Perspectives on Governor Cuomo’s Pension Smoothing Proposal

By Anita W. Laremont

We recently posted an article on Governor Cuomo’s pension smoothing proposal, referred to as the “Stable Rate Pension Contribution Option,” wherein we explained the legislative proposal, which would permit municipalities and school districts to reduce their Employer Contribution Rate (ECR) below what it would otherwise be now by agreeing to pay a flat rate going forward for a period of years to be determined by the state comptroller and the Teachers’ Retirement System, thereby accelerating their Tier VI savings to save money now. Since the proposal was unveiled in the governor’s budget proposal, there has been a great deal of discussion, with a variety of views being expressed. Some mayors, including Tom Richards of Rochester, have expressed support for this proposed legislation, arguing that it would provide sorely needed immediate financial savings as he struggles to close a projected $30 million shortfall. Even the New York State Conference of Mayors has expressed some support for the plan, calling it a worthy option for municipalities’ consideration. Others, such as Syracuse Mayor Stephanie Miner, have been vocally critical of the measure, asserting that it detracts focus from the more serious fundamental issues facing cities, such as declining tax bases, aging infrastructure and the need for substantive mandate relief. (Nonetheless, Mayor Miner did not rule out having Syracuse take advantage of the lower rate if the initiative were to be enacted.) The New York State United Teachers union has put its support behind the proposal. And although New York State Comptroller Tom DiNapoli initially appeared to be dubious of the initiative, he subsequently announced that he has commissioned a study of the proposal. Finally, the Citizens Budget Commission this week wrote letters to Comptroller DiNapoli and the president of the Teachers’ Retirement System, urging them to reject the proposal, saying that it would endanger the financial viability of the pension plans.

We will continue to monitor views on this proposal and its progress throughout the budget process.

3 Responses to “Perspectives on Governor Cuomo’s Pension Smoothing Proposal”

1. Charles Barley says:

   March 1, 2013 at 4:38 pm

   The smoothing plan addresses one of the systemic flaws in the current methodology. I never quite understood why we established an employer contribution system permitting little or no contribution when money was flush to fund the pension, but required onerous payments when tax revenues plummet and the market underperforms. One could argue the current arrangement begged for eventual watering down of defined benefit structures.

   While I am also optimistic the approach will provide the promised results, I also believe it was a mistake to market the smoothing plan on future Tier 6 savings. NYCOM, NYSAC, or any of the other associations could convince the public to support pension reform based on Tier 6 savings, but no honest person would rely on those savings to alleviate cost for at least a generation. Had Cuomo and DOB avoided the Tier 6 spin, there would be more supporters for the smoothing proposal. There’s no unringing that bell, I suppose.

   Reply
2. Marty Mannix says:

   March 1, 2013 at 10:33 am

   I have trouble understanding this blog. It appears to me that the proposal is simply a matter of math. Instead of utilizing a rolling three year return average to calculate contribution levels, this proposal allows a more stabilized approach. This is something that makes total sense when calculating contribution levels on a fixed benefit retirement plan.

   In my mind the current 12.5 percent estimate might have been too conservatively calculated, but it is better to proceed with caution. I see this plan as a significant move on the part of the governor to mitigate a very burdensome mandate put in place by a legislature that doesn’t have to pay for the benefit.

   I congratulate Governor Cuomo for finding a methodology for addressing this issue while others simply stood by wringing their hands.

   Reply
   • Anita Laremont says:

     March 1, 2013 at 5:05 pm

     In summarizing the various perspectives on the governor’s proposed pension smoothing legislation, we endeavored to crystallize the bases for support or objection. Mr. Mannix’s comment suggests that we did not clearly present the views against the proposal, so here is our take on those arguments.

     Bases for objection to the proposal fall into two somewhat distinct, but related categories. Mayor Miner and others object on the basis that the proposal is essentially an illusory remedy that defers, but does not eliminate, municipal pension obligations, and does nothing to address municipalities’ long-term financial woes. Fiscal watchdogs, such as the Citizens Budget Commission (CBC), object based on a view that implementation of the proposal would endanger the financial integrity of the pension fund. CBC, in urging the state Comptroller and Teachers’ Retirement System to reject the governor’s pension smoothing proposal, argued that the proposal endangers the pension funds, explaining in its letter of February 25, 2013 to Comptroller DiNapoli that “Adjustments to contribution rates are…inherent to defined benefit plans; pretending otherwise by “fixing” an arbitrary rate that is unlikely to hold five or ten years from now does a disservice to the public by creating the impression of assisting local governments with their fiscal problems. In fact, the plan will merely push a larger problem off to later years.” This view focuses on the fact that the pension funds will be underfunded for at least the next six years, leading to the concern that when repayment of the accrued obligation begins in 2020, these pension funds will be less financially sound than they are right now.

     This issue will continue to be discussed in the weeks to come, and we welcome our readers’ views.

     Reply