Understanding the Growth in Government Contributions to New York State’s Public Pension Plans

Richard W. Johnson, Owen Haaga, and Benjamin G. Southgate

The Facts

  • New York has some of the best-funded public pension plans in the nation.
  • However, retirement benefits for state and local government employees have become increasingly costly for New York State’s taxpayers over the past decade.
  • Recent research suggests that the recent increase in required contributions to the plan was driven primarily by plan investment losses as well as the plan’s practice of adjusting government contributions to offset unexpectedly high or low investment returns.

Introduction

New York State has some of the best-funded public pension plans in the nation (Pew Charitable Trusts 2015). Data from plan actuaries show that the retirement plans covering the state’s public school teachers, state and local public safety workers, and general state and local government employees held enough assets in 2014 to cover 92 percent of future pension obligations. However, retirement benefits for state and local government employees have become increasingly costly for New York State’s taxpayers over the past decade (State Budget Crisis Task Force 2012). Nationally, contributions by state and local governments to public employee retirement plans increased 133 percent in inflation adjusted dollars between 2002 and 2014. In New York State, by contrast, total government contributions increased 609 percent over the same period, the second-largest increase in the nation. This surge in government contributions has created financial problems for local governments and raised questions about the sustainability of the state’s retirement plans, prompting some observers to advocate cutting retirement benefits for public employees (McMahon and Barro 2010).

The appropriate response, however, depends on why costs have been rising. Are pensions too generous? Or have costs been rising because the state and local governments contributed too little to the plan in earlier years (AFSCME 2012), forcing them to contribute more recently to make up for past shortfalls, or because risky investment strategies did not pay off? The first explanation suggests policymakers should cut benefits, raise mandatory employee contributions, or fundamentally change the retirement plan design. The latter explanations suggest policymakers should tighten funding rules or investment policies, but not necessarily change benefits.

This surge in government contributions has created financial problems for local governments and raised questions about the sustainability of the state’s retirement plans.

This report explores the increase in government contributions to the pension plan for New York State’s government employees, examining the retirement benefits offered to employees and how they are financed. We focus on the New York State and Local Employees Retirement System (ERS), which covers general state and local government employees in the state, excluding teachers and public safety workers. Our analysis simulates the level and distribution of annual and lifetime pension benefits, shows how they have changed over time, and compares average benefits in New York to average benefits in other states. We also report changes in plan revenues over time. Our results indicate that the recent surge in government contributions to the plan was driven primarily by plan investment losses as well as the plan’s practice of adjusting government contributions to offset unexpectedly high or low investment returns. Significant reductions in employer contribution rates in the past when the fund earned healthy investment returns also contributed to recent rate increases. Current retirees receive more generous benefits than in nearly all other states, but recent cutbacks will sharply curtail future retirement benefits for new hires. As a result, relatively few new hires will get much out of the plan.

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