Governor Cuomo and other reformers in Albany had reason to celebrate in the spring when the governor signed a landmark pension bill that experts say will save the state something like $80 billion over the next three decades.
Now, however, we’re beginning to understand that welcome as those reforms were, the state and the city still face a potentially catastrophic fiscal crisis if more radical changes to public pensions are not made soon.
The managers of public pension funds have been helping politicians avoid difficult decisions by making absurdly optimistic estimates of the funds’ return on investments. The New York Times reported the other day that funds in many states and municipalities routinely project a return of 7 to 8 percent on their investments. The Times noted that Mayor Michael Bloomberg, who knows from return on investment, noted acidly that these projections are simply “indefensible.”
And so they are. But here’s why they’re being made, even in the face of logic and common sense: If the fund managers lower their projections, political leaders will have to find alternative ways of covering liabilities. And that means either higher taxes or a radical revision of public pension systems.
Actually, there’s a third way, one that only a fool would recommend. Governments could simply decide not to make payments into the pension system in the hopes that down the line, somebody will bail out the system in some unforeseen way. That’s what New Jersey has been doing for years-—the state owes its pension system more than $50 billion, which is why the rating agency Fitch lowered its rating on New Jersey general obligation bonds last year.
New York has taken an important step in the direction of sanity and prudence. The city’s top actuary recently proposed that the city’s five public pension funds recalculate their books to assume a 7 percent return, rather than 8 percent. Experts no doubt would argue that even 7 percent is wildly optimistic in today’s climate. That’s true, but here’s why even a modest acknowledgment of fiscal reality is so difficult. If the city’s pension funds lower their assumptions by a single percentage point, the city will have to find nearly $2 billion a year to cover liabilities. City Hall already spends more than $7 billion a year in pension costs. That’s 10 percent of the overall budget.
Taxpayers simply cannot afford pension systems that were designed for a very different time in the nation’s history. Politicians realize this, which is why Albany defied the state’s politically powerful and economically reactionary public employee unions last March, when Mr. Cuomo signed a major reform package.
Those reforms really were modest compared to the size of the crisis. For example, the retirement age for state workers was raised by only a year, from 62 to 63. Raising it to 65 would have saved hundreds of millions over the long term.
New York continues to make pension promises it simply will not be able to keep. Every new public employee at the state and local level should have a 401(k) retirement account rather than a defined-benefit pension. But under the recent reforms, only nonunion workers making more than $75,000 a year will have such accounts. Others will continue to be eligible for unaffordable defined-benefits pensions.
New York is making progress. But it should be clear that drastic reform is necessary, the sooner, the better for all.