As noted in my previous post, I have downloaded and arranged all the data the U.S. Census Bureau has collected since 1957 on currently active public employee pension plans in New York and New Jersey. I wanted a historical record of how future generations were left with this mess, a record older generations and the political class have little incentive to compile. This is the first of a handful of posts using this data; hopefully someone else will do even more with it sooner or later. This post is about the New York City, New York State, and New Jersey teacher pension plans, which also cover some related employees.
The data shows that in New York City the road to ruin was paved primarily with a series of extremely expensive pension benefit increases, employee contribution cuts, and one time “incentives” that vastly inflated the amount the NYC teacher pension plans paid out. Not shown by this data is a similarly large increase in the cost of retiree health insurance, as the city was forced to pay retirees for many additional years before Medicare picked up most of the burden. The pension benefit increases for the New Jersey teacher pension plan and the New York State teacher pension plan, which covers teachers in the rest of New York State, were not as frequent or as costly. New York City taxpayers may have also underfunded the city teacher pension plan, relative to the state, after a New York State Court of Appeals decision prevented the state pension plans from doing the same. The NYC teacher pension plan has also had lower investment returns over the long term. In New Jersey, taxpayer pension funding virtually disappeared starting in the mid-1990s, and is the primary cause of the crisis there. Further discussion and a spreadsheet with a series of charts are below.
The charts for teachers are in this spreadsheet, with tabs at the bottom.
The entire database is, once again, in this speadsheet.
Chart 1 shows the effect on NYC teacher pension fund benefit payments of the pension “incentives” of 1991 and 1995, the retroactive pension increase of 2000, and the retroactive pension increase/early retirement deal of 2008. All these deals were described to an ignorant public as “costing nothing” or “saving money,” but each caused inflation-adjusted pension benefit payments to soar.
In 1992, during the administrations of New York State Governor Mario Cuomo and New York City Mayor David Dinkins, pension benefit payments from the New York City teacher pension fund increased 33.7%, adjusted for inflation, from the year before. According to the United Federation of Teachers, arguing for yet another deal like this in 2010, an early retirement incentive passed in 1991 “led to nearly 6,000 retirements in the Teachers’ Retirement System — well over double the number of the prior year.”
It also led to the retirement of one out of every five principals, according to the New York Times. As is usual with these deals, it was not described as a trade of money from future taxpayers to a union, in exchange for political support. Instead the goal was described as “saving money” and increasing affirmative action. “Despite his support for early retirement for principals, Mr. Petrides, a former dean at the College of Staten Island, said that his experience at the City University of New York led him to be cautious” according to the Times. “The university, which used a retirement incentive plan in 1986, lost professors who were hard to replace and did not achieve the savings it sought or its affirmative action goals. ‘It can in the long term be very positive,’ he said. ‘It can also be an absolute disaster.’”
Actually, unless you are permanently downsizing, will not need to replace the employees who retire, and will not then be paying two people to do work previously done by one, these deals are always a disaster.
I didn’t know about, or at least did not remember, the 1991 deal until compiling this data. Were there other, similar deals in 1989 (Koch’s last re-election campaign) that would explain the 19.1% inflation-adjusted increase in NYC teacher benefit payments in 1990? I do know that two years after the 1987 stock market crash, the city somehow found the money to drastically increase its workforce during Koch’s last year in office, leaving the incoming Dinkins Administration to face the consequences.
I do remember the 1995 early retirement retroactive pension incentive offered by Mayor Giuliani when he first came into office, signed off on by Governor Pataki. To “save money.” That led to a 37.0% increase in inflation-adjusted benefit payments by the NYC teacher pension fund over two years in 1996 and 1997. According to the UFT, that deal allowed “9,200 retirements, about as many as occurred in total over the next five years.”
With the two pension incentives, the city had handed out golden parachutes to tens of thousands of veteran teachers, years earlier than they had been entitled to retire, right before the national teachers shortage as the “baby boom echo” generation flooded the schools in the late 1990s and the smaller “baby bust” generation trickled out of college to teach them. The result, for the city’s children, was the hiring of thousands of uncertified, unmotivated placeholders who didn’t teach, often more than one per class in a single year.
Although the NYC and NY State teacher pensions were controlled by the same New York State Legislature, somehow the state pension plan didn’t take the same hit. In 1992, when pension benefit payments for retired NYC teachers jumped 33.7% in real dollars, the increase for the rest of the state was just 12.6%. From 1995 to 1997, the increases were 37.0% for NYC and 22.6% for the rest of the state. New Jersey may have also had a pension incentive in 1991, with a 16.3% increase in benefit payments from its teacher pension plan in 1992, but there was no other huge one- or two-year increase in the mid-1990s.
Note that NYC’s retired teacher benefit payments fell, when adjusted for inflation, from 1979 to 1981. The rich Tier I pensions handed out retroactively by then-Mayor Lindsay in the late 1960s had contributed to a collapse in city services, including the city’s schools, but that deal did not include an inflation adjustment. The high inflation around 1980 reduced the inflation adjusted cost of the Tier I pensions awarded in the Lindsay years, helping to save the city, and also left those retired teachers in Florida with a less rich heist than they thought they had received. I wouldn’t expect inflation to save the city this time, however. The expected inflation rate for the next 10 years is just 1.72%, according to the 10-year TIPS/Treasuries spread, and deflation is not out of the question.
Moreover, thanks the massive pension deal of 2000, pushed by Comptroller Carl McCall and also signed off on by Governor Pataki, an inflation adjustment was retroactively added to all New York pension plans, including those of New York City. The greatest beneficiaries were those long retired, among NYC employees Lindsay’s Tier Is, who got a huge increase in their pensions to adjust for the high inflation of the late 1970s and early 1980s. The benefit payments by the NYC teacher pension fund soared 51.7% from 1999 to 2000, although a subsequent decrease from year-to-year implies there was a large, one-time payout under the deal. The increase in inflation-adjusted benefit payments over four years from 1999 to 2003, after which things settled down, was 27.0% for the NYC teachers’ pension fund, 44.8% for the New York State teachers’ pension fund, and 49.2% for New Jersey. This deal didn’t affect just New York City. Many other pension funds increased benefits retroactively at about the same time.
But the New York City pension disaster is greater than in most places, thanks to a 2008 pension increase that only applied to New York City teachers. That deal went down eight years after the 1990s stock market bubble started to deflate, and a few weeks before Bear Stearns went down. This was a Mayor Bloomberg/Governor Spitzer deal. No sense mentioning the state legislature, which would gladly vote to boost pension benefits for retired public employees tenfold, leading to the complete elimination of public services and casting the state into poverty, as part of a political deal with the unions. In fact, the Republicans in the State Senate got a political deal as part of this pension deal, which was also described as “costing nothing” or “saving money” to the extent that it was described at all.
The 2008 deal for NYC teachers was, for me, the last straw. It led to a 32.1% increase in inflation-adjusted benefit payments by the NYC pension fund over two years from 2008 to 2010. And unless there is a data error there is reason to believe there is much more damage to come, as will be discussed later. There were no similar increases in payouts by the New York State and New Jersey teacher pension funds at the same time.
The question is, why did Mayor Bloomberg go along with it? With a finance background, and already dealing with the consequences of past pension deals, he can’t blame ignorance, and in many of his other policies he appeared to give a damn about the city’s future, unlike most city and state politicians. All I know is the deal was cut while he was considering running for President. Other pension increases went down when Governor Cuomo, Governor Pataki, Mayor Lindsay and Governor Rockefeller were looking for support to run for President, Mayor Giuliani was looking to run for Senate, and State Comptroller Carl McCall was looking to run for Governor.
Lets’ move on to Chart 2. All the retroactive pension deals and incentives for New York City teachers were described as “costing nothing” or “saving money,” perhaps because they were not paid for at the time. There were no huge increases in taxpayer dollars coming into the NYC teacher pension fund to offset the increase in money going out. Those increases would come years later, when the pension plan was already in a death spiral.
One possible exception was the 1991 deal, during the Dinkins Administration, with a huge one-time taxpayer pension contribution in FY 1992 – a point in time when the city was virtually bankrupt. Where did the city get the money? Whenever I see huge one-year spikes in taxpayer contributions to pension plans, the usual explanation is a “pension bond.” A large amount of money borrowed by the city or state and deposited into the pension funds, to force future taxpayers to pay for past pensions. Thus today’s taxpayers are probably paying for the Dinkins/Cuomo pension deal, like the rest, but “over the table” in bond payments rather than “under the table” in future pension contributions. This is yet another example of why New York City’s high debts are associated with a limited ability to maintain or expand its infrastructure, because the past debts were not used for real capital expenditures.
Since 2002, New York City taxpayer contributions to the New York City teachers’ pension fund have soared, leading to cuts in the classroom despite a series of tax increases and a shift of funds to education from other services. Indeed, virtually nowhere else in the U.S. are taxpayers sacrificing more to put money into public employee pension funds. When it comes to pension contributions, New York City taxpayers are number one.
While services are being cut and taxpayers are putting in more, however, NYC teachers are putting in less. As part of the 2000 pension deal, the part associated with “Giuliani for Senate,” the 3.0% of pay employee contribution to the pension plans was eliminated for those with 10 more years’ seniority. Since it is those with seniority to earn most of the money, I have estimated that lifetime employee pension contributions by NYC teachers were cut by 75.0% by that deal. And from FY 2002 to FY 2003, pension contributions by NYC teachers to their own pension fund decreased by 84.0%, to less than one-sixth their prior level, after adjustment for inflation.
The data implies that the Tier I Lindsay pension deals also cut employee contributions to the NYC teacher pension fund in the early 1970s. Later, with the city on the verge of bankruptcy, Tier IV restored a 3.0% contribution for new hires. But the city was too broke to hire many teachers, and new teachers do not make much money anyway under the backloaded UFT contract. Teacher contributions to their own pension fund did not increase significantly until the late 1980s.
Similarly, with the NYC teacher pension fund close to a death spiral, the union and politicians have stuck new NYC teacher hires with vastly a vastly higher contribution rate of 5.85% for their entire career. This makes teaching a less attractive job, particularly given that pension benefit levels for new hires have been cut to less than Tier IV hires had been promised to begin with. As in the late 1970s and early 1990s, however, because so teachers few have been hired since the employee contribution increase, because new teachers earn so little compared with those later in their careers, and because more and more existing teachers reach the 10-year seniority point and have their contributions cut every year, the contributions by NYC teachers to their own pension fund remain rock bottom, and will stay there for years.
So how much extra money did New York City taxpayers put in to make up for the drastic cut in pension contributions by New York City teachers? None, at first. In fact, as part of that same 2000 deal with the unions, Mayor Giuliani was allowed to cut the taxpayer contributions to the New York City pension fund by 56.8% from FY 1999 to 2000, so Giuliani would have some money to throw around while running for Senate.
Chart 3 shows the ratio of active pension plan participants (mostly working teachers) to those receiving periodic payments (mostly retired teachers). Rapidly growing areas, such as the suburbs in the Baby Boom era, have a high ratio of working teachers to retired teachers. That was also the case for New York City in 1972, after the baby boom generation flooded the city’s schools.
Later, the 1970s fiscal crisis forced cutbacks in the number of city teachers, and the entrance of the baby bust generation into school caused enrollments to fall. The number of active members of the NYC teacher pension fund fell from 105,000 in FY 1972 to 79,200 in 1976. Pensions are supposed to be pre-funded, so a high ratio of working teachers to retired teachers should mean a high ratio of pension contributions to benefit payments. With today’s high contributions paying for tomorrow’s high benefits. But retroactive pension increases are NOT pre-funded, and lead to devastating consequences in a shrinking workforce.
Neither New York City, nor the rest of the state (with teachers in the NY State pension plan), nor New Jersey have been rapid growth areas since 1990. The ratio of working teachers to retired teachers fell, and then leveled off in NYC and the rest of New York State. Without underlying growth to pump up the number of active teachers in the short run, we now see what the number of years of required work and retirement age for teachers, and current life expectancy levels, really mean. Just 1.6 years worked by NYC teachers for each year paid to be retired, and just 2.0 for the rest of New York State. In New Jersey, the ratio is still dropping.
Moreover, for those NYC teachers who took maximum advantage of the deal to allow them to retire at age 55 after just 25 years of work, the ratio is probably one year worked (or less) for each year paid to be retired. The overall ratio is higher because of teachers who leave the profession before becoming eligible for pensions, and those who work beyond the minimum service time and/or age (thereby increasing their pension benefits beyond the 50.0% of pay of pay tax-free).
Chart 4 shows the number of active, retired, and “inactive” members of the New York City teacher pension plan. Inactive members have earned and retained pension credits, perhaps up to the number of years required for a full pension, but have yet to start collecting, perhaps because they have yet to reach the minimum age. After being so low as to generally not be tracked before 2009, the number of “inactive” members soared in 2010. Was this a data error? Or did the 2008 25/55 deal allow a large number of teachers to leave teaching after 25 years of service, but before age 55? If the latter, this will lead to an explosion of pension benefit payments as those “inactive” plan members reach age 55 and start collecting pension benefits, further draining the NYC teacher pension fund.
Note that the 2008 deal required NYC teachers to contribute an extra 1.85% of their pay to the pension fund in exchange for being allowed to retire five years early. But the extra contributions only began in 2008. If a teacher was eligible to retire immediately, they just left and paid nothing extra. And if a teacher left the city schools with enough service time to retire but not yet at age 55, they also paid nothing more.
The soaring cost of the 2008 deal, multiplied by the 2000 deal and other deals, has led to classroom cutbacks and a decrease in the number of working teachers, based on other data I compile. This would be disastrous, given that one of the excuses for the 2008 deal “costing nothing” was the higher pension contributions future teachers would pay. But the number of active participants in the NYC teacher pension plan has been going up, not down. Have other titles been moved to this plan, to get more money coming in? That would weaken the general NYC public employees retirement plan.
Moreover, there are rumors that Bill DeBlasio’s “universal pre-K” plan would not make pre-K universal after all. Instead, it would substitute higher paid UFT members for those working in private pre-kindergarten programs with city funding, leaving a substantial share of the city’s children out in the cold. UFT members who would contribute 5.85% of their pay to the NYC teachers’ pension fund, to pay for the extra benefits received by the beneficiaries of the 2008 deal.
Chart 5 is the shocker. It shows the consequences of all the deals in all the backrooms over all the years, with little or no public discussion. It is the ratio of pension benefit payments to pension assets. For 401K plans, retirement advisors used to recommend only spending down 4.0% of retirement assets per year, but with today’s lower interest rates some are saying that is too high.
There ought to be enough pension assets in the New York City teacher pension plan to pay for all of the future pension benefits of teachers and related workers who are already retired, most of the future pension benefits of those soon to retire, and some of the future benefit payments of younger teachers. Instead, benefit payments by the NYC teacher pension plan equaled 14.8% of assets in FY 2011. At that rate of payout per year, the fund would be emptied in just seven years. That means today’s taxpayer pension contributions, and even today’s employee pension contributions, are going to pay today’s benefits for those already retired. With little or no money is being set aside for future retirees, to offset the pension rights younger teachers are earning. A death spiral.
It is likely that the latest stock market bubble, created entirely by Federal Reserve easy money policy in a weak economy, has made this ratio look better than it was 2011. But it has also cut the amount of investment cash, in interest income and dividend yield, coming into the pension fund. Who knows how high the ratio of benefits paid to pension assets will be when interest rates rise and the market value of stocks and existing bonds falls? Because for the next decade or two inflation adjusted pension benefit payments are going one way: up. Unless we get even worse inflation than in the late 1970s and early 1980s, overwhelming the pension inflation adjustment under the 2000 deal.
The situation of the New Jersey teacher pension fund is nearly as dire, as it paid out 12.1% of its assets in 2011 in benefit payments, or one dollar in eight. In comparisons among state pension plans, New Jersey is generally held out as one of the worse examples of pension mismanagement in the U.S. As of 2011, however, the local government pension plan covering New York City teachers was in even worse shape.
The New York State teacher pension plan, covering teachers in the rest of New York State, is hardly in great shape. Its benefit payments equaled 6.4% of its assets in 2011, up from 4.4% in 1995 – before the 1990s stock market bubble and the 2000 retroactive pension increase. But that is hardly disastrous; in fact cross-state comparisons generally credit the New York State pension funds as being among the best-funded in the U.S.
Yet since the Taylor Law of 1967, the same New York State legislature that has set the pension benefit levels for the state pension funds has also set the benefit levels for the New York City pension funds. So why is the city teacher pension fund in so much worse shape? That’s something I have always wondered, and it is to answer that question that I compiled this long run-database. One possible explanation is that the city pension funds never really recovered from the Mayor Lindsay deals of the late 1960s.
After the Lindsay deals, the Lindsay debts, and the Lindsay/Wagner deferred maintenance on the infrastructure wrecked NYC public services, it was a long, painful road back for the City of New York. In 1976, pension benefit payments equaled 10.1% of the assets in the New York City teacher pension fund, and the soaring pension contributions required to get that fund out of the hole helped gut the city’s schools. But in 1990, pension benefit payments the New York City teacher pension plans were apparently out of the hole. For teachers, the ratio of pension benefit payments to asset was only slightly higher or the NYC teacher pension plan that it was for the New York State teacher pension plan. The two funds have diverged since 1990.
It seems that for the City of New York, as soon as one era of irresponsibility was recovered from, another era of irresponsibility began. Prior charts have shown that the state legislature has passed more frequent and more costly retroactive pension increases and “incentives” for New York City teachers than for teachers in the rest of the state, in effect if not in design. These deals by the UFT with city and state politicians account for most of the current pension crisis, and thus for most of the current and future de-funding of the city’s schools.
The other factor in pension crises throughout the country is underfunding by taxpayers, which is demonstrated for NYC in the two years after the “Giuliani for Senate” pension deal of 2000. But those who years may not have been the only example of taxpayer underfunding in New York City.
Chart 6 shows the ratio of taxpayer pension contributions to benefit payments for the New York City, New York State, and New Jersey teacher pension funds. The data shows that the city’s taxpayer pension contributions, relative to its payouts, were lower than those for the New York State plan (the presumed pension bond of 1992 aside) for most of the 1980s and 1990s. Until the late 1990s and early 2000s, when the state pension plans became just as irresponsible.
Why the difference? Here is something I just found out last week, in the blog post linked below. In the early 1990s case of McDermott v. Regan, the New York State Court of Appeals “struck down an attempt by Gov. Mario Cuomo and the Legislature to shift to a lower-cost pension funding method that arguably would have weakened the system’s funded status. This reinforced the notion that government employers in New York must make their annual required contribution–although recent state law has given them a troubling amount of wiggle room in this area.”
Didn’t this decision apply to New York City’s pension funds as well? Almost certainly, but the courts only get involved if someone sues. In the case of pensions, the only people who know what is going on are the public employee unions, the politicians, and New York City pension actuary Robert North, appointed and kept in office by the politicians. And since the New York City’s public employee unions in general, and the United Federation of Teachers in particular, were in on the deals to pillage the pension fund (on behalf of ex-teachers cashing in and moving out), no one sued.
If you want to see the data for a place where past taxpayers, not the public employees and their unions, deserve most of the blame for the pension disaster, just look at New Jersey. Aside from then-Governor Christie Whitman’s disastrous pension bond deal in 1997, and a couple of years of the Corzine Administration, that state contributed virtually nothing to its teacher pension fund for a decade and a half. During that period, the State of New Jersey offered excellent public services despite an overall state and local tax burden, as a percentage of its residents’ personal income, that was at or below the U.S. average. Future state residents will now face the reverse: above average taxes as a percent of income, and services are worse.
Based on its research, the pro-pension pro-union Center for Retirement Research at Boston College has made the claim that union power does not explain the extent of pension underfunding of different plans. Perhaps that is because with Generation Greed in charge, someone was going to pillage those pension plans, whether the public employee unions or politicians promising tax cuts. The only difference is who did how much damage. In New York City, the unions and retired and soon to retire public employees get most of the blame. In New Jersey, it is past taxpayers.
There is one more stop on this miserable journey through the unsaid. One theory is that New York City’s pension plans are in worst shape, in part, because they have been looted by Wall Street to a greater extent than other pension plans. I am no fan of the move by the city’s pension funds into alternative assets such as hedge funds and private equity, a move made by the public employee unions that control the New York City pension boards and the City Comptrollers they have put in office.
Chart 7 shows the annual return on the assets of the New York City, New York State, and New Jersey teacher retirement funds. Before 2002 the Census Bureau tabulated pension plan assets by book value, but starting in 2002 market value has been the measure, leading to more volatility. As noted in my prior post, in their official and public statements the New York City and New York State pension plans have hidden pension looting by using “market values” during stock market bubbles and “smoothed” values during asset value downturns.
According to data reported to the Census Bureau the year-to-year investment returns show no clear patterns that would distinguish one teacher pension plan from another. But based on the average investment return over the long term there is some evidence that lower investment returns, along with more pension increases and less pension funding, have hurt the New York City funds. From 1991, after 1990 when the city plans had finally gotten out of the hole, to 2011, the average annual return on the New York City teacher pension fund was 7.9%, compared with 9.5% for the New York State teacher pension plan and 9.0% for the New Jersey teacher pension plan. These high returns for all three plans reflect an investment era that was more bubble than bust, and higher inflation than is present today. Future investment returns are likely to be much lower, as discussed in my previous post. In the past, however, the effect of such a difference in the rate of return between the city and state pension funds is substantial. Particularly if funding increases are insufficient to offset it – and retroactive pension increases go forward even so.
So there you have it. More than two decades of legalized crime, expertly covered up until most the criminals had made it to Florida or the grave. The crime was legalized became the criminals make the laws. And with so many people and interests, and all of Generation Greed, in on the deal, no one wants to talk about it. The beneficiaries bitterly resents anyone who does talk about it. Omerta. “Let’s not talk about the past.” “How about being part of the solution instead of just talking about the problem?” With regard to pensions, however, there is no solution unless someone invents a time machine and we can go back to the past.
Who, exactly, was robbed, of what, and with what consequences? And when will these losses finally be handed out in full, and how large will they have grown by that point? Regardless of the official line, under the surface New York’s state and local politics is likely to be about that very question, for at least a decade or two into the future. Even if there are no more deals, and there will surely be more deals, because they have gotten away with it. Everything else is bullshit. In particular, everything else about the New York City public schools.
Additional posts will follow, and hopefully be shorter, since many of the deals and trends that have affected the teacher pension funds have affected all the pension funds, and thus will be discussed in less detail.