One of the most notable aspects of Governor Cuomo’s 2012-13 Executive Budget, which posted online yesterday morning, is a new Tier for the New York state pension system. This time the proposal is for a defined-contribution retirement plan option. When the governor proposed a “Tier 6″ pension plan last year he sought to simply make adjustments to the existing defined-benefit pension system by raising retirement ages, extending the vesting period, and proposed only modest increases for new hire employee contributions. The announcement of change to the pension system is much bigger today. The new Tier 6 would be a system not unlike a 401(k) system applied in the private sector, but here there would be a variable risk/reward system whereby employee contributions would decrease or increase, within limits, tied to economic conditions. In addition, the new system would include a staggered schedule of employee contributions, ranging from three percent to six percent depending on salary level, with higher salaries paying more into the plan.
There would be a voluntary defined benefit plan which would include a minimum employer contribution of four percent, which could increase to a maximum of seven percent if the employee matches with a three percent contribution, bringing potential annual retirement savings to 11 percent. The Budget Message notes that such a system would “offer a portability and early vesting feature not available with defined-benefit options.”
This is a huge deal and a great step for New York state in reforming the huge unfunded liability of pensions. This defined benefit elimination takes the risk and shifts some to the employee, rather than the system in Tiers 1 through 5 which places 100 percent of the financial risk on the taxpayers of New York. Of course, Tiers 1 through 5 are still going to remain a huge financial issue in the next 25 years, but at least the madness will stop for new hires if Tier 6 is implemented.
Last week the Citizens Budget Commission released a policy brief titled “The First Priority in the New Year – Pension Reform.” It compiles the latest financial data on the rising cost of pension obligations of government entities in New York state, including New York City, other localities and the Metropolitan Transportation Authority – here’s the interesting link http://bit.ly/AecueJ.
A link to the governor’s press release is http://www.governor.ny.gov/press/06082011PensionReformLegislation.