(Reuters) — New York state lawmakers approved pension reform that will save an estimated US$80 billion over 30 years, largely by reducing benefits for newly hired state and local public workers, which union officials Thursday blasted as an attack on the middle class.
Governor Andrew Cuomo praised the bill enacted by the legislature with several others starting late Wednesday as key to maintaining the state's fiscal health. The bill also provides a safeguard for municipalities that will protect them from any financial burden if the state increases their pension benefits.
Spiraling pension obligations are one of the top financial problems faced by state and local governments across the United States. For New York's municipalities, pension costs have risen more than 650 per cent since 2002, to US$12.2 billion in 2012, Cuomo said.
The new law creates a sixth tier of smaller pension benefits for future state and local public workers. It raises retirement plan contributions by a sliding scale, ranging from three per cent for employees who earn up to US$45,000 per year to six per cent for those with annual salaries of at least US$100,000.
Though the governor wanted to raise the retirement age for civilian workers to 65, the new law only raises it by one year to 63. Workers who retire early will collect pensions that are 6.5 per cent lower.
Further, the average salary used to calculate benefits will be the last five years of employment, instead of the last three years. And only US$15,000 of a worker's overtime can be used in this calculation, adjusted for inflation.
Cuomo, a Democrat, had repeatedly warned that pension costs could bankrupt local governments if not lowered.
"Without this critical reform, New Yorkers would have seen significant tax increases, as well as layoffs to teachers, firefighters and police," he said in a statement.
Public workers unions decried the new law. "Once again, middle class New Yorkers will pay the price for Wall Street's misdeeds," said AFL-CIO president Mario Cilento.
"Tier 6 is not reform; it is an assault on the long-term economic security of nurses, teachers, firefighters, and other workers," he said, also citing previous layoffs, furloughs, wage freezes and cuts in pension benefits.
The pension bill was enacted with Cuomo's other top priorities, including legalizing casinos, expanding the state's criminal DNA database, and redrawing election districts.
New York state's US$140 billion pension fund is exceptional because it is fully funded — unlike Illinois, for example, which has an US$83 billion liability.
Yet New York's annual payments are enormous. In 2009, 768,392 residents received a total of US$20.5 billion in pension benefits from state and local plans, an average of US$2,200 per month, the National Institute on Retirement Security said.
Investment earnings provided 69.9 per cent of New York's pension fund receipts, while contributions from employees only provided 6.57 per cent between 1993 to 2009, the group said.
New York Mayor Michael Bloomberg, who organized politicians to support the bill, praised its passage.
"Skyrocketing pension costs have caused fiscal crises in many cities and counties around New York, cutting into local governments' ability to deliver core services," said Bloomberg.
Under the bill, the state will have to pay for any increases in pension benefits enacted, instead of forcing counties, cities and towns to pick up the bill.
Bloomberg, an independent, said Albany's past decisions drove the cost of the city's pension contributions to US$8 billion in 2012 from US$1.5 billion in 2002.
Under the bill, new, non-unionized employees earning at least US$75,000 per year for the first time will have the option of selecting a 401(k) defined-benefit thrift plan.
State and local governments grappling with high pension costs also face mounting pressure to lower their expected rates of return on pension fund investments.
This week, the board of California's pension fund, one of the largest in the country, voted to lower its assumed rate of return to 7.5 per cent from 7.75 per cent.
New York City's actuary has recommended reducing the investment rate of return to seven per cent from eight per cent.