How to Pay for Pensions

State and local governments everywhere are in sticker shock over the rising cost of public-employee pensions and scrambling to manage those obligations. New York State has taken a reasonable approach that allows public employers to pay a portion of their yearly contributions to New York’s $140 billion public pension fund and to pay the remainder in installments, with interest, over a decade.

Critics say this program is a borrowing sleight-of-hand that only postpones the problem. We were also skeptical when the idea was first raised. But the state comptroller, Thomas DiNapoli, has persuasively argued that the program is transparent and helps smooth out payments in tough times, without undue risk to the fund.

Of course, this fix deals only with the near-term problem. Solving the longer-term pension problem still depends on broad reforms, as Gov. Andrew Cuomo has proposed, and building up pension reserves in times of robust investment returns.

The state fund is financed through contributions from public employers and employees and from investment earnings. Recently, annual employer contributions soared, mainly to make up for huge investment losses from the financial meltdown. Of course, when investment gains were high and employer contributions were low, no one complained about pensions.

Albany politicians and public employers added pension sweeteners. And instead of using the good years to build reserves for lean times, as allowed by a law passed in 2004, some employers used money that could have gone to pension contributions for tax cuts and other spending. For long-term relief, Governor Cuomo’s sensible reform proposal will help. It would increase the pension contribution and retirement age for new employees, while reducing their ultimate payouts to 50 percent of pay after 30 years of service, from 60 percent currently. His plan would also bolster anti-abuse provisions in the law to prevent employees from loading up on overtime in their final working years to inflate their payouts.

In the near term, New York’s mechanism to reduce employer payments is better than the alternatives. Some states, for instance, have deferred making contributions, which deprives pension funds of consistent payments. Others have used rosy assumptions about future costs and returns to keep contributions unrealistically low.

New York’s relief plan avoids those pitfalls. As an added protection, it will use payments by employers that participate in the program to create a reserve fund to cushion the impact of contribution increases in the future. In the meantime, Mr. DiNapoli must monitor the program carefully for signs of strain in the system, particularly if employers fail to make timely payments.

So far, the state government and some 165 other public employers have opted for the relief program, out of roughly 3,000 employers in the pension system. Obviously, it would be preferable if they all made full contributions today. But this plan, coupled with pension reforms and mechanisms like reserve funds can help public employers get through the current budget crunch.

Editorial