New York shifts more public pension costs to taxpayers

The New York Common Retirement Fund (NYCRF) is fully funded, placing it far ahead of the national average of public pension systems, which are 73% funded on average. Recently, the New York pension plan’s leadership made a series of positive changes, including lowering the assumed rate of investment returns to 5.8%, a national low that is more in line with long-term investment return expectations.

However, the 2022 state budget passed by New York lawmakers also reversed several major pension reforms enacted in 2012. As a part of the new budget, the state reversed the 2012 law’s requirement that higher-salaried employees contribute more to their pensions. This change transfers more costs to future state budgets and taxpayers.

Vesting period changes that were in the 2012 pension reform bill will also be reversed, which will also undo some of the savings of the reform. But the vesting change could be a welcome one because the shorter vesting period will better align the NYCRF with the needs of a modern workforce. It is crucial to examine each of these reversals in more detail to understand what they will mean for NYCRF’s long-term perspective.

Reducing Pension Contribution Requirements

As part of a bipartisan agreement between legislators, the 2012 pension reforms established a progressive payment system for new state employees. As a result, public employees who earned a higher salary paid a higher percentage of their compensation toward the pension fund, which helped manage growing pension costs for government employers.

However, the 2022 budget passed by the legislature and signed by New York Gov. Kathy Hochul removes this feature, which will be a significant windfall for public employees with higher salaries. As previously noted, it also brings increased fiscal pressure on state budgets and taxpayers to make up the difference.

Public pension benefits are typically constitutionally protected, meaning the government—and taxpayers—must ultimately be the backstop if projected contributions to a pension system are not enough to cover the benefits promised to workers. Due to this rollback in progressive contributions for public employees, state and local governments will have to find taxpayer money to make these increased pension contributions. So, while the state budget measure puts more money in the hands of public employees now, it is a significant burden for taxpayers to carry now and into the future.

Temporary Overtime Costs Waiver

Usually, New York’s Tier 6 employees (those who joined the public pension system after April 1, 2012) had their pension contributions calculated based on their base and overtime pay. The new budget legislation removes overtime pay from the Tier 6 contribution rate calculation (applied to wages earned from April 1, 2020, through March 31, 2022), effectively lowering a member’s contribution rate.

However, the change does not affect the benefit calculation for the same workers. As a result, the workers’ contributions will go down for the time they were employed during the COVID-19 pandemic, while their pensions will remain unchanged. Tier 6 is now the largest tier in NYCRF. Since there are more than 325,000 members in Tier 6, the reduction in contributions will ultimately be a significant expense for the state.

Reduction in Vesting Requirement

The reversal of the 2012 pension reform will also lower vesting requirements from 10 years back to five years, which will also generate additional costs and pressures on state budgets. This particular rollback, while expensive, should improve the state’s ability to provide valuable retirement benefits to its public employees. Essentially, this change should allow more public workers to be eligible for a pension benefit because they will be able to qualify for a pension in half the time. New York state was an outlier in this regard, as most public pension plans only require around a five-year vesting period to become eligible for pension benefits.

While lengthy vesting requirements may reduce costs, they are a concern because they lead to large portions of employees being left without a sufficient retirement benefit, which is counter to the purpose of the state’s retirement plan.

Many modern employees are switching jobs and careers more frequently and sooner than their older counterparts. For example, on average, modern public-sector workers spend just 6.5 years on a job. So, expecting a 10-year commitment before someone vests into the public pension plan ends up excluding a large percentage of employees.

Overall, lowering the vesting requirement back to five years will allow more workers to retain their full retirement compensation, and it will be a valuable improvement for the state because it will align the retirement plan with existing shorter tenure patterns.

Thus, there are both negative and positive impacts from New York policymakers rolling back the pension reforms made a decade ago. While it is good to step back from the counter-productive 10-year vesting requirement, the reversal of a progressive employee contribution policy will transfer significant costs to taxpayers.

The post-pandemic economy, with its high inflation and uncertainty, may be pushing New York lawmakers to relax some of the state’s previous more fiscally conservative reforms. However, a recent Reason Foundation analysis of expected funding outcomes shows that public pension plans across the country are likely to see their unfunded liabilities increase. Lawmakers shouldn’t remove guardrails that were enacted to address growing budgetary pressures and runaway costs.