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%

The Impact of the Drop in the Assumed Interest Rate to 7%

The NYCERS actuary, Bob North, has finally started using 7% as the assumed interest rate in the financial statements for the city pension funds. The new rate still requires authorization legislation from Albany. That by itself is a whole other story.

With the new rate the funding status of all five pension funds has dropped significantly in FY-2012 from the levels in FY-2011.

1. NYCERS 64.2% from 78.6%
2. TRS..... 58.9% from 64.1%
3. Police... 60.1% from 71.3%
4. Fire..... 48.2% from 56.8%
5. BERS.... 57.8% from 68.7%

While 7% is more realistic than 8%, the city funds have only earned 4.82% over the last 13 years since FY-2000. That is a great argument for a 5% assumed interest rate. The end result of this miscalculation on the interest rate has been a long term short fall on the necessary annual contributions to the pension funds.

The historical rate of return on stocks is 6.8% and for bonds it's 3.5%. Actuaries should not be playing with these rates. A standard prudent pension plan should operate within a 50/50 range of stocks and bonds depending on the level of annual benefit payments that the plan is required to make. A 5.15% interest rate should be almost a mandatory upper limit for interest rate assumptions.

It is always painful to see pension plans being damaged by bad behavior when it is so easy to to run a successful plan.