Those Pernicious Pensions . . .

In May, 2008, the Albany Times Union created a sensation when it revealed that almost 900 people, including state officials convicted of crimes and retired police officers, were receiving $100,000 or more annually in retirement benefits. The following August, the Buffalo News noted that a local school superintendent retired with an annual pension of over $205,000, more than his former pay; that a local math teacher retired with a pension of more than $90,000 per year, about equal to his pay; and that statewide almost 700 teachers and administrators had retired with six-figure pensions. These are the exception rather than the rule; however, to many who are not on the public payroll, and to those who rely exclusively on Social Security, even average government pensions look generous. Newsday recently reported that newly retired teachers state-wide last year received almost a $46,000 pension (almost $72,000 for those with 35 years on the job), police and firefighters about $58,000, and state and local workers almost $25,000.

The reason why everyone is focusing on pensions now is the nation's economic crisis and the state's fiscal crisis. In early March the Associated Press reported Comptroller DiNapoli's estimate that the state's pension fund had lost about 20% of its value last year and that losses were continuing. People who are not on the public payroll expect that they will probably be taxed more to finance government pensions, while watching their own retirement nest-eggs disappear. In fact, they need to know that Article V §7 of the New York State Constitution forbids any diminution or impairment of these pension benefits, while Article VII §8(2) allows benefits to be increased. Article XVI §5 exempts the benefits from state taxes. Pension benefits for existing employees are iron clad. Even before the current crisis, taxpayer costs for public pensions in New York State were rising dramatically: from around one billion dollars in 2000 to 6.7 billion dollars in 2005. If the financial meltdown continues, there is a real chance that basic governmental services will have to be curtailed, while taxes are dramatically increased just to cover pension obligations.

Pension benefits have long been an enticement to public employment. Government employees did not expect to get rich when they joined the public payroll 20 or 30 years ago. They often accepted less pay than their peers in the private sector in return for greater job security, a predictable career path, more time to be with family, health benefits, the satisfaction of doing public good, and a secure retirement. 

Times have changed, however. In our area, most of the better paying jobs in the private sector (excluding health care, which is supported by insurance premiums similar to taxes) have simply vanished, owing to an inability of employers to compete in a national, and later, a global marketplace. The level of taxation necessary to maintain legions of public employees contributed to New York's private employers' inability to compete with those elsewhere. Public employees, however, have been insulated from this competition, protected by laws, rules, and powerful labor unions (some more “effective” than others). A comparison of public school teacher salaries with those in private schools, or with the salaries of government lawyers and engineers having a less powerful union, is a sobering demonstration of how the strongest public employee unions use their political influence to distort the labor market. Now, the better-paying jobs are more often the public jobs, but there is no longer a healthy private sector to sustain them.

A big problem with public employee pensions is the manner in which benefits are determined. Usually benefits are calculated as a multiple of the years worked times the average of the highest three years of compensation. While this approach lends itself to prediction of the cost of the pension for those civil servants who follow the typical progression up the career ladder, there are simply too may ways for some to artificially inflate their “high three” years far above what their careers would justify. 

For example, the Buffalo area superintendent mentioned above seldom took vacation and sick time. The pension rules applicable to him allowed him to cash in literally hundreds of days of leave during his last year on the job, inflating his final salary to almost $534,000. The Buffalo News calculated that this added almost $53,000 to his annual pension benefit, allowing him to retire on a pension that was bigger than his salary. Had he simply collected the value of the leave by remaining on the payroll longer in leave status, no increase in pension would have occurred. 

Those who can control their overtime are also in a position to inflate their “high three.” Stories of police officers doing things of little value such as washing police cars to burn overtime have been urban legends for years. Teachers have been suspected of inventing after school clubs and activities to obtain advisor stipends that increase base pay. While school boards consider the immediate annual cost in their budget when the club is in operation, they often fail to consider whether or not the timing of the stipend will result in a permanent increase to the teacher's pension.

Employees, even part time employees, who have political connections can sometimes use them to get themselves appointed to positions paying far above their normal pay. It only takes 2 or 3 years in a political position to significantly increase a retirement benefit for the rest of one's life.

Recently the Town of New Hartford approved a payout of almost $72,000 for several years of alleged back overtime to a bookkeeper who, according to Town Board minutes, was originally hired as an “exempt” employee (a category not usually eligible for overtime). This person's 2008 pay zoomed from $50-something thousand to about $128,000, due to the overtime payment. Did the Town Board consider the probable long-term cost of this “one shot” deal to the taxpayers for pension benefits? Could the payout have been structured to take place over time to avoid pension consequences? There is no evidence that these considerations were even on the Board's radar screen.

Employees, who engage in these “inflation” techniques, feel that they are entitled to the resulting pension benefits because the rules of benefit calculations allow it. Managers that may be in a position to minimize abuses, either do not see conservation of tax dollars as their responsibility, or they are in a position to benefit from the abuse themselves. But are these practices fair to the taxpayers – or fair to other employees who do not engage in them? 

The typical employee who retires has years of contributions into the system, either by him or herself, or by the employer on his or her behalf, at levels commensurate with earnings that gradually increase to the “high three.” Over the years, a substantial amount of contributions would have built up to pay for this person's pension. With an inflated “high three,” however, the money is NOT already in the system. That means that money either must be reallocated to the inflated pension from the contributions made for our typical employee, or the taxpayers must make up the difference. In the case of the superintendent, the $53,000 additional benefits per year for two or three decades of retired life would be a significant burden on the taxpayer. That money could otherwise be used to hire another teacher. The benefit formula, in a sense, allows some to take contributions intended for others. It is easy to see how just a few of these bad apples can threaten the viability of the pension fund or ruin budgeting for years to come.

During the fiscal crises of the '70s and '80s, the state placed new hires into “tiers” with scaled-back benefits. Although the unions argued that it was unfair for two people doing the same job to have different benefits, this was necessitated by the constitutional prohibition on cutting benefits for existing employees. As the economy improved and the value of pension fund investments increased, there was pressure to both increase benefits for those in new tiers as well as to scale back contributions. Around 2000 Gov. Pataki and the State Legislature not only eliminated a requirement for employees to contribute 3% of their salaries into the system after 10 years, they allowed pensions to vest after employees had only 5 years on the job, instead of the 10 years previous. That opened the door for many relatively short-term political appointees to obtain long-term benefits from the pension system – another form of political patronage. Once increased benefits are given, the constitution prevents them from being cut. 

What can be done to control pension costs? One thing proposed by Governor Paterson is the creation of another retirement tier, Tier V, that will increase retirement age to 62 from 55, require employees to contribute 3% of their pay throughout their employment, return pension vesting to 10 years, and eliminate overtime when calculating pensions. Unions will scream “unfair,” but what is going on now is unfair. These changes, however, will only apply to new employees.

For existing employees, our public leaders need to keep pension benefits on their mind when taking any action that involves personnel. For example, was overtime and the impact on pension benefits ever considered when Utica decided to go into the ambulance business – or considered in the latest police contract? Overtime needs to be carefully regulated. Payouts for accumulated leave or other benefits need to be structured over a period of time to avoid a pension impact. 

Pension costs are posing great peril for the taxpayers. The public needs to be aware of the problem and demand that it be brought under control.

[This article was originally published in the April, 2009 "Utica Phoenix." Be sure to pick up this month's "Phoenix" to read "What is the Fix for Upstate" ... available now in a newsrack near you.]