EdVANTAGE Blog

Public pension issues have been in the news this week.

Yesterday, Governor Paterson’s Budget Division issued a report concluding that his “Tier V” pension proposal would save taxpayers nearly $50 billion over the next 30 years.

Earlier in the week, State Comptroller Thomas DiNapoli warned school board members at NYSSBA’s State Issues Conference that, due to investment losses, the employer contribution rate for the State and Local Employees Retirement System (ERS) could be in for a “significant increase” in 2011.

The State Teachers Retirement System used the same phrase in a similar warning issued a few weeks back.

As part of the state budget he proposed back in December, the Governor recommended creating a new tier of benefits for most newly hired public employees. In general, the proposal removes enhancements enacted since the implementation of the last new pension tier – “Tier IV,” created in the early 1980s.

For example, the Governor’s proposal would:

• restore the minimum retirement age from 55 to 62;
• renew the requirement that employees continue contributing toward their retirement past their first 10 years of service and instead throughout their careers;
• restore the minimum number of years of service to qualify for a pension from five to 10 years; and
• exclude overtime compensation from final average salary calculations.

The state constitution forbids the reduction of pension benefits for current system participants.  Accordingly, absent a constitutional amendment – a multi-year process, reductions in benefits must be imposed prospectively, applied to only future public employees.

The Division of the Budget (DOB) estimates that the proposal would save school districts outside New York City over $16 billion over the next 30 years. The report says, “An analysis by the New York State Teachers’ Retirement System (TRS) actuary indicates this proposal will result in savings equal to 3.4 percent of a Tier V employee’s salary base.”

Because both ERS and TRS base their employer contribution rates upon multi-year averages of investment earnings, and because both systems had a series of successful years, the rates are due to decline for the fiscal year for which districts are now developing proposed budgets.

The TRS rate is due to decline from 7.63 percent of payroll, to 6.19 percent. ERS has multiple rates but all are due to decline.

Again, both major retirement systems covering school employees expect a “significant increase” in employer contribution rates in the next year. Neither system has publicly volunteered an actual figure.

But a rule of thumb for understanding the impact of pension contribution rate increases is that, since payroll is about 50 percent of total school spending on average, every 2 percentage point jump in the contribution rate by itself would equate to a 1 percent increase in total spending.

Employer contributions are calculated by multiplying the contribution rates against the applicable payroll for the year preceding when the contribution is collected.

Accordingly, contributions reflecting investment losses and resulting “significant increases” in employer contribution rates would be based on 2010-11 payrolls and collected during the 2011-12 school year.

But, the overwhelming majority of school districts now follow “Generally Accepted Accounting Principles” (GAAP), which requires accounting for costs when they incurred, which sometimes occurs well before when they are actually paid. Under GAAP, districts are expected to budget each year for pension contributions based on the rate applicable to that year’s payroll.

To be specific, the decline to a 6.19 percent TRS employer contribution rate should be reflected in the budgets that “GAAP” school districts are developing now to propose to the voters in May.

The “significant increase” in employer contribution rates will need to be reflected in the budgets that districts assemble a year from now, at least for the majority of districts employing GAAP accounting.

Schools are at a disadvantage compared to local governments in preparing for this foreseeable cost spike, because they are not permitted to set up pension reserve accounts for TRS costs.  Both school districts and municipalities can use this reserve to save for ERS costs, but not TRS.  Most school employees are covered by TRS.

One of the themes of the Council’s budget advocacy this year has been that even with optimistic assumptions concerning the continuation of new federal support and recovery in the state’s fiscal capacity, schools face accumulating cost pressures, starting with pension costs.

The Governor’s Tier V proposal may not be perfect. Cost cannot be the only consideration. The most important factors that schools control in influencing student achievement are the quality of teachers and school leaders they employ.

So compensation structures should be designed, in part, with the aim of helping schools to get and keep the best teachers and leaders. Extending the period for vesting from five to 10 years, for example, might worsen already high attrition among early career teachers.

But the Governor’s proposal should start a careful and forthright discussion on how to balance the compensation needed to attract and keep the best teachers and administrators for schoolchildren with ensuring costs that are sustainably affordable for taxpayers.