Bloomberg News

New York Faces Pension Cost Bulge From Budget-Paring Incentives

October 24, 2011

Oct. 24 (Bloomberg) -- New York state and more than 100 local governments face at least $600 million in extra pension costs after thousands of workers grabbed one-time incentives meant to shave former Governor David Paterson’s last budget.

About 12,000 public employees seeking to retire early fueled a pension-application record in 2010, according to a report from state Comptroller Thomas DiNapoli. The state processed 30,772 requests for retirement benefits that year, about 50 percent more than average, according to the report.

Lawmakers passed the plan in May 2010, as Paterson, a Democrat, estimated fiscal 2010 and 2011 budget savings of $320 million. Combined, the extra cost to state and local governments that offered the inducements will be almost $650 million, and more if municipalities spread out their payments to the New York State Common Retirement Fund, according to officials in Albany. About $50 million of the added expense will be in interest.

“Generally, any savings in the short-term are offset, or more than offset, by added pension costs” from incentive programs over the long term, said E.J. McMahon, a senior fellow at the Manhattan Institute for Policy Research in New York. The nonprofit research organization focuses on “ideas that foster economic choice and individual responsibility,” according to its website.

Added Pension Payments

The state will pay $385.5 million to the pension fund, including interest, since it opted to spread out its payments over five years, said Morris Peters, a Budget Division spokesman. Local governments face at least $264.4 million in extra payments, said Eric Sumberg, a DiNapoli spokesman.

“I think at a time when you’re trying to downsize your workforce, it is preferable to encourage people to retire rather than lay people off,” DiNapoli said in an Oct. 18 interview in Albany. “I do think that there’s perhaps not as significant an upfront savings as people might assume.”

DiNapoli oversees the $146.9 billion pension, the nation’s third-largest retirement plan for public workers, covering about 1.06 million state and local employees, retirees and beneficiaries. The incentive offers ended last year.

One of the two inducements added time credited for service for those 50 and older with at least 10 years of service in jobs that could be eliminated. The second let employees 55 or older with at least 25 years to retire early without penalty. Retirement at less than 30 years on the payroll can result in reduced benefits.

Lower Budget Costs

The state’s annual operating costs will be $225 million lower as long as no early retirees are replaced, Peters said. No estimate was available for local savings.

In 2002, when incentives also were offered to spur early exits, almost 13,000 state and local workers took advantage, later costing the state and some local governments a combined $502.7 million in extra payments into the pension system, according to figures from the comptroller’s office.

Incentives were also offered each year from 1996 to 2000, prompting 24,419 workers to accept and adding $660.8 million to payments into the pension fund by the state and local governments, the figures show. Peters said no estimate is available for savings produced by the earlier plans.

Extra pension costs aren’t the only expense, either.

An incentive plan “never saves what they say it’s going to save because people are rehired in the positions that people retire from,” said Assemblyman Peter Abbate Jr. “Often times, there’s less people on the payroll, but then the jobs are outsourced,” he said.

Voted For It

The Brooklyn Democrat, who leads the Governmental Employees Committee, sponsored the Assembly measure offering the 2010 incentives and voted for it.

“It was negotiated at a level above me and was an agreement between the governor and the unions,” Abbate said.

Paterson didn’t respond to a request for comment on the incentive costs, when contacted through Sean Darcy, a spokesman.

The Civil Service Employees Association, the state’s largest government-workers union, doesn’t always support such offers, said Stephen Madarasz, a spokesman. Incentives can save jobs while leading experienced workers to leave, taking their institutional knowledge with them, he said. They also may end up forcing fewer employees to do the same amount of work, he said.

“We did support it,” Madarasz said of the latest offers. “We looked at it as an alternative to potential layoffs.”

--Editors: Ted Bunker, Mark Schoifet.

To contact the reporter on this story: Freeman Klopott in Albany, New York, at fklopott@bloomberg.net,

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net.


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