New York Must Defuse the Pension/Overtime Time Bomb or Face Fiscal Collapse
By Steve Levy
By now, most of us are aware that the factoring of overtime into public sector pensions is crushing taxpayers, but few have calculated how devastating this impact will be over the next two decades, as hundreds of thousands of current employees prepare to retire. A report just issued by the Center for Cost Effective Governance brings those devastating numbers to the forefront.
Unless the state legislature changes the law that allows overtime to be factored into pensions, New York State taxpayers will be on the hook for over $50 billion over the next 20 years, just to pay for the parts of these pensions that are inflated by the overtime inclusion. That figure leaps to an astounding $84 billion when adjusted for inflation.
Stated another way, if Albany would simply pass a reform eliminating overtime from pension calculations, taxpayers could save up to $84 billion. That’s more than one-and-half times the MTA’s capital budget plan.
There are few, if any, single pieces of legislation Albany can pass this year that would have a more positive impact on easing taxpayer burdens in New York.
We’ve all heard the horror stories. The most recent was the Empire Center’s exposé of a Long Island Rail Road employee earning $344,000 in overtime in his last year to inflate his annual pension to a whopping $162,000. And earlier this year, The New York Post reported that a Nassau police officer earned $85,000 in overtime to wind up with a $179,000 pension. As far back as 2010, The New York Times reported that more than 100 of the police and fire pensioners in Yonkers were earning more in retirement than they were as active officers because overtime jacked up their final salaries.
In the midst of the Great Recession almost a decade ago, Albany enacted a new Tier 6 retirement category that would limit overtime to no more than 15% of one’s base pay being factored into pension calculations. Sounds good, but, unfortunately, we won’t see any savings for at least a couple of decades, since it only applies to employees hired after April 2012.
Over two-thirds of current employees in the State Employee Retirement System and 74% of those in the Police and Fire Retirement System were hired before that date and will continue to have overtime inflate their pensions. If this trend continues, we may be bankrupt before we see the first dime of savings from the Tier 6 reform.
We examined Nassau police officers who retired in January 2018. We listed their base pay, the overtime they earned in 2017 — which averaged $37,000 — and their final pensions.
Government employees generally receive pension amounts that are 50% to 60% of their highest average three-year earnings. Police officers and firefighters on disability pensions — and there are lots of them — will receive 75% of their highest salaries (exempt from state taxes).
To be conservative, our Center assumed each individual would retire at a modest 50% of their final averages. That equates to an annual taxpayer burden of $2.4 million for just one graduating class of 130 officers. But the average lifespan for these officers retiring at 55 is 25 years, and much more if they retire earlier due to their 20-year retirement eligibility.
Over the lifetimes of these retirees, taxpayers will incur an additional $60 million, just because overtime was included in these calculations. But remember: there will be 25 more classes of retirees over that span that will amount to a jaw-dropping $783 million. And this does not even incorporate wage inflation, which is certain to occur. Nor does it reflect the annual raises tied to the CPI once the employee retires.
We, thereafter, did the same calculations for police officers and firefighters outside New York City. The eventual retirement of these 34,000 active members will result in an additional taxpayer burden of $5.14 billion over the next 20 years.
And let’s not forget that there are over 600,000 active employees within the state retirement system outside of police and fire employees, or the teaching profession. Then, there are over 200,000 non-uniformed New York City employees. Figures provided by the Empire Center note an annual average overtime of $11,599 per individual approaching retirement. This seems small, but when half of that amount is added to such a large number of pensions, the additional taxpayer burden over 20 years will balloon to $5.78 billion for the city retirees and $24.8 billion for the state system.
The extra pension costs attributable to overtime for other New York City departments over the next 20 years were also analyzed: Police ($6.74 billion), Fire ($1.05 billion), Sanitation ($567 million), Corrections ($3.15 billion) and the Port Authority ($888 million).
And, if we circle back from where we started with the MTA, and look at its 80,000 employees, and factor in their average overtime, there will be an eye-popping $5.69 billion in additional taxpayer liability due to overtime being factored into the pension.
The total cost for all employees, including others not listed above, due to overtime being factored into their pensions, amounts to an inflation-adjusted $83.9 billion.
This enormous taxpayer obligation can be wiped out in a nanosecond if pressure comes to bear on state legislators to pass resolution A536, introduced by Assemblyman Michael Fitzpatrick. Scholars are divided as to whether a constitutional amendment would be needed to enact this reform for present employees. Our Center does not believe so, but even if it were, Fitzpatrick has introduced a companion bill that would amend the Constitution and erase any doubt.
Elected officials who are hesitant to reform the system need to become cognizant of the fact that reforms will actually help ensure that the pension fund remains viable for future retirees. We already know what failure to act will lead to. Just look back to the municipal bankruptcies in Detroit and San Bernardino. The time to act is NOW.
Steve Levy is Executive Director of the Center for Cost Effective Government. He served as Suffolk County Executive, as a New York State Assemblyman, and host of “The Steve Levy Radio Show.” www.SteveLevy.info, @SteveLevyNY