The Chief
April 17, 2009


'Unaffordable' Pensions: Unsupportable Rhetoric

April 17, 2009


Richard Steier
Ed Skyler speechifies about how traditional city pensions are unaffordable; Lillian Roberts rails against the city threatening layoffs at the same time that it's spending $9 billion a year on private contractors.

The unifying thread between the comments of the Deputy Mayor for Operations and the executive director of District Council 37 is that their value is solely rhetorical and unlikely to have any impact in the tense struggle between the Bloomberg administration and the municipal unions over what price the workforce should pay as part of stabilizing the city's finances.

Mr. Skyler's comments, of course, got a lot more mileage. They were delivered in an April 2 speech to the Citizens Budget Commission, which four days later recycled what amounted to a greatest hits collection from its own complaints about the city pension system and those aired in the news and editorial pages of the New York Post. Further synergy was provided the following day when the Post printed much of the CBC report in an op-ed by the business-funded group's research director, Chuck Brecher, and its senior research associate, Maria Doulis.

TWO VIEWS OF 'UNAFFORDABLE': Deputy Mayor Ed Skyler (left) contends that the city's traditional defined-benefit pensions are 'unaffordable,' citing skyrocketing contribution costs, but Patrolmen's Benevolent Association President Pat Lynch counters that this is a temporary problem caused by the stock-market slump and that reduced pensions would create long-lasting woes by making it difficult to recruit qualified candidates for police jobs.

PBA: That's Rich

Patrolmen's Benevolent Association President Pat Lynch dismissed its pension findings this way: "As usual, the group of millionaire lawyers, investment bankers and real-estate moguls who run the arm of the Mayor's press office called the Citizens Budget Commission are far off the mark on this issue."

The Bloomberg administration wasn't ready to take its hand off the throttle, however. The day after The Post excerpted the CBC musings, Budget Director Mark Page, who as it happens reports directly to Mr. Skyler, fired off a memo to all agency heads telling them it was time to cut their budgets again. Without even waiting for them to lay out how they planned to do it, he stated it was most likely to take the form of layoffs as the key element of cutting as many as 7,000 jobs from the city payroll.

This prompted a response from Harry Nespoli, in his role as chair of the Municipal Labor Committee, that the negotiating process had been hijacked by "amateurs." A couple of other officials thought the layoff threat was actually Mr. Skyler's over-the-top reaction to an article that appeared in this newspaper a day earlier in which Mr. Nespoli parried the Deputy Mayor's pension comments by questioning his judgment. If they were right, Mr. Nespoli's latest response wasn't likely to produce a breakthrough in the labor-management discussions.

Mr. Skyler and his boss seem to share Rahm Emanuel's belief that a crisis is a terrible thing to waste, and have tried to slap together a few isolated facts—the city has a serious budget problem, caused in part by escalating pension costs—to produce a lesscostly retirement system for future workers by offering them inferior benefits and making them work longer to receive them.

The unions, as well as state legislators who would have to approve such a pension change, are skeptical about the city's claim of significant short-term savings, and question why a drastic reduction in long-term compensation should be part of the conversation. Mr. Nespoli has argued that the city should be focused on the obvious place for short-term relief: through economies in the health-benefits plan.

Co-Pay Most-Plausible Solution

But a gap of more than $350 million exists between what Mr. Bloomberg is demanding and what the unions are offering, though labor leaders point out that the $200 million they have put on the table matches what the Mayor originally asked for. Union leaders also wonder why the number rose on the same day that the city learned it was going to be getting a more-generous hunk of the Federal stimulus pie than had originally been anticipated.

The unions are unwilling to require their members to pay a portion of their health premiums for basic coverage. Mr. Bloomberg, noting that state workers already pay the 10 percent that he is seeking and that transit workers now devote 1.5 percent of their earnings towards their health coverage as one of the unappetizing aftermaths of the 2005 strike, seems convinced he can wear them down, aided by newspaper editorialists.

There would seem to be a middle ground here: the imposition of $5 employee co-pays for those covered by the Health Insurance Plan of Greater New York. Such a co-pay exists for those covered by the city's largest health provider, Group Health Incorporated, but Ms. Roberts is said to be resisting accepting one for her members under HIP. The copay wouldn't come close to splitting the difference between what Mr. Bloomberg is seeking and the unions are offering—one labor leader estimated that it would save the city another $50 million. But it would potentially offer a livable compromise: Mr. Bloomberg could walk away saying he had won an employee co-pay, and the unions could tell members that their basic health coverage was still free.

"At the end of the day, there's gonna be a health deal," one union official said. But where the Mayor is using the layoff threat to try to tilt that deal closer to his terms, the unions are convinced that they can't show any sign of sweating if they don't want to be undressed as they were when Rudy Giuliani threatened massive layoffs 14 years ago.

Bill Henning, the second vice president of Communications Workers of America Local 1180, recalled ruefully that then-DC 37 leader Stanley Hill told Mayor Rudy Giuliani, "We will do anything to avert layoffs."

Set Stage for Wage Freeze

"That pretty much telegraphed what happened," Mr. Henning said, referring to a contract deal that froze wages for two years and imposed a starting salary for new workers that was 15 percent below what was paid to incumbents.

He called the Mayor's estimate that the city could save $200 million in the coming fiscal year if Tier 5 were imposed "voodoo economics," adding that city officials and the CBC had tried to stir up public wrath against employee pensions by focusing solely on the higher ones generally received by cops and firefighters.

The average pension for those belonging to the largest city fund, the New York City Employees' Retirement System, Mr. Henning said, is less than $22,000.

Mr. Bloomberg's crusade to reduce pensions, Mr. Henning said, was "a great disappointment, because when he came in I thought he was going to be a marked departure from his predecessor— he was going to be someone who believed in the value of public services."

Any notion that Mr. Skyler's analogy of the city pension systems to General Motors and its current wobbly financial condition was purely his own opinion was dispelled when the Mayor said April 9 that current pension and health costs "are going to bankrupt this city. There's virtually nobody in the private sector who has anything remotely like the plans that we have."

Makes Up for Lower Salaries

But then, most employers don't look to encourage career service the way that the city does. One of the key inducements government offers is a pension that is designed to compensate for the fact that it generally pays less than good employees could make in the private sector.

Uniformed Firefighters Association President Steve Cassidy said in an April 10 phone interview responding to the Mayor's comments, "I think people in the public sector look at what he's paying people in his private companies and say, 'Hey, I wouldn't mind making those salaries.' "

His members, the UFA leader continued, have higher burn and death rates than those in any other department in the nation, and the right to retire after 20 years at full pension or with a tax-free disability pension regardless of years of service is a just reward for those who put their lives and health at risk and survive to collect those allowances.

Mr. Cassidy has argued that the rise in disability pensions reflected the impact of a single catastrophic event —9/11 and the long-term health damage done to the large number of firefighters who spent months at Ground Zero afterward searching for the remains of their colleagues—rather than a trend that will continue to escalate the city's pension costs.

Mr. Bloomberg has chosen to focus on the fact that city pension contributions have more than tripled during his tenure, reaching $7.17 billion during the current fiscal year for all five pension systems.

Caught in Wall Street's Draft

But that is largely the product of the prolonged slump on Wall Street and the corresponding drop in pension system earnings, which has forced the city to increase its contributions to make sure the funds remain solvent. The Wall Street boom years of the mid- to late-1990s produced such robust earnings that nine years ago, the city had to contribute just $693 million to the five funds, and legislative action was taken that both allowed it to reduce its contributions and improved benefits and lessened contributions by employees.

While the rise in its contributions seems shocking, the current payout by the city is not when placed in historical perspective. The current pension contribution represents 32 percent of the municipal payroll; back in fiscal 1981, when city contributions to the five funds totaled $1.5 billion, that amounted to 30.5 percent of payroll. In both instances, the high numbers reflected years of lackluster stockmarket performance; by fiscal 1988, after several good years on Wall Street, city pension contributions equaled just 23.3 percent of payroll, and in the midst of the 1990s boom, the fiscal 1999 contributions amountnever ed to 10.2 percent.

No Longer Exceeding Expectations

Those drops in contributions were possible because the systems were producing earnings of 12 percent or more on a consistent basis at a time when the city was estimating returns of 9 percent or less. More recently, the city has been losing money on its pension investments while anticipating the same basic returns, which has forced it to keep upping its contributions.

But Mr. Skyler's analogy between the city systems and GM is flawed for several reasons, not the least of which is that GM is in its current trouble mainly because it continued to produce vehicles that made little financial sense given the skyrocketing cost of gas over the past few years, and a public that began to see all its oversized vehicles as Hummers, figuratively as well as literally, responded accordingly.

From a strictly practical standpoint, the primary distinctions between the automaker and the city are that the city is not in danger of going out of business or having to file for bankruptcy, Mr. Bloomberg's florid rhetoric last week notwithstanding. That means it has a lot more time to make up for its losses once the stock market inevitably turns around. If Mr. Bloomberg believed a market turnaround might not happen for a long time, he could have sought to alter the balance of the funds' investments, which currently are 70 percent in stocks and 30 percent in the lowerreturn but surer bond markets.

'401(k)s Not Retirement Plans'

Mr. Skyler's complaint that definedbenefit pension plans were both "obsolete and unaffordable" was unaccompanied by a plausible alternative. The private sector over the past couple of decades had moved towards defined contribution plans such as 401(k)s under which employees' returns were governed by how much they put in, with matching contributions by their employers. The market crash has made such plans look a lot less palatable to employees, however, than the traditional public pension, which offers a guaranteed payout linked to years of service and salary at the end of career, rather than market earnings.

"The defined-contribution plans were real retirement plans," said one pension expert who spoke conditioned on anonymity. "They're savings accumulation vehicles."

Such plans actually entail greater administrative expenses, he continued, but "they create a level of certainty for the employer." That same certainty can also be provided, however, under a defined-benefit plan, he said.

David Langer, an actuarial consultant who was one of the most-cogent voices against President Bush's chuckleheaded plan four years ago to privatize Social Security, said the city might want to consider a contribution system similar to what exists under the Federal retirement plan, where employer and employee each put in 6.2 percent of that employee's salary.

'No Unfunded Liabilities'

"That way you don't have any unfunded liabilities, and it's not that expensive to administer," Mr. Langer said. "For Social Security, the administrative cost is about 1 percent of benefits."

That is feasible; in fact, the earliest city pension programs created nearly a century ago involved equal contributions. By the 1960s, cops and firefighters were contributing close to 8 percent of their salaries toward their pensions, but legislation was approved that returned 5 percent of those contributions to their paychecks once the city realized it could also save money on the proposition (currently the Increased Take Home Pay level is 2.5 percent for those workers).

There are other states, the pension expert said, that approved higher employee contribution rates after "they found members don't mind paying a bit more as long as their benefits are a bit more generous."

But that move elsewhere reflects the reality that employees are conscious of the value of their pensions. That makes it likely that even if those new to the workforce weren't initially aware, it could eventually affect their willingness to stay with the city under a reduced retirement plan.

Warns of Recruiting Problem

Which was why Mr. Lynch, talking about cops' pensions, said those granted to his members "are about average in the law-enforcement profession, are not the problem and reducing them for future officers will not save any money in the near future and will only create a recruiting crisis for the NYPD."

Mr. Bloomberg just got over a similar experience that resulted from an arbitration award four years ago that at the city's insistence drastically reduced starting salaries in order to offset raises for Police Officers well above those that had been granted to civilian employees. It was not until he boosted starting pay by more than $15,000 over the course of two subsequent contracts that the NYPD found itself with enough qualified candidates to fill all vacancies.

And the fact that the Tier 5 proposal does not cover cops and firefighters outside the city means no legislator here who values his job is likely to support the change. That's probably why Diane Savino, who heads the State Senate's Committee on Civil Service and Pensions, has said that the best the Mayor could hope for is some amendments to Tier 4, with others regarding the most-likely one being a revival for new workers of the requirement that they continue contributing to their pensions beyond the current 10-year period.

Part of 'Middle-Class Workforce'

For past generations of New Yorkers, the civil service system and its guarantee pension for career workers has offered a gateway to the middle class, although those lower down on the pay scale, including a large percentage of those represented by DC 37, still would not fit in that category. GM, United Federation of Teachers President Randi Weingarten said, played a similar role in "ensuring health-care and retirement security while creating a middle-class workforce" before poor manufacturing decisions made those benefits an unsustainable burden.

But the notion that the city or the nation as a whole can't continue to provide such protections to future workers, she said, "is a really terrible vision of America. I think it is a race to the bottom as opposed to figuring out how you lift all boats. Everyone in America should have a defined-benefit pension plan."