The Mandate: In recent years, the pension cost crisis has revealed the underlying imbalance between the high cost of New York's public pension benefit structure and the limited fiscal capacity of local governments and their taxpayers. The state and its local governments operate under what is known as a defined benefit plan where employees are guaranteed a certain level of benefits financed primarily by state and local employer contributions to the retirement system. Over the years, these benefits have become increasingly more difficult to sustain.

Pension contribution rates - as a percentage of payroll - have declined moderately in recent years, currently placing them in the same range as they were in the late 1980s (ERS rates in 2010 will be 7.4 percent of payroll, down from 8.5 percent in 2009 and 9.6 percent in 2008, while PFRS rates in 2010 will be 15.1 percent of payroll, down from 15.7 percent in 2009 and 16.6 percent in 2008). However, the base upon which pension costs are calculated - that is, salaries - has risen substantially since then. This, coupled with the pension benefit enhancements that have been granted over the last several years, has resulted in the continued rise in the pension bill amounts for many local governments. According to NYCOM's 2007 Budget Survey, city pension bills increased an average of 17 percent between 2006 and 2007. It should also be noted that general purpose aid from the state is now, for many municipalities, a much smaller portion of their budgets than it was some twenty years ago. And while municipalities (outside NYC) have received AIM increases in each of the last four fiscal years, in many cases those increases have been used primarily to fund local pension costs rather than the intended purpose of property tax relief.

The Cost: While pension contribution rates have declined in recent years, and thus, are in the same range as they were in the late 1980s, public sector salaries upon which pension costs are calculated, have risen substantially since then. Furthermore, villages and cities (outside NYC) experienced a tenfold increase in pension costs between 2003 and 2005. According to the NYS Comptroller's data, pension costs alone accounted for 6 percent of city expenditures in 2005. Other than raising property taxes, local governments have few options to help address these costs.

The Solution: The state must undertake a thorough analysis of the benefits, assets and oversight structures of our public pension system. While pension benefits for retirees and current public employees are constitutionally protected, it is time to evaluate both the system's funding methodology and the need for restructuring retirement benefits for future employees of New York State and its local governments.

In December 2007, Comptroller DiNapoli, former Governor Spitzer and Insurance Superintendent Eric Dinallo proposed a number of reforms to the state pension system, most of which focused on enhancing ethical standards, improving oversight and increasing transparency. Given the desire and willingness of our state leaders to undertake this comprehensive review of the state's pension system, it seems that a logical next step would be to also reevaluate the overall funding methodology - specifically the factors that determine contribution rates - to ensure that local governments are not paying any more than is absolutely necessary to properly fund the system. To undertake this analysis now would be particularly worthwhile, since the Comptroller has already cautioned public employers that if current economic conditions continue, pension rates in 2011 and beyond will likely increase. NYCOM and its member cities and villages are not advocating any modifications that would jeopardize the strength or integrity of the system, but rather changes that maintain proper funding levels while having the additional benefit of mitigating the excessive pressure on the real property tax. The goal of state leaders should be to strike a better balance among the solvency of the Common Retirement Fund, the interests of public employees and the welfare of the state's taxpayers.

The state should also enact legislation creating a new retirement tier with more affordable retirement benefits for new hires in both the Employees' Retirement System and the Police and Fire Retirement System. Given the current workforce demographics, with many of the state's "baby-boomers" nearing retirement age, coupled with the fact that public sector salaries and benefits currently equal, and often exceed that of the private sector, now is the time to pursue the creation of a new retirement tier. This new tier should, at a minimum: 1) require an employee contribution; 2) increase the minimum retirement age at which an individual can begin to draw down even a partial pension benefit; and 3) revise the way the final average salary (FAS) is determined by considering more than three years and taking into account only base pay.