DiNapoli: Cuomo Pension Plan Not 'The Smartest Move'

WNYC - January 24, 2012

by Colby Hamilton

Governor Andrew Cuomo is calling for a new pension tier for future state workers, which would give them the option of enrolling in a 401(k)-style retirement plan. But the state's top fiscal officer, Comptroller Thomas DiNapoli, calls making decisions about the pension system based on today's fiscal troubles "might not be the smartest move."

"We can no longer sustain the current pension system," Cuomo said during his budget address in Albany last week. He went on to call the rising costs to state and local government "devastating."

An Option

The Governor put up this slide during his presentation: pension costs to governments were projected to rise by 185 percent from 2009 to 2015. The projection put the price tag in 2015 at $6.6 billion.

The long-term solution, Cuomo said, was a new Tier VI that would give future employees the option of choosing a 401(k)-type retirement option (the SUNY system is already using such a play). He estimates the state will save an estimated $79 billion over three decades.

"Why wouldn't you want to give the person the option," the Governor asked during his speech. "We never said pensions were a life-time legacy for future workers who aren't hired yet."

The Power of A Pension

New York State's pension fund is huge, and remains the third largest state pension fund in country, valued at $147 billion. To put that in perspective, the world's largest hedge fund, Bridgewater Associates, is valued at only $77.6 billion, according to Bloomberg Markets Magazine.

To the nearly 400,000 retirees and beneficiaries in the system, it's also a regular check in the mail.

With its size and obligations, any change to the system--even ones that will take potentially decades to have a significant affect, like the new tier Governor Cuomo is proposing--has a remarkable impact.

In a speech to the National Public Pension Coalition last week, DiNapoli called 401(k)s "woefully inadequate" as a form of retirement security, noting that New York's fund is the best funded in the country. But in a phone interview last Friday, he also pointed to the inherent benefits of a big pension fund that goes beyond taxpayer obligations and retiree benefits.

"By aggregating that capital, we can not only maximize the power to get superior return," the Comptroller said. "You also can focus on the other ways in which you can make those companies you invest in be responsible corporate citizens in a way that makes their business model sustainable and profitable."

He went on to cite executive compensation and the impact of climate change on a corporation's business model as ways to push companies in a more socially responsible way. "We can do well for the fund, from a financial point of view, do well for the retirees and the future retirees, but also do some good things that end up benefiting the larger society as well," he said.

Not the New Normal

DiNapoli also pointed out that, in general, the fund actually does well. A lot of the criticism surrounding pension funds has been their sustainability. But according to analysis provided by the Comptroller's office, the past two decades have seen only 17 percent of pension benefits paid for by state and local governments. As the Governor's chart shows, that hasn't been the case since the start of the Great Recession.

Consider this the dueling charts: the Comptroller's office pointed to the following chart. If you look at what happened after the last economic hit after the dot-com bubble burst, government employers saw their contribution rates fall. We're currently in a five-year smoothing period, where the hit the pension took is absorbed by the fund over a few years. It ends two years from now--the end of the Governor's projections.

If history is any guide, the thinking goes, there's a point beyond 2015--assuming no major economic shakeup--where employer contribution rates start falling again. In other words, the same graph the Governor's using for the need for a new Tier VI might give a different, possibly opposite, impression over the next couple of years.

"We're dealing with a historic loss in investment return," DiNapoli said. "To make decisions about changing the parameters of the system, under the label of reform, assuming that worst-case scenario that we're going through now is going to be the new normal might not be the smartest move."

The Trickle Up Theory

Governor Cuomo made it clear during his presentation that the new pension tier would not solve the current issues with the state's pension fund. The costs to state and local governments is actually a reflection of future obligations, not current ones, so a new Tier VI could drop governmental employer obligations even further when the smoothing period is over.

If the issue becomes less about the state's pension fund's sustainability, then it becomes more about what type of system the state wants to give its former employees. For Governor Cuomo, the answer is in providing new employees with a choice. For Comptroller DiNapoli, the answer lies in the current system and what he describes as its "trickle up theory."

"There's certainly, in terms of community impact of this stable source of income for people when they're no longer working, I think is very fundamental to economic activity," he said. "When the everyday people... have money and security and they're spending...that's a lot of people spending money."