Pension reform divides state of New York

Pension reform in the state of New York is politically embroiled with the New York Governor Andrew Cuomo and fellow democrat New York State Comptroller Thomas DiNapoli at opposite ends of the defined benefit/defined contribution debate.

DiNapoli is the sole trustee of the state’s $149.9 billion public fund and a strong proponent of its defined benefit (DB) status.

His advocacy of the current system and its generous benefits to public employees stands in contrast to Cuomo, who has galvanized bipartisan support from mayors and counties across the state for his pension-reform package.

Governor Cuomo’s plan aims to cut pension costs that for local governments across the state now top $12.5 billion annually.

DiNapoli, as the sole trustee of the New York State Common Retirement Plan (CRF), has advocated the continuation of the current DB system, denying it is a drag on public finances.

He has previously said that over the past 20 years investment returns from the fund account for 83 cents of every dollar paid to New York public pension recipients, compared to a national average of 68 cents.

He also has hit out at the trend towards using defined contribution (DC) funds to provide for public employee’s retirement benefits, saying 401(k) plans had been “woefully inadequate”.

It is not the first time Cuomo has proposed changes to the state fund. The Governor ran for office on a promise to reform the governance structure of the CRF, replacing the sole trustee with a board.

He is yet to deliver on this election promise but has pushed ahead with his reform package, which focuses on winding back generous retirement packages for new hires.

It appears DiNapoli’s opposition to reform is shared by New York City Comptroller John Liu.

Liu oversees five NYC public pension funds and is conspicuous in his absence from the list of 12 city mayors and 13 county executives who have signed up to support reforms.

Prominent backers of the plan include New York City Mayor Michael Bloomberg, who says pension costs now account for one in every six dollars of the city’s budget.

“Local governments around the state are all in the same boat and we are joining together to support Governor Cuomo’s push for pension reform to ensure the boat does not become a sinking ship,” Bloomberg said.

“Passing responsible pension reform is essential to ensure that we can afford retirement benefits for tomorrow’s workers – and the public services that today’s citizens deserve and demand.”

It is retirement benefits of tomorrow’s public workers that Governor Cuomo has clearly in his sights.

Governor Cuomo is set for a bitter fight with unions to push his reform package through, with claims by organised labour groups that it cuts retirement benefits to new public employees by up to 40 per cent.

The plan aims to cut back generous pension benefits by excluding overtime from the formula used to calculate final average salary for pension payments, as well as providing a new DC option that public employees can choose.

While other states have made DC options compulsory for new hires, New York has stopped short of denying DB schemes to new entrants.

Unions have flagged that that the push to increase the DC component of future public employees’ retirement benefits will be a key a battleground.

Governor Cuomo’s reforms also include raising the retirement age from 62 to 65 and raising employee contribution levels in line with other states.

New York State public employees currently contribute around 3 per cent annually of their salaries to retirement funds. The reform plans will increase this from 4 to 6 per cent, depending on salary.

Public employees currently retire on around 60 per cent of their salary and the Governor’s proposal will see retirement benefits for new hires cut to 50 per cent.

As part of a coordinated campaign by the Governor, city and county executives called NY Leaders for Pension Reforms, new pension costings for NYC were released this week.

They show that pension costs have risen almost five-fold since 2002, with pensions swallowing an increasing share of the public purse.

Pension costs are projected to take up to 16 per cent of the city’s operational expenses by 2013, totaling more than $8 billion and crowding out spending on other programs, city officials claim.