Say Hello to the Tip of the Public-Pension Iceberg

The New York Times has received quite a bit of criticism here and elsewhere, almost all deserved.

To be fair, the paper has excelled in calling attention to the state and municipal pension crisis most parts of the country face. After doing a story on Duluth, MN some months ago and San Diego, CA more recently, its latest exploration of the problem last Sunday was in its own back yard (link does not require registration at the moment), and yet another small tip of a very large iceberg:

August 20, 2006
New York Gets Sobering Look at Its Pensions
By MARY WILLIAMS WALSH and MICHAEL COOPER

Every year since 1999, New York City has reported that it has all the money it needs to pay for the pensions that have been promised to city workers.

With the retirement plans said to be financially sound, state politicians have happily showered city employees with generous pension enhancements — annual cost-of-living increases, holiday bonus payments, early retirement with full benefits — that are the envy of private-sector workers, whose pension benefits have eroded.

But a close inspection of city pension records shows that the funds committed to the plans may fall well short of the city’s promises to hundreds of thousands of current and retired workers. They look fully funded chiefly because the city has been using an unusual pension calculation that does not comply with accepted government accounting rules. Even the city’s chief actuary, who helps produce the annual reports, says the official numbers are “meaningless” when it comes to showing the plans’ financial health.

The chief actuary, Robert C. North, has prepared a little-noticed set of alternative calculations showing that the gap in the pension funds could be as wide as $49 billion. That is nearly the size of the city’s entire annual budget and the equivalent of the city’s publicly disclosed outstanding debt.

The existence of a big gap between the city’s future obligations and the resources committed to meet them does not mean the pension funds are about to run out of money. But it does mean that New York City is promising its current employees future benefits it might not be able to provide without big tax increases or major budget cuts. When such a reckoning might occur, if at all, is hard to predict.

Pensions are now one of the city’s fastest-growing expenses. In recent years the city’s required contributions to its pension funds have more than quadrupled, to $4.7 billion this year from $1.1 billion in 2001.

Two years from now, the city expects to spend one out of ten dollars in its budget on pension contributions.

Here’s the real kicker in New York (paragraphs presented out of order from original article):

The new benefits New York City has added since 1999 have been politically popular. But they have also been very expensive. Even though they look modest on an individual basis, their cost adds up quickly because they have to be paid to many people who will be retired for many years.

In New York, public workers’ pensions are guaranteed by the State Constitution, so once they are granted, they cannot be reduced, even if they cost more than expected.

That guarantee means that short of the state declaring bankruptcy, the taxpayers are on the hook.

The article doesn’t deal with the gold-plated retiree health care benefits city workers receive; those may actually turn out to be a bigger problem, because unlike pensions, there is usually very little effort to set aside money now to fund those future healthcare costs (NY City may be an exception, but I tend to doubt it).

It could be that disputes that will make last year’s subway workers’ strike look like a picnic may be coming.

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UPDATE: More on the long-term dire situation in public pensions is here.