Tier 6 - Overkill and Stupid

Tier 6 is "pension reform" run wild. We will look back with nostalgia for the time when David Paterson was governor. He was able to get Tier 5 enacted without burning the house down.

Always remember that the current pension crisis in New York has been caused by three things listed in order of impact:

1. Horrible investment returns
2. Deliberate underfunding
3. Mid-career benefit enhancements

The proposed Tier 6 bill makes no attempt to fix the first two problems. Correcting investment failures and runaway investment costs would provide significant immediate cost savings. Funding reform would strengthen the pension funds long term health and remove the the temptation to cheat on annual employer contributions. While there is a need to reform the benefit structure, overkill will invite future attempts to make changes.

There are many bad ideas in the proposed Tier 6.

For example, the new defined contribution plan will provide a nice fat benefit to high paid political appointees. Without a disability benefit it will do nothing for long term employees.

Taking away the loan provision from sanitation and correction workers is strictly punitive. As of today NYPD and FDNY do not have a loan benefit for new members under Tier 3. This exclusion not only has no cost benefit. It actually takes away a valuable investment option from the pension funds. Member loans pay the pension funds a guaranteed 7% annual rate of return on 100% cash backed loan with no investment fees.

Some genius thought that the little provision below would prevent any future changes to this new benefit structure.

§ 81. No enhancement, increase or other alteration or change in the benefit structure provided herein shall be authorized.

The inherent stupidity of this attempt to prevent the world from changing is breath taking. I wonder who actually wrote this proposed legislation. There was obviously a lot of work done in putting it together. But there is a certain meanness in these changes that will eventually lead to its own undoing.

But the following Tier 6 idea is a really pernicious scheme. I've listed one of the occurrences of the the bill text below. This text applies specifically to NYCERS but the pattern is repeated for the other city pension systems. There are comparable texts for the state which are a bit more rational but still have a sting.

Here is the idea behind this scheme. Each year, the city's Director of OMB will determine what the city should pay for the pensions of new employees. If the NYCERS actuary sends the city a bill that is higher, then the new employees will have to pay half of the extra money. If the bill is less than the director's number, then the new employees will get a discount on their contributions.

By the way, the contribution rates for new employees will be either 4%, 5% or 6% depending how much they make each year with time&half overtime excluded but straight time included.

I can not begin to describe the kind of political mischief this will lead to.

The real danger is poor investment returns which cause the city's cost to be higher than the magical OMB number. For every dollar increase that the pension trustees cause by their decisions, fifty cents will come out of the pockets of the new employees. Of course, taxpayers shouldn't have to pay for incompetent trustees either. But I can see these new employees wanting to know what investment manager is contributing to which trustee when the employees are paying half the cost.

c. In years in which the employer contribution rate applicable to members of the New York city employees' retirement system who first became members of such system on or after April 1, 2012 exceeds a rate to be determined by the budget director for the city of New York, with the approval of the New York state director of the budget, such members shall be required to make additional employee contributions of annual wages in addition to those made pursuant to other sections of this chapter in accordance with the following formula: the difference of the employer contribution rate and a rate to be determined by the budget director for the city of New York, with the approval of the New York state director of the budget divided by two. In years in which additional employee contributions are made pursuant to this subdivision, the employer contribution rate to be paid by the city of New York shall be reduced by the value of such additional employee contributions.

d. In years in which the employer contribution rate applicable to members of the New York city employees' retirement system who first became members of such system on or after April first, two thousand twelve is below a rate to be determined by the budget director for the city of New York, with the approval of the New York state director of the budget, the employee contributions made pursuant to other sections of this chapter shall be reduced in accordance with the following formula: the difference of a rate to be determined by the budget director for the city of New York, with the approval of the New York state director of the budget and the employer contribution rate divided by two. In years in which employee contributions are reduced pursuant to this subdivision, the employer contribution rate to be paid by employers shall increase by the value of the employee contributions reduced pursuant to this subdivision.