Last month the Empire Center for New York State Policy, a fiscally conservative think tank, issued a report on New York State’s pension plans, and the news was not good. The Center projects that by 2015, for the teachers’ pension fund alone, school district contributions will quadruple, increasing from 6.2% of payroll last year to 25% in just five years’ time.
For the Irvington school district, this would mean that our pension contribution would increase from $1,089,440 million in 2010 to roughly $5 million in 2015. Without spending cuts, we would need a 3.5% tax hike every year through 2015 just to cover pension contributions—and that’s before we even think about how to fund the raises we are contractually obligated to pay: step increases, column raises, longevity bonuses, and any across-the-board increases negotiated in the union contract.
Unfortunately, the school board has no power to delay an increase in pension payments until local incomes and home prices recover. State comptroller Thomas DiNapoli has sole control over state pension funds and has set next year’s payment rate for the teachers’ pension plan at 11-11.5% of payroll (the final figure has yet to be determined). This means we will pay an additional $700,000 for both pension plans (teachers/administrators and clerical/custodial), not counting the $200,000-plus we owe for three teachers who took early retirement last spring, a payment we can either make in full or finance at 8% through the pension plan. Altogether, we will be sending $900,000 to Albany, the equivalent of a 2.1% tax hike.
That won’t be the end of it. New York State has been underfunding pensions for years, and the Great Recession slammed state finances just as waves of baby boom teachers retired into the system. Today, while markets have recovered to some degree, the teachers’ pension’s net asset values are lower than they were ten years ago, while payments to beneficiaries have doubled. Our numbers here in Irvington tell the story. Last year the district was supporting 147 retirees, nearly one for every two active employees, and since then 5 teachers have taken early retirement.
The pension crisis has hit Irvington schools.
To deal with the crisis, we have three options: cut spending, raise taxes, or cut spending and raise taxes. What we can’t do is ask employees to contribute more to the pension funds. In the private sector, employees contribute to their retirement plans throughout their careers, but New York State law exempts most teachers and administrators from contributing to their pensions after their first 10 years on the job. Beginning last year, new employees are required to contribute 3% of their salaries annually. Irvington has few employees who fall under that rule.
So without change from Albany, taxpayers will be supporting a large and growing number of retirees — and supporting them very well indeed. A teacher earning $110,000 who retires at age 60 after 35 years of service receives $74,250 annually, the equivalent of a $1.4 million lump-sum payment upon retirement. Her pension is exempt from state and local taxes, and the district provides lifetime healthcare for her and for her family, adding another $16,500 (and rising) to the total package. And when the next recession strikes, her pension and benefits will continue to be paid by taxpayers whose own incomes, home values, and 401K savings have fallen.
As generous as New York pensions are, we would not be in the fix we’re in if Albany had required school districts to fully fund pensions from the start. Instead, Albany cut pension contributions, and school districts used the “savings” to hire more employees, whose pensions were also underfunded.
Another challenge: retirees may be collecting pensions for a longer period than originally projected. Not so long ago, teachers and administrators earned modest salaries and retired at age 65. Today, salaries have increased well beyond inflation, and the average age of retirement is 60. Pension and retirement benefits have become so generous that retirement is now a more attractive option.
Clearly, the pension system needs reform. Taxpayers are maxed out, and money sent to Albany is money that cannot be spent in the classroom.
Public sector pension benefits are guaranteed by our state constitution, so changes will not be easy to make. Here, though, are five things we can do:
- Urge Albany to switch to defined contribution plans like 401(k)s for new hires. With 401(k)s, both employer and employee contribute, and the employee – not the taxpayer – bears the risk.
- Insist that employees already in defined benefit plans contribute for the remainder of their careers.
- Carefully monitor headcount and keep a lid on compensation. Last year over 100 district employees earned $100,000 or more, and the higher our salaries, the higher our pension payments.
- Encourage employees to continue working past retirement age.
- Keep an eye out for pension spiking, the practice of pumping up compensation in an employee’s final years, the years on which the pension is calculated.
CORRECTION: The following correction was provided to authors Robyne Camp & Catherine Johnson – The State comptroller Thomas DiNapoli has sole control over only the NYS Employees Retirement System rates, not the NYS Teachers Retirement System rates.
NYSTRS employee contribution rates are set by the NYSTRS retirement board. The retirement board sets NYSTRS policy and oversees the System’s operations. Trustees on the TRS board represent various constituents, including active and retired teachers, school administrators, and school boards. The ten Board members are responsible as fiduciaries to protect the long-term value of the System’s investment portfolio and to provide benefit security for members.
[blockquote class=blue]Robyne Camp is a lawyer who serves on the Irvington school board. The views in this article are her own and do not necessarily represent the views of the Irvington School Board. Catherine Johnson a New York Times best selling author is the cofounder of the Irvington Parents Forum, an online discussion group about public school quality and spending.