Pensions for Non-Teachers: A Slightly Different Road to Ruin in New York City

New York City and New Jersey have more than one pension plan for public employees.  There are separate plans for teachers and related workers, for police officers and firefighters, and big plans for just about everyone else.  My prior post in this series, which this post will assume the reader has read, was about the New York City, New York State, and New Jersey teacher pension plans, with the New York State plan covering teachers in the part of the state outside New York City.  This post is about the big plans for most public workers:  the New York City Employees Retirement System (NYCERS), which also covers New York City transit workers, the New York (state) Public Employees Pension and Retirement System, which also covers local government workers (including police officers and firefighters) in the rest of New York State, and the New Jersey Public Employees Retirement System.

I thought this post would be written very quickly, because the trends and situation would be the same as it was for the teachers.  But when I put data from the database of long term Census Bureau data into the same charts that I used for the teacher pension plans, I found that wasn’t the case for New York City.  The various retroactive pension increases and incentives over the years had less of an effect on inflation-adjusted NYCERS benefit payments than they did on benefit payments by the Teachers Retirement System of New York City.  But NYCERS is nonetheless only slightly better funded than the NYC teachers pension plan, because the extent of taxpayer pension underfunding has been greater.  Indeed, unlike the pension plan for NYC teachers, NYCERS never really got out of the hole after the big pension increases under former Mayor Lindsay in the late 1960s.  Further discussion and a spreadsheet with a series of charts follow.

The charts for the three big pension plans for general public employees in New York and Jersey are in this spreadsheet, with tabs at the bottom.

Long Term General Pension Charts NYC NY NJ (2)

The prior post on New York and New Jersey teacher pension plans, which should be read first, is here.

It should be noted that the three general employee pension plans that are the subject of this post include workers with very different levels of pension benefits.  For New York City, most current and recently retired workers were hired under the “Tier IV” rules imposed after the soaring cost of Lindsay’s “Tier I” benefits wiped out city services in the 1970s.  Most Tier IV workers were promised a half pay pension at age 62 after 30 years of work, but with a required employee contribution at 3.0% of their pay during their careers.  But some workers, those in “physically demanding” titles such as sanitation workers and transit workers, were allowed to retire at age 55 after just 25 years of work, also with a 3.0% contribution.

Chart 1 shows the percentage change in pension benefit payments by NYCERS from year to year.  It shows the effect on benefit payments of the pension “incentives” of 1991 and 1995, which allowed workers to retire earlier than they had been promised, and the retroactive pension increase of 2000, which increased the pensions of past and future retirees for inflation.  All these deals were described to an ignorant public as “costing nothing” or “saving money.”

Chart 1

During the administrations of New York State Governor Mario Cuomo and New York City Mayor David Dinkins an early retirement incentive was passed that increased pension benefit payments by the New York City teacher pension fund by 33.7%, adjusted for inflation, from 1991 to 1992.  That was a large and ongoing hit to the fund’s assets.  One would expect NYCERS members to have benefitted from the same early retirement incentive.  And yet the 1990 to 1992 increase in inflation-adjusted benefit payments for this plan was much less than for NYC teachers, at just 14.4%.  So the damage to NYCERS was less than half as large.

Note that the data shows a big drop in NYCERS pension payments in 1989 and a jump in 1990.  That may be a source data error for 1989. Or it may reflect a little ledgerdemain, shifting a pension payment from the last day of the month (and fiscal year) to the first day of the money (and the next fiscal year) to make the pension plan look healthier in 1989, a Mayoral election year in New York.

The 1991 pension incentive apparently did not affect the New York State teachers’ pension plan as much as NYC’s teacher pension plan, as its payments increased by just 12.6% more than inflation.  The 1990 to 1992 increase for the New York (state) Public Employees Pension and Retirement System was 15.8% more than inflation, similar to the increase for teachers.  For New Jersey, payments by the teacher’s pension plan increased 16.3% from 1991 to 1992, compared with a 16.7% increase for the New Jersey Public Employees Retirement System.  Only for the New York City pensions systems was there a big difference between the two plans, the one for teachers and the one for most employees, because the increase in benefit payments for NYC teachers was much larger.

While the 1991 early retirement pension incentive did not increase pension benefits as much for NYCERS or the other plans as much as it did for the NYC teacher pension plan, the 1995 deal does not seem to have increased NYCERS payments much at all.  Under that deal, proposed by Mayor Giuliani and adopted by the state legislature and Governor Pataki, workers who had been promised a retirement at age 62 were allowed to retire at age 55 after 25 years of work if they retired immediately, and at age 57 after 30 years of work if they were hired later or retired later, but only if they paid 1.85% more into the pension plan during their careers, for a total of 4.85% of their pay.

The 1995 deal led to a wave of retirements by New York City teachers, and a 37.0% increase in inflation-adjusted benefit payments by the NYC teacher pension fund over two years from 1995 to 1997.  But NYCERS payments increased just 6.1% more than inflation during those two years.  The benefit payment increases for the New York State and New Jersey plans for general employees from 1995 to 1997 were 20.3% and 18.3%.

I’m not in a position to know why NYCERS was less affected by the pension deal of 1995, but I can speculate.  Perhaps those who were already eligible to retire at age 55, including transit workers and sanitation workers, did not benefit, or benefitted less, from the deal.  They are a substantial share of the workers covered by NYCERS.  Perhaps the buy-back requirement discouraged participation in the pension incentive.  The city workers who benefitted from the deal were not only required to start paying a higher share of their pay into their pensions going forward, but also were required to “buy back” all the years they had previously worked.  That required a large chunk of money.  Under the 2008 deal for New York City teachers, in contrast, the employee was required to contribute an extra 1.85% of their salary to retire at 55, but only on a going-forward basis, not for past years of service.  Those who retired immediately paid nothing extra at all, and there was never a need to come up with a big chunk of money to buy back past years.

It is also possible that a large number of New York City public employees who retired after Mayor Lindsay agreed to the rich Tier I pension deal died off in the mid-1990s, offsetting a rising number of early retirees. The number of NYCERS pension beneficiaries fell by about 7,800 from 1992 to 1994, but then increased by 22,400 from 1994 to 1995, perhaps due to the early retirement deal, before falling again by 25,600 from 1995 to 1997.  Of course the newly retired, with their higher final salaries, received higher pension benefits than those dying off who retired long ago, as there was no inflation adjustment for the pension plans at the time.

NYCERS members, like other public employee pension recipients in New York State, benefitted from the massive pension deal of 2000, pushed by Comptroller Carl McCall and also signed off on by Governor Pataki.  It included a retroactive inflation adjustment for both those still working and for those already retired.  It was particularly beneficial to those who retired long ago, had their pension benefits set by the salaries of the time, and then received a massive catch up pension increase.  Including those who cashed out after Mayor Lindsay’s Tier I deal.

The retroactive inflation adjustment for those who were already retired caused pension benefit payments to soar immediately.  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 the New Jersey teachers’ pension fund, presumably the result of a similar deal.  The 1999 to 2003 increases in inflation-adjusted pension benefit payments for NYCERS, the New York (state) Public Employees Pension and Retirement System, and the New Jersey Public Employees Retirement System were 31.3%, 57.5%, and 48.7% respectively.

Of all the retroactive pension increase deals, only the 2000 pension deal lead to as great an increase in pension benefit payments by NYCERS as it did by the NYC teacher’s pension fund.  And, of course, NYCERS members did not benefit from the 2008 deal for teachers alone.  So retroactive pension benefit increases are less responsible for soaring pension costs for NYCERS members than they are for teachers.

Finally, as was the case for the teachers, pension benefit payments to NYCERS retirees soared in the late 1980s.  While I don’t recall a retroactive pension increase at the time, the data implies there was yet another big deal in addition to those already described (and the many other small ones that pass every year).  Presumably a deal done in the dark, and described as “costing nothing” to the extent the public was told about it at all.

Chart 2 shows the inflation-adjusted contributions to NYCERS by New York City public employees and by taxpayers over the years.  While most of the pension increases were described as “costing nothing” or “saving money” at the time, the 1991 pension incentive was associated with a huge one-time taxpayer contribution to the New York City teacher’s pension fund, perhaps the proceeds from a “pension bond.” For NYCERS, on the other hand, the Census Bureau data show a major extra employee contribution of about the same amount of money  (about $11,400 per active worker in $2011).  That may be an error, with NYCERS also receiving the proceeds from the pension bond rather than money from the employees.  Or it may be a” buy-back” of service time to qualify for earlier retirement, although those are generally paid for over several years.  Employee contributions to NYCERS were also elevated in 1992, 1997, 2000 and 2001, perhaps also associated with buy-backs.

Chart 2

But employee contributions to NYCERS fell by half from 2001 to 2002.  Like NYC teachers, Tier IV NYCERS members benefited from having their 3.0% pension contributions eliminated after they reach 10 years seniority, under the portion of the 2000 pension deal pushed by then-Mayor Giuliani.  Because public employee wages rise with seniority, the total reduction in their contributions to their own pensions fell by a large percent.  They only had to contribute a percentage of their salary in the lower-paid early years of their careers.

The reduction in employee contributions, however, was less for NYCERS members than it was for New York City teachers, perhaps because many were still “buying back” time to qualify for retirement at age 57.  As is the case for NYC teachers, the Tier VI pension will force new hires to pay a higher share of their wages for a less generous pension.  Although until a public employee is dead, there is no way to tell what their pension will eventually turn out to be.  It cannot be reduced, but it can be increased at any time, over and over.

While NYCERS members cut their pension contributions less than NYC teachers, NYC taxpayers cut their contributions to NYCERS even more than they did to the NYC Teachers Retirement Fund.  In fact, as part of that same 2000 deal with the unions, Mayor Giuliani was allowed to cut the taxpayer contributions to the NYCERS by 68.6% from FY 1999 to 2000, so Giuliani would have some money to throw around while running for Senate.  And for several years from 1997 to 2003, NYCERS members were actually contributing more money to NYCERS than New York City taxpayers.

Chart 3 shows the ratio of active pension plan participants to those receiving periodic payments. Rapidly growing areas, such as developing suburbs and expanding Sunbelt cities, have a high ratio of working public employees to retired public employees, because years earlier – perhaps when an area had been rural – there had been fewer public employees working to be retired today.  Later, years after an area is built out and its population and public employment levels off, the ratio of workers to retirees levels off as well, at a point that reflects the service requirements and retirement ages of the pension plan.  New York City has essentially been in that situation for decades.

Chart 3

For New York City, the ratio of workers to retirees has mostly reflected the limited work required to earn years being paid for a permanent vacation under the Tier I Lindsay pension deal and subsequent pension incentives and sweeteners.  The 1995 deal, for example, arrived just in time to ensure that no one promised a “Tier IV” pension with an age 62 retirement age when they were hired actually had to settle for that deal.  They could retire at 57 instead.

NYCERS averaged 1.8 active workers per retiree in 1987, when most of those retiring were in Tier I, and 1.4 workers per retiree in 2011, when just about everyone retiring was in Tier IV.  That seems to be the ratio going forward – an average of 1.4 years worked for each year in retirement.   Of course for those eligible for 25/55, including transit workers and sanitation workers, and who work exactly 25 years and retire right at 55, that is probably closer to one year worked for each year in retirement.

For these workers “Tier I” had been even more generous, with retirement at age 50 after just 20 years of work.  As the date approached when the first transit workers hired under Tier IV would be forced to work until age 55 instead of retiring at age 50, there was unrest within the Transit Workers Union (TWU).  A dissident group, New Directions, promised they would fight for 20/50 if the transit workers would oust the faction associated with the national union.

After New Directions took charge, the New York State legislature went ahead and passed a 20/50 pension deal for NYC Transit workers, even though the cost and disruption of the original 20/50 deal under Mayor Lindsay had devastated the transit system in the late 1960s and early 1970s. They passed it without a single “no” vote, more than once, but this time then-Governor Pataki vetoed the deal.  The result was the 2003 New York City transit strike, just before Christmas.  Oh they’ll insist that strike was about “respect” or something else, not early retirement.  But I know differently.

With the suburbs expanding, New Jersey and the portion of New York State outside New York City continued to increase their populations, adding public employees along the way, right through 1990.  Once their populations and government employment levels have leveled off, however, the ratio of active workers to retirees began to fall.  For the New York (state) Public Employees Pension and Retirement System it has fallen to 1.4 years worked for each year in retirement on average, although this system includes police officers and firefighters with every earlier retirement.  This shouldn’t affect the pension fund’s financial stability, because pensions are supposed to be paid for while an employee is working.  But since the pension funds are not fully funded, the rising burden can be crushing.  Since retiree health care is not pre-funded at all, it is even more crushing to have relatively more retirees.

Chart 4 shows the number of active, retired, and “inactive” members of NYCERS. 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 1997, the number of “inactive” members soared in 2008.  The teacher’s pension fund shows a similar jump two years later.  Perhaps this is a reporting mistake by the pension funds, but it may have another explanation.  Why are so many more city workers leaving before retiring but with pension credits for later retirement retained?

Chart 4

Perhaps this is the reason.  Before Tier VI, one only had work for five years to be eligible for retirement benefits.  Of course the pension for five years worked would be tiny.  But a lifetime of retiree health insurance, starting with the retirement age (perhaps 57 for those who got the 1995 deal under Tier IV) went with it.  That’s worth a lot, particularly from age 57 until age 65, when Medicare picks up most of the burden.  And costs a lot.  For new employees, the new Tier VI passed a couple of years ago increases the years of service to get retiree health insurance to ten years.  Or at least it did when enacted.  They might have changed it last night at 3 am.

In any event, New York City and New York State taxpayers are carrying ever more retirees.  But the growth is greater for the New York (state) Public Employees Retirement System, with an increase of 86,950 retirees (to 385,000) from 2001 to 2011.  The number of retired members of the New York State Teachers Retirement System increased by 35,640, to 141,630, during the same decade.  The population of the rest of New York State certainly isn’t rising that fast.  Nor are the inflation-adjusted incomes of those who don’t work for the government and don’t work on Wall Street.

Chart 5 shows the ratio of pension fund benefit payments to pension fund assets for the three large pension funds for New York City, New York State, and New Jersey.  It shows the consequences of all the deals in all the backrooms over all the years, with little or no public discussion. And as for the separate teacher pension plans, it is a shocker for New York City.  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.  But NYCERS paid out 9.4% of its assets in benefits in 2011, compared with 5.8% for the New York Public Employees Retirement System.  New Jersey was even worse off, with 11.5% of assets paid out.

Chart 5

There ought to be enough pension assets in the NYCERS to pay for all of the future pension benefits of city 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 workers.  But at the benefit payment and asset value levels of 2011, the fund would be emptied in just 11 years.  There were just seven years of benefit payments in the pension fund for New York City teachers at the time.  And though the funding level for the New York (state) Public Employees Retirement System may look better, recall that the ratio of workers to retirees may continue to fall and thus increase benefit levels even faster.

It is, once again, 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 today than it was 2011.  But that easy money policy has also cut the amount of investment cash, in interest income and dividend yield, coming into the pension funds.  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?

Why is the benefit payment to assets ratio so much worse for NYCERS than for the New York (state) Public Employees Retirement System, given that the same New York State legislature that has set the pension benefit levels for both for decades?  One possible explanation is that the city pension funds never really recovered from the Mayor Lindsay deals of the late 1960s.

For the NYC Teachers Retirement System I found this was not so.  That plan had recovered to near parity with the New York State Teachers’ retirement system in 1990, before another wave of retroactive pension deals and underfunding put it back deep in the hole.  In the case of NYCERS, however, the ratio of benefit payments to assets soared to a level far above the level of the NY State plan from 1967 to 1972, after the Lindsay deals, and with some fluctuations based on stock market bubbles and busts, never came back down.  Compared with the New York Public Employees Retirement System, NYCERS has been in the hole 40 years! Through booms and busts, not enough money was contributed to get this pension plan out of the hole.

And pension deals were passed that got it further in the hole.  As the big 2000 pension increases was being debated, I recall reading in the newspaper a quote by a NY State legislator saying he was sure the state pension plans could afford it, but he wasn’t sure about the city plan.  They passed the deal anyway.  Now NYCERS has, based on a back of the envelope estimate, perhaps half the money it needs to have.

Chart 6 shows the ratio of taxpayer pension contributions to benefit payments for the NYCERS, the New York state Public Employees Retirement System, and the New Jersey Public Employee Retirement System.  The data shows that the city’s taxpayer pension contributions to NYCERS, relative to its payouts, have been lower than those for the New York State plan since the 1960s.  At first this was understandable.  With the suburbs in the rest of the state booming, the ratio of workers earning benefits to retirees collecting benefits was high.  Local governments in the rest of the state had to put more in, relative to the amount the pension plan that covered them was paying out, to fund those future benefits.

Chart 6

Given that NYCERS never really got out of the hole, however, there is no excuse for the plunge in NYC taxpayer contributions to NYCERS after 1990.  And in particular for the near elimination of taxpayer contributions during the Giuliani and early Bloomberg years.  In the year 2000, at the peak of the stock market bubble, the City of New York put $265 million (in 2011 dollars) into the New York City teachers’ retirement system, down 56.8% from 1999.  But it only put $89.6 million into NYCERS, down 68.6% from the year before.

Which shows that just because NYC teachers received more valuable pension increases than city workers in most other city agencies, that doesn’t mean NYCERS is much better funded or other city agencies. And it doesn’t mean that other city services will be cut less than the public schools.  Even if it is the teachers that grabbed more, others may suffer as much. And if fact, New York City residents and businesses will likely end up paying for a substantial share of the state fund, which covers local government workers outside the city, as well.

With regard to teachers, the New York City pension fund is in worst shape than New Jersey, the poster child for pension mismanagement before people found out about Illinois.  With regard to the pension plan for most public employees, however, New Jersey is worse off.  In large part because New Jersey taxpayers contributed almost nothing in most years from 1992 to 2004, and absolutely nothing in some of those years.  New Jersey government workers, meanwhile, contributed far more to their own pensions than those in New York City or the rest of New York State.

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 the post on teacher pension plan, from 1991 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. I was surprised by this huge gap.

Chart 7

Comparing the three big pension funds for most employees, one finds the same gap. The average annual returns are 7.4% for NYCERS, 9.3% for the comparable NY State plan, and 9.5% for the comparable New Jersey plan.  I’m stunned that these plans didn’t all end up about the same over the long term.  Did NYCERS plan accept a lower return in exchange for lower risk?  Look at the chart.  Post 2002, with the data measuring assets at market value, it s returns sure seems just as volatile.  Are the fees higher for New York City?  Is the home of Wall Street snorting its own supply?

Despite the lower rates of return for the New York City plans, I’m not prepared to concede that poor investments are a significant reason for soaring pension costs.  While lower than the returns for the New York State and New Jersey pension plans, New York City’s returns were in-line with its expectations, which were officially 7.0% before the 2000 pension deal, 8.0% starting with the peak of the stock market bubble that year, and 7.0% once again today.  NYC taxpayers and public employees should have contributed enough to the plans to make them fully funded with a return of 7.9% for the teachers and 7.4% for most workers.  And if plans were underfunded based on those assumptions, there certainly shouldn’t have been any retroactive pension increases.

While below average investment returns don’t get the blame for the past, they could be devastating for New York City in the future. The high returns for all three plans from 1991 to 2011 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 explained in this post.

In this new era of lower returns, that 1.5% per year gap could be the difference between a 4.5% average return and a 3.0% average return, with one-third less coming into the New York City pension funds.

I plan to conclude this series with a post on the police and fire pension funds for New York City, New Jersey, and perhaps (for 2011) a few other places.  That will require some time, because these plans have some additional issues, but I will get to it when I can.  If you can’t wait, you can always download the database — with all the data for pension plans in New York and New Jersey — and analyze it yourself.

Pension Data Long Term NY NJ