with the full value of their retirement savings, said Ronald Snell, a senior fellow with the NCSL, a Washington, D.C.-based organization that tracks state policy trends. A smaller group of states, including New York, took steps to slash the amount of money that future retirees will receive each month.
Pension benefits matter because 25 percent of public workers are not eligible for Social Security.
States with severely underfunded pension pools have been making questionable decisions for about a decade, Snell said. Lawmakers have often made politically expedient but unfunded promises to public employees that have improved pension benefits instead of offering higher wages or raising taxes. Public pensions have fallen deeper into the red because of stock market collapses at the beginning and end of the 2000s, Snell said. In 2008, the pension fund cuts began.
"The conversation we need to be having is not how can we make pensions for government workers smaller," said Alicia Munnell, a Boston College professor who studies retirement issues, "but how can we make retirement more secure for everybody. That's the question to ask."
A guaranteed retirement income can make it easier for a worker to retire, said Munnell. No matter the size of a pension or how much the stock market fluctuates, a worker can count on those benefits. By comparison, the average worker between ages 55 and 65 with a 401(k) or similar retirement plan has less than $100,000 in savings, according to Federal Reserve data. A person 65 or older earning $50,000 a year needs $300,000 in savings to replace their income.
In New York, pension obligations take up less than 3 percent of the state budget, but have been projected to consume over 7 percent by 2014. Public pension observers and lawmakers across the country have closely watched Gov. Andrew Cuomo's effort to overhaul public pensions, because while the state's benefits are more generous than those of other states, New York's pension fund is far from the nation's most insolvent. The fight in New York also pitted a powerful, monied group of private citizens and a Democratic governor against a strong public sector union in a blue state.
"This bold and transformational pension reform plan is a historic win for New York taxpayers and municipalities," said Cuomo in a statement released this week. "Without this critical reform, New Yorkers would have seen significant tax increases, as well as layoffs to teachers, firefighters and police."
The state's final pension reform deal bumped the age at which workers can retire to 63, increased the amount that employees must contribute toward their own retirement and created a sliding employee contribution scale. It also reduced the income that a state or local government pension will guarantee to retirees.
The reforms made were absolutely necessary and will improve the state of public budgets in New York, said Carol Kellermann, president of the Citizens Budget Commission, a New York-based nonprofit that studies state and local government spending. New York's public pension benefits are more generous than those elsewhere and far outpace retirement benefits offered in the private sector.
"Look, that doesn't mean that we should be engaged in a race to the bottom," said Kellermann. "Compared to what most people have, this (package of reforms) is still relative security. This is not anywhere near the bottom that many people in the private sector have to face."
Public pensions are taking the blame for a much larger set of financial decisions, said Brian McDonnell, legislative and political director for AFSCME-NY, a public sector workers union that represents about 420,000 workers in the state. The state legislature has put local governments in a difficult financial position that pension reforms will not address, he said.
Last year, the New York legislature limited property taxes -- a key source of revenue for cities and counties -- to increases of no more than 2 percent each year. New York, like many states, also slashed the money it sends to municipalities.
Cuomo then stood behind an income tax plan that will pull less money out of rich households this year, said McDonnell.
"We think this was a very cynical attempt to seize on the public's understanding that there is a broader state fiscal crisis," said McDonnell, "and pit private sector workers, who are facing tremendous uncertainty around retirement, against public employees."
The average annual pension payout new workers can expect under last week's deal comes to about $15,000, according to AFCME projections. That's down from about $19,000 under the state's previous pension plan.
Cuomo was not completely victorious. The governor had hoped to open the new 401(k)-like plan to all new hires. Under the reforms approved last week, only a small group of non-unionized workers who earn more than $75,000 a year will have the option of using a 401(k)-like plan. Had the 401(k) option been opened to all workers, the plan might have attracted a large number of government employees and slowly eroded the public pension plan, McDonnell said. It did not require an employee contribution.