On June 6, 2016 the mayor announced an agreement with the unions representing the Uniform Forces of Fire, Sanitation, and Corrections granting their Tier 6 members a ¾ accident disability benefits under Tier 6.
The Uniform Fire Force
The benefit for the Uniform Fire Force needed subsequent state legislation, Chapter 298 of the Laws of 2016. It will cost eligible firefighters 2% of payroll every year to start. As of 9/18/2019 the actuary will review the cost of the program and I am quite certain the cost will rise to 5%. Luckily for firefighters the cost is capped at 5%.
Chapter 298 also created a new agency to administer the Fire pension fund staffed with personnel from the internal pension division within the Fire Department.
When members are paying 5% per year for the benefit, I guarantee you that the number of accident disability awards at the FDNY will greatly increase from the current level of 57% of retirees (9,842 out of 17,261 as of FY-2015). God help the funding level at the FDNY-PF.
The Uniform Sanitation and Correction Forces
In contrast to Fire, the benefits for the Uniform Sanitation and Correction Forces utilized Article 25 of Tier 6 to authorize the new benefit. See the recap below. In this structure there is no cap on the costs that the eligible members will have to pay for the new accident disability benefit.
In 2012, as part of the Tier 6 legislation, the legislature added three new parts to the RSSL, Articles 23, 24, and 25. Articles 23 & 24 apply to the NYSLERS. Article 25 applies to NYCERS, NYCTRS, and BERS.
The idea behind these new articles is to provide the state and the city with the right to grant pension benefits to bargaining units with the provision that the members getting the new benefits would pay for the full cost of the granted benefits.
At first look this might seem like a reasonable idea. It has, however, several potential problems.
Initially, the definition of the new pension benefit is not contained in state statute. I would assume the mayor will issue an executive order legally describing the benefit and giving public notice since there will inevitably be litigation arising from these benefits. As of today there are no publicly available executive orders granting the new benefits.
Secondly it appears that only the state legislation can terminate these benefits. Without legislation the parties are locked into these benefit/funding arrangements, no matter how onerous.
Thirdly, the retirement system involved, in this case NYCERS, will have to set a contribution rate and a control system to insure that the members are paying for the cost of the benefit. This is something very easy to say but very hard to do.
To properly do this, NYCERS will have to carefully track each one of these new accident disability awards correctly determining the extra cost for each benefit and offsetting the reserve that has been built to cover this cost. The actuary will have to be very careful to correctly cost these benefits because the city can not pay for any of this added cost. The interest rate assumption and mortality tables will be crucial. You know there will be shortfalls all the time.
The Added Cost of the New Benefit
Let me give you an idea how much this benefit will cost. A current Tier 6 Sanitation member is eligible for a 50% accident disability benefit equal to 50% of his/her five year average earnings (FAS) reduced by 50% of his Social Security disability benefit. This is a rough description. The SS offset can get very convoluted. For the sake of simplicity and being conservative, let us assume that the final benefit after the offset would be 45% of the member’s FAS.
The new benefit will be 75% with no SS offset. That is a 30% increase in the lifetime benefit. For example, a member with a $70,000 FAS who is disabled at age 38 will see an annual increase of $21,000 in his accident disability benefit. The IRS 4% annuity factor at 38 is 19.1665. Together they create present value of $402,496. For this example let us assume 25 accident disability awards per year. This gives you an annual cost for the new benefit of $10,062,400.
There are approximately 7,000 Sanitation workers of which about 1,750 are in Tier 6 right now. That number grows by 350 per year. NYCERS must give the existing 1,750 members the option to elect this benefit. All new Tier 6 members will be forced to pay for the benefit. The cost divided into 2,100 workers is $4,830 per year. That is 6.9% of a $70,000 salary.
I suspect you already can see the tidal wave coming.
What NYCERS Is Charging
NYCERS has costed this benefit out at 1.3% of payroll for Sanitation and .8% for Corrections and stated that they will review the rate on 6/30/2019. It would be interesting to see the calculations that support these percentages. But I guess that would be too much information for the public to handle. Yeah, right.
The Sanitation rate will fund a benefit with an annual value of $1,911,000 (2,100*.013*$70,000) or 4.75 accident disability pensions per year. What does NYCERS do if they have 10 accident disability pensions a year? What will NYCERS do on 6/30/2019 if they 15 or 20 unfunded accident disabilities? That could be a $8M deficit.
I suspect that there are approximately 350 Sanitation workers retiring each year. If they are a Tier 6 members, they now have an intense motivation to file for an accident disability pension. The moral hazard is very large.
I spent 20 years sitting at NYCERS Board meetings for disability benefits. The idea that there will only be 2.3 accident disability awards per year per 1,000 Tier 6 Sanitation workers is naïve.
If 7,000 Sanitation workers find themselves paying a substantial percentage of payroll for a ¾ accident disability benefit, they are going to file for it.
I won’t be 57% but NYCERS should be ready for at least 33%. They will work until they are injured. Members know how to maximize their pensions.
When a member pays for a benefit, he or she is going to get it, hell or high water. This will get very ugly. You can imagine if they have to pay 15% every year for this benefit.
Everyone should read about the Dallas Police and Fire Pension Fund to see how bad things can get when people are irresponsible about running a pension fund.
Recap of Article 25 of the NYS RSSL.
- The city of New York may elect to provide its employees benefit enhancements
- Such election may be made at the sole discretion of the mayor of the city of New York to the retirement systems upon receipt of a request from the collective bargaining organization,recognized or certified to represent such eligible employees, for such benefits.
- Upon election by the city of New York, the retirement system shall require additional member contributions to be paid by all eligible employees.
- The additional member contributions to be paid by eligible employees shall be of a level so that no additional contributions shall be paid by the city of New York to cover the cost of such additional benefits.