Tuesday, May 17, 2011

Gov. Cuomo Proposes Pension Reform; Unions In Uproar

New York Governor Andrew Cuomo is proposing significant pension reform for the state, including creating a new tier of workers that are entering the state workforce that would not be entitled to the kind of pension perks that prior employees had. The state simply can't afford the gold-plated pension system it has in place, and benefits are going to increasingly drag on the state budgets in coming years.

Cuomo's proposals would change benefits and require employee contributions as follows:
Double the employee contribution to 6 percent for new hires.
- Raise the minimum age of retirement to 65. Retirement age is now 62 for most employees and 57 for teachers. Early retirement, now allowed at age 55 with a 38 percent penalty, would end.
- Require workers to put in 12 years before they qualify for a pension. Employees are now "vested" after 10 years.
- End the practice of "padding" a pension by factoring in overtime pay late in service, unused vacation and certain types of sick leave.
- Cap pensions for the highest-paid state employees -- physicians at state teaching hospitals, CEOs of public authorities and utilities among them -- based on the governor's $179,000 salary. Many of those employees earn far more.
- Eliminate a "multiplier" that boosts a pension after 20 years and 25 years of service.
Needless to say, the unions aren't happy at all but some are cautious in what is being proposed. Moreover, this comes just as the governor is negotiating with unions over a new deal.

What would this actually do for the state's long term financial picture? According to Cuomo's team, it would save the state anywhere from $60 to $90 billion or more over 30 years, depending on whether the state shifts from a defined benefit to defined contribution plan setup. The problem begins with the fact that the state's benefits contributions are constitutionally required:
Currently, public employees are liable only for a fixed contribution to their plan, and the benefit is constitutionally guaranteed by the state of New York -- come hell, high water or a catastrophic market failure.

But under a defined contribution, the government's contribution would remain at a fixed level of the employee's salary. Employees of the State University at New York have the option to enroll in this type of plan as opposed to the defined benefit plan, and they, too, are at first required to contribute a portion of their income.

"Without the defined contribution option, it's like Tier V-a," said E.J. McMahon, a senior fellow at the conservative Empire Center think tank, of Cuomo's reported proposal. "The main benefit of a defined contribution model is that it caps and makes certain the employer share, which remains completely uncertain and subject to a great deal of volatility under the traditional model."
At a minimum the state needs to take a closer look at raising the retirement age to obtain pensions from 62 to 65, bringing it closer in line with the retirement age of workers in the private sector. Increasing the vesting period wont have nearly as much impact as raising the retirement age. Eliminating padding would be a good start, although possible compromise on this point could involve changing how the final pension calculation is done.

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