State of Pay

Pension obligations are growing at an incredible rate. This is due mainly to a practice called “spiking,” where union employees tack on massive amounts of overtime and are compensated for unused paid-vacation time as they are about to retire. Numerous cases have been documented recently showing that public-sector employees who had salaries of $70,000 to $80,000 per year are on pensions in excess of $150,000 per year, and will be for life. The pervasiveness of these abuses has caught the attention of Attorney General Andrew Cuomo, who is currently investigating these practices.

The implications are disastrous for the city. For example, rising pension obligations and the plunging performance of pension-fund investments over the past two years has placed the New York City Fire Department pension fund in a precarious position. The fund is only about 55 percent funded, and the city pays about as much to the 17,500 FDNY retirees as it does to the 11,000 firefighters currently on the job.

The FDNY is not alone in its predicament. The New York City comptroller’s office indicates in its fiscal 2009 report that our five pension funds have a deficiency in unfunded employee pension and health benefits that tops $105 billion. A real solution here would be to transition all new hires and as many current employees as possible from the traditional “defined benefit” plan (which pays a defined amount regardless of investment performance) to a “defined contribution” plan, similar to a 401(k), which is the most prevalent plan in the private sector.

In most states, taxpayers are on the hook for these unfunded obligations. Not surprisingly, the states with the largest budget deficits are those that have the biggest gap between compensation packages for public employees versus those for private employees. In fact, if public workers earned the average of what workers in the private sector earn, states and other municipalities would save an estimated $339 billion a year from their more than $2.1 trillion budgets. These savings would be larger than the combined estimated deficits for the next two years in every state in America. It is clearly time to look at these compensation packages and bring them down to earth.

 

THE MASSIVE DEFICITS that have been created in New York are starting to take their toll. It is time for legislators to bring spending on public-sector jobs in line before a rash of public-sector layoffs creates quality-of-life issues for the city. The reality is that if labor won’t help out, workers will be terminated: Simply stated, terminated workers do not contribute to future pension obligations. Unfortunately, these layoffs, while helpful economically, would not be good for the city.

Two weeks ago, we became concerned to learn that violent crime in the city is rising. Murders are up 22 percent, and shootings rose 21 percent. When asked about this troubling trend, the mayor said, “We have fewer police officers than we did before.” Without union concessions, we could have even less in the not-too-distant future.

We also recently saw significant service cuts from the M.T.A., which is saddled with higher labor costs thanks to our legislators in Albany. The M.T.A. budget is being cut to the bone, and fares will be hiked for a third time in four years.

The mayor, to his credit, has been negotiating with unions and urging lawmakers to pass reforms that would substantially cut benefits, not for today’s workers but for new employees. These consist of increasing the years of service required before collecting a pension from 20 to 25, and setting a minimum retirement age for police and firefighters. The city’s own Comprehensive Annual Financial Report shows that the five pension systems are positioned at less than 80 percent of the generally accepted thresholds for healthy funds.

In an interview on Fox Business News last week, Comptroller Tom DiNapoli claimed that New York’s budgets were “in good shape” and that they were not underfunded. But whether plans are technically “funded appropriately” is dependant upon hocus-pocus math that assumes an annual 8 percent rate of return on pension fund investments. Public-pension accounting rules incorrectly assume that plans can earn high investment returns without risk. These practices leave pension-plan advisers fooling themselves with unrealistically low deficit projections.

This mechanism allows our legislators to avoid having to make difficult choices today at the expense of massive burdens on taxpayers in the future. Even though the 8 percent target rate is unrealistic, government officials do not want to change the law to lower the required earnings, as this would mean bigger upfront payments, discontented unions and political upheaval.

This year presents an opportunity for elected officials to stand up and fix this economically destructive problem. Our legislators control the future of these contracts. The Legislature could change significantly after this fall’s elections. Aggressive support for fiscally responsible candidates who promise to modify unreasonable labor agreements and their resultant pension problems would well serve the interests of the city and state.

The more in line these costs are with the realities of the marketplace, the less upward pressure we will see in real estate tax obligations moving forward. The new state budget will tell us if legislators are willing to stand up to politically powerful unions and set sustainable spending levels.

The answer to this question will tell us a lot about real estate tax obligations moving forward.

rknakal@masseyknakal.com

 

Robert Knakal is the chairman and founding partner of Massey Knakal Realty Services and has brokered the sale of more than 1,050 properties in his career.

State of Pay