Beware the pension gimmick

E.J. McMahon

In lieu of actual mandate relief, Governor Cuomo wants to make a seemingly irresistible offer to local governments. A proposal included with his 2013-14 Executive Budget would give counties, municipalities and school districts the option to (a) immediately reduce pension contribution rates by up to 43 percent, and (b) “lock in” a “stable” pension contribution rate for a 25-year period.

This would be accomplished by significantly under-funding the pension system in the short term, based on the expectation that Cuomo’s Tier 6 pension plan will ultimately yield more than enough savings to make up the difference later in the 25-year period. (See Part G on page 14 of this memo for a detailed explanation.)

There are three basic problems with the idea.

Even under ideal, fair-weather economic and financial market conditions for as far as the eye can see, it’s likely to be a losing bet for employers — saving them less in the short term than it would cost them in the long term.
It weakens and increases the financial vulnerability of the pension funds in the short term, and in the long term is a big financial gamble for both their beneficiaries and their ultimate underwriters, New York’s taxpayers.
It may violate the state Constitution’s Article V, Section 7, prohibition on impairment of retirement benefits.

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