Tier 6 - The New 3/4 Accident Disability Benefits - What Will Members Pay?

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.) In 2016, the Mayor issued executive orders under Article 25 for the Uniform Sanitation and Correction Forces.

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)

• 2,100 workers
• 1.3% payroll deduction
• FAS: annual salary $70,000

This funds 4.75 accident disability pensions per year ($1,911,200/$402,496). 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.

NYCERS, Is This Really a Ponzi Scheme?

In the NYCERS FY-2015 CAFR on page 189 you will find the updated Solvency Test issued by the NYCERS actuary.

The last year listed on the chart is 2013. The actuary has always been slow in doing his/her work. On the last line there are several amounts:

1. $7.6B = the total contributions made by active workers plus the 5% interest they have earned on their money.
2. $36.2B = the pension liability for all current retirees (7% assumed interest rate)
3. $30.6B = the employer financed pension liability for all active workers (7% assumed interest rate)
4. $47.3B = the actuarial value of NYCERS assets

What the City/Employers Actually Pay for Active Workers

Workers are currently contributing approximately 3.6% of payroll into NYCERS. In FY-2015, workers contributed $457.1M to NYCERS and the covered payroll was $12.7B.

For argument sake let us assume the city and the other employers are contributing $3 for each $1 that the workers are contibuting. That would be 10.8% of payroll. Lets assume that the $3 earn the same conservative 5% that worker's $1 earns. That would mean that there should be at least $22.8B along with the $7.6B set aside for the active workers. That would be $22.8B to cover a $30.6B liability. Wrong!

Faking It

If you go back to the last line in the chart, you will see that the actuary is claiming that both the liability for all current retirees, $36.2B, and the workers contributions, $7.6B, are 100% funded. She is also valuing NYCERS's assets at $47.3B.

So when you start with $47.3B and you subtract $36.2B and $7.6B, you are left with only $3.5B. That is $3.5B to cover a $30.6B liability for active workers. This is a truly frightening conclusion.

The Other City Pension Funds

The story only gets worse. The Police Pension Fund is in the same shape as NYCERS with only $2.3B to cover a $17.9B liability for working police officers (page 151 of the FY-2015 NYPPF CAFR).

Teachers and the Fire Funds are in totally worse shape. The Fire Pension Fund has NO money to cover a $5.2B liability for working firefighters and only $8.0B to cover a $10.5B liability for current retired firefighters (page 151 of the FDNYPF FY-2015 CAFR).

Teachers with over a 100,000 working teachers has NO assets to cover their $18.6B pension liability and only $31.9B to cover the $37.5B pension liability for retired teachers (page 120 of the NYC-TRS FY-2015 CADR).

This grim picture is based on the unrealistic 7% assumed interest rate assumption. You don't want to do the arithmetic for a lower interest rate assumption. Just going from 7% to 6% at NYCERS increases the unfunded liability from $20.2B to $28.0B (page 114 of NYCERS FY-2016 CAFR)

What is Really Going On

Of course, there is one major flaw. The current retirees benefits are not fully funded. Most of the pension contributions the city and the other employers are making each year are catch up payments covering pensions being paid to current retirees.

The city and other employers paid $3.4B to NYCERS in FY-2016. The workers paid $485.5M. Three times what the workers paid is $1.5B. Under our 3 for 1 scenario it is reasonable to conclude that $1.9B went to cover retirees benefits not current workers. This is actually a Ponzi scheme and not an actuarially funded pension plan. It is a lot like the Social Security benefit system.

What is actually going on is that the city and other employers are trying to pay two different pension bills each year. One for active workers and the other for former workers who are now collecting pensions from NYCERS. You can just imagine the political nightmare this is. Part of the ongoing pension funding issue is not just about pensions for current workers. It is the huge mass of current retirees whose benefits the city did not properly secure when the workers retired.

How did this happen?

When a worker retires, the actuary can very accurately compute the cost of the benefit. She, however, can be very prudent or a total screw up. You know where this going. A 62 year old retiree is going to get a pension of $40,000 a year for the rest of his/her life. The actuary can say that $400,000 will cover this benefit or she can say that $520,000 will cover the cost.

Now if the fund hasn't even put aside the $400,000, you can imagine how they feel about the $520,000 cost figure. In either case there is going to be catch up, even if the fund is hitting its interest targets. Needless to say pension funds are not known for hitting their interest targets

One thing that NYCERS active workers should immediately demand is that their annual statement be expanded to include how much the city or their employer have contributed on their behalf during the year for their future pension benefit. The statement should also include an opening balance of employer contributions and how those assets performed during the year. And don't let anyone tell you it can't be done.

Bad Year for the NYC Pension Funds - FY-2015 - Investment Fees and Performance

The Comptroller released the NYC FY-2015 Comprehensive Annual Financial Report (CAFR) on Friday, October 30, 2015. The following are some points from the press release:

The City pension systems earned $4.746 billion in net investment income in FY15 and paid benefits totaling $13.4 billion during FY15. Employer and employee contributions to the City pension systems were $10.0 billion and $1.8 billion, respectively;

The City pension systems paid investment expenses totaling $708.9 million in FY15, an increase over FY14 that primarily reflects increased assets under management and more comprehensive fee disclosure and reporting;

These numbers are accurate but they are presented in a deceptive way.

The five funds received $1.94B in interest payments and $2.66B in dividends during 2015. They also earned $73M in securities lending income. That adds up to $4.67B. It does not take much skill to collect interest and dividend payments. It definitely does not take $708.9M in fees, a $183.0M increase from last year.

Listed below are the fees (pension funds only) for the last 14 years. You can see from the numbers that the "increased assets under management" comment is not valid. Of course previous reported fees may be inaccurate but that's not what "more comprehensive" means. I have a strong feeling that the Comptroller's office is in shambles when it comes to accurate records of the payment of investment fees.

• Year: -- Fees ---- Assets
• 2015: $705.0M ($145.7B)
• 2014: $522.0M ($144.5B)
• 2013: $472.5M ($124.8B)
• 2012: $370.3M ($111.3B)
• 2011: $395.7M ($111.0B)
• 2010: $426.8M ($90.0B)
• 2009: $339.3M ($79.5B)
• 2008: $310.2M ($101.9B)
• 2007: $262.0M ($110.9B)
• 2006: $192.7M ($96.0B)
• 2005: $158.2M ($90.6B)
• 2004: $131.6M ($86.5B)
• 2003: $ 96.7M ($78.1B)
• 2002: $101.9M ($80.7B)

On July 30, 2015, P&I reported that the Comptroller estimated that the city pension funds had a 3.3% rate of return for FY-2015. Of that amount 3.1% is due to interest and dividends paid to the pension funds.

Based on the details in the CAFR, the total pension assets for the five funds increased only 0.198% in FY-2015. In addition, this miserable number is based on unreliable asset values for private equity, real estate, and hedge fund classes. Note that two of the funds have avoided getting sucked into the hedge fund swamp.

The opening balance for the city pension funds (no TDA and no VSF) was $144.5B. The closing balance was $145.7B. With a $0.9B positive cash flow you get a 0.198% increase in asset value.

The other bruising fact in the city's CAFR, along with the $183M increase in fees, is the $1.294B that was skimmed off from the TRS & BERS pension funds to the TRS & BERS TDA funds and the $672M that was skimmed off to the VSF funds.

In FY-2015, the S&P 500 index rose 5.2% (from 1960.23 to 2063.11). NYCERS reported a 1.88% net of fee return on its structured fixed income class (Treasures, Corporates, & Mortgage Backed Securities) with a benchmark of 2.08%. With the 70%/30% asset allocation that the funds are currently using, the projected increase in asset value for FY-2015 could easily have been 4.24%, not 0.198%. That would have been a $150.95B closing balance instead of $145.67B.

That is $5B in one year. This why investment decisions are so important. The state implements Tier 6 and the trustees blow it all on bad investments.

All five of the pension funds had a decease in their funding status in FY-2015. The levels weren't great to start with. Here is the bad news.

• NYCERS went from 75.32% to 73.13%.
• TRS went from 71.79% to 68.04%.
• BERS went from 78.60% to 75.33%.
• Police went from 74.44% to 73.85%.
• Fire went from 63.78% to 62.79%.

Here are the accounting numbers for the five city pension funds:

Money Coming In for FY-2015

(in millions)	Five Funds	NYCERS	TRS	BERS	Police	Fire
employee contributions	$1,015.0	$467.1	$158.6	$39.6	$241.1	$108.6
employer contributions	$9,986.8	$3,160.3	$3,270.0	$258.1	$2,309.6	$988.8
other contributions	$55.5		$55.5
interest	$1,939.5	$635.7	$758.5	$36.9	$392.8	$115.6
dividends	$2,661.8	$795.3	$889.2	$46.2	$703.7	$227.4
SL income	$72.5	$26.5	$20.3	$2.7	$18.0	$5.0
other	($64.9)	$4.1	$0.3	($115.1)	$4.6	$41.2
Cash-in	$15,666.2	$5,089.0	$5,152.4	$268.4	$3,669.8	$1,486.6

Money Going Out for FY-2015

(in millions)	Five Funds	NYCERS	TRS	BERS	Police	Fire
Benefits	$11,994.1	$4,235.6	$4,024.3	$223.2	$2,360.5	$1,150.5
Transfers from TRS & BERS to TDA	$1,294.0	$0.0	$1,249.0	$45.0	$0.0	$0.0
Payments to VSF *	$12.2	$11.9	$0.0	$0.0	$0.3	$0.0
Transfers (Pension to VSF) *	$660.0	$30.0	$0.0	$0.0	$590.0	$40.0
Investment expenses *	$705.0	$231.8	$203.0	$10.1	$192.1	$68.0
Admin expenses *	$141.9	$54.6	$58.4	$11.0	$17.9	$0.0
other	$7.1	$7.1	$0.0	$0.0	$0.0	$0.0
Cash-out *	$14,814.3	$4,571.5	$5,534.7	$289.3	$3,160.8	$1,258.5
*
Net Cash *	$851.9	$517.5	($382.3)	($20.9)	$509.0	$228.1

Closing Balances & Asset Increases for FY-2015

(in millions)	Five Funds	NYCERS	TRS	BERS	Police	Fire
Open Bal:	$144,538.0	$54,422.0	$44,490.0	$3,279.3	$31,750.9	$10,595.8
Close Bal	$145,674.8	$54,889.3	$44,254.7	$3,359.8	$32,356.0	$10,815.0
Net Change	$1,136.80	$467.30	($235.30)	$80.50	$605.10	$219.20
Cash Flow:	$851.9	$517.5	($382.3)	($20.9)	$509.0	$228.1
Open Bal Adj:	$144,538.0	$54,422.0	$44,107.7 $3	,258.4	$31,750.9	$10,595.8
Close Bal Adj:	$144,823.4	$54,371.8	$44,254.7	$3,359.8	$31,847.0	$10,586.9
Net Change Adj:	$285.4	($50.2)	$147.0	$101.4	$96.1	($8.9)
Rate of Asset Increase:	0.197%	-0.092%	0.333%	3.112%	0.303%	-0.084%

Payroll & Pension - Police & Fire - FY-2014

In its FY-2014 Adopted Budget, NYC has funded

• 36,164 police officers with a payroll of $3,676.5M and pension cost of $2,320.9M
• 10,910 fire fighters with a payroll of $1,257.5M and a pension cost of $960.7M.
• 114,404 teachers with a payroll of $8,987.5M and a pension cost of $2,917.0M
• 111,642 general workers with a payroll of $8,424.5M and a pension cost of $1.934.0M

Unfortunately, this is the heart of the pension issue for NYC. For every dollar the city pays to a police officer, it is paying 63 cents to the police pension fund and for every dollar it pays to a fire fighter, it pays 76 cents to the fire pension fund.

This is compared to the 33 cents that the city is paying to the teachers pension fund for every dollar it pays to a teacher. Make no mistake, 33 cents is also way out of line but it is far from the insane levels for police and fire.

In addition to the usual investment and funding mistakes the police and fire pension funds have enormous disability burdens, especially the fire fund.

There needs to be a public policy decision made about what is the acceptable pension cost percentage for emergency service employees, teachers, and general government workers. This is the hard point of pension reform.

From calculations ( police , teachers ) that I have done, it appears that for new Tier 6 members (post 4/1/2012) the city will have to make annual pension contributions of 6% of pay for teachers and general workers and 29% of pay for police officers and fire fighters (see note below). Are these percentages acceptable to the voters of NYC?

It is not clear how the disability issue will play out in Tier 6. The benefits are now lower for police and fire. We will have to see if the frequency drops. This is as much a management problem as a pension problem.

Note:
I used an annual salary increase assumption of 2.5% for teacher/general workers and 5% for police and fire. I used a 5.5% pre-retirement assumed rate of return and a 5% post-retirement return. This also assumes that the actuary directs the city to contribute at least 6% and 26% every year and that the trustees adopt an investment policy that earns a 5.5% annual rate of return, a reasonable target.
I've done some research on police salaries and 7% is a more realistic salary increase rate. This increases the employer contribution rate (Tier 6) to 29%

FYI: New York City Labor Costs in FY-2014

Disclaimer: All of the figures listed below come from the NYC OMB web site and the NYS Financial Control Board.

Sometimes the actual hard numbers tell their own story. New York City has budgeted $38.367M ($38+B) for personnel costs in FY-2014. The city will employee 273,120 people during the year.

The fringe costs total $16,021M which leaves $22,346M for actual paychecks. The fringe costs are detailed below:

> >

NYC Personnel Costs for FY-2014

Category	General	Dept. of Education	Retirees – DOE	CUNY	Cultural Affairs	Totals
Social Security Taxes	$ 945,377,286	$ 774,704,532	na	$25,186,254		$1,745,268,072
Health Insurance Premiums	$2,385,907,769	$1,675,842,974	$ 370,353,278	$40,943,606	$1,503,728	$4,474,551,355
Supplemental Welfare Funds	$ 549,405,510	$ 380,688,742	$ 133,715,336	$15,805,711		$1,079,615,299
Workers Compensation	$ 205,196,474	$ 40,142,415		$1,843,985		$247,182,874
Unemployment Insurance	$ 28,256,171	$ 37,760,989		$539,682		$66,556,842
Workers Comp - Other	$56,200,000					$56,200,000
Disability Insurance		$611,303				$611,303
Annuity Fund Payment		$33,812,860				$33,812,860
Non-city Pensions	$78,415,014					$78,415,014
City Non Actuarial Pensions	$57,667,273					$57,667,273
City Actuarial Pensions	$8,180,622,400					$8,180,622,400

Note: Health insurance premiums cover active workers, retiree under age 65, and retirees over age 65. The union welfare funds, administered by the unions, provide added fringe benefits to members of the participating unions. Both of these items need detailed analysis. I think that the city is not getting its money's worth in these areas. In response to the Emblem Health take over of HIP/GHI in 2008, the city produced a very rational argument against the takeover and the city seems to be aware that there is a fundamental problem with the system. There are very entrenched special interests connected with health insurance and welfare funds. (Note: The city runs the welfare fund for city managers.)

City Actuarial Pension Systems

• $2,917.0M (TRS)
• $1,728.1M (NYCERS)
• $ 205.9M (BERS)
• $2,320.9M (Police)
• $ 960.7M (Fire)

Note: Of the $8,132.6M amount, $357.2M is needed to replace investment fees paid in FY-2012 and $106.8M is needed to replace administrative expenses incurred in FY-2012. The city only incurs 55% of NYCERS investment and administrative costs. NYCERS covers other participating employers, like the Transit Authority.