Pension Self-Deception is A New York State of Mind

We’ve all heard the saying “borrowing from Peter to pay Paul.” The people who manage New York government finances, however, created a scheme that recently inspired The New York Times to coin a new phrase: “borrowing from Peter to pay Peter.”

State and local government employers across the state are borrowing from the state pension system to finance the contributions they owe to that same system. The state comptroller’s office, which cooked up this unusual arrangement in 2010 along with then-Gov. David A. Paterson, says it is less a matter of borrowing than it is a form of amortization, in which debts are paid gradually, with interest.

This benign description is an exercise in self-deception. Debt is amortized by paying down the balance. The balances owed to the pension system in New York continue to mount rapidly as cash-strapped budgeters take advantage of the liberties they are being offered.

In the past year, the number of public employers using the borrowing scheme has tripled. This fiscal year, municipalities are handing over IOUs for around $200 million, while the state itself is borrowing $553 million. Next year, borrowing from the pension fund may exceed $1 billion. The only thing being amortized is confidence in the New York pension system’s integrity.

The program’s defenders claim that amortization is necessary to smooth out the effects of market volatility and tax revenues that fluctuate along with economic conditions. “Amortizing pension costs is an option for some local governments to manage cash flow and to budget for long-term pension costs in good times and bad times,” state Comptroller Thomas DiNapoli said in a statement.

But there’s a big problem with this gamble. There’s no way of ensuring that the pension fund’s investment performance will quickly improve, or that public employers will have the cash they don’t have now at some point in the reasonably near future. Given that these municipalities and institutions are already unable to keep current on their existing contribution burdens, it seems overly credulous at best, and just plain dumb at worst, to hope they will soon be able to fund not only the new obligations they rack up, but also the contributions they’re now deferring, plus interest. Meanwhile, it is 100 percent certain that pension costs will ultimately need to be paid.

The underlying problem in New York is the same as in many other cities and states: For years, public employers have made promises they simply can’t afford to keep.

There are a number of ways to postpone dealing with the issue. While New York devised its dubious amortization program, Illinois and New Jersey have issued bonds to push costs into the future. There are, however, only two real solutions to the underlying problem. States and municipalities can cut pension costs by reducing benefits, or they can cut pension costs by reducing their workforces.

In New York, Gov. Andrew M. Cuomo has made a set of proposals for ways to start cutting costs. Under his plan, the retirement age would increase from 62 to 65; new employees would be required to contribute 4 to 6 percent of their salaries to pensions, as opposed to the current standard of 3 percent; and an alternative 401(k)-style retirement plan would be offered to new employees.

While Cuomo’s plan is being treated as a radical call for reform by supporters and critics alike, it actually does not go far enough. To truly fix New York’s pension problems, Cuomo would need to insist on making the new 401(k)-style plans mandatory for new employees, rather than just offering them as a voluntary option. It’s also no longer feasible to maintain the current pension system for existing employees without cutting their numbers; the fact that governments already cannot meet their current obligations is proof of that. The state and its municipalities need to switch current employees over to the new 401(k)-style plans, require them to contribute more of their salaries, or significantly reduce the number of workers accumulating benefits.

Yet even Cuomo’s relatively modest proposals may not get much traction. Public employee unions continue to exert an outsize influence. In New York, they have a strong ally in Comptroller DiNapoli – the man who is supposed to serve as the state’s fiscal watchdog. DiNapoli has essentially promised to do everything in his power to block Cuomo’s plan, telling the state’s Conference of Mayors, “I may not have a vote in this, but I do have a voice in this.”

Meanwhile, public employers in New York continue sinking deeper into debt. “The threat of bankruptcy hangs over every single municipal government in the state because of escalating pension costs,” Maggie Brooks, the county executive of Monroe County, said. That is no exaggeration.

Most municipal officials seem fully aware that borrowing from the pension fund to pay the pension fund is no solution, but they see no other choice. “I don’t think any financial manager likes to see the can kicked down the road,” Tamara Wright, the comptroller of Southampton, told The New York Times. But nevertheless Southampton, on the East End of Long Island, borrowed a fifth of its pension bill this year. As long as municipalities can avoid facing the full costs of the pension obligations they’re incurring, we are unlikely to see any real effort to fix the underlying problems.

As Thomas M. Roach, the mayor of White Plains, put it: “The road to hell is paved in amortizing pensions.”

About Larry M. Elkin 524 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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