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New York Tests Limits of Fiscal Folly


Soaring employee costs and unfunded pensions in New York State are forcing hundreds of municipalities to choose between cutting back on services and postponing pension payments.

Unsurprisingly, the vast majority have opted for the latter. A 2010 law supported by Governor Andrew Cuomo allows employers to divert money earmarked for pensions and delay payments to stop the bleeding in their budgets. The result is a fourfold increase of deferred payments since 2011 (from $293.2 million to $1.1 billion), putting serious strain on a pension system that oversees the retirement savings of more than a million workers. Reuters reports:

The so-called smoothing or amortization rules – first introduced by the state in 2010 – are intended to give municipal governments facing huge increases in pension costs some wiggle room. Pension contribution rates, which have been soaring after pension fund assets were depleted during the 2008-2009 financial crisis and as interest rates have fallen, are based on defined future payouts that pension funds have to make to members.

As former New York Lieutenant Governor Richard Ravitch sees it, this system of “pension smoothing” is “nonsense”: “They’re contributing promissory notes to the pension fund and that is what’s called in my world kicking the can down the road, and I consider it highly irresponsible, highly risky.”

Ravitch has a point. Delaying payments to pension funds may seem like an appealing idea now, but these are exactly the sort of decisions that have driven Stockton and San Bernardino to the brink of bankruptcy. In New York, cities like Niagara Falls have followed this dangerous strategy and are nearly insolvent as a result.

It’s become obvious that many of these struggling cities simply can’t afford the generous pensions they promised in the past. Rather than putting off the tough decisions about the future of their pensions, cities should instead look to readjust their programs and reduce their obligations to something they can pay (and, hopefully, shift away from defined-benefit plans for the future). Any such plan is bound to be opposed by those who have paid into the current system, but a reduced pension is better than a bankrupt city and potentially much harsher cuts imposed by a bankruptcy judge. Here’s to hoping that prudence and discipline prevail before New York falls off the cliff.

Here’s also hoping that the harrowing consequences of the series of lies and delusions that New York’s political class and union leaders colluded in for many years will wake the state’s voters into a new sense of reality.

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  • Jim Luebke

    This is the fate that awaits our welfare state as a whole.

    Best to cut back now, rather than keep trying to sustain the unsustainable by driving ourselves deeper and deeper into debt and destroying the strength we have.

    The only “people who depend on government” who will benefit overall from the current situation are the ones that will die before the reckoning hits. By putting things off we’re making them much, much worse.

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