New York state relies on gimmicks and non-recurring revenue to pay for rising pension costs, said a group led by former Federal Reserve Chairman Paul Volcker and former Lt. Gov. Richard Ravitch.
Annual pension contributions might increase 31% to $10.6 billion by 2015 from about $8.1 billion in 2013, and would probably need to rise by an additional $14.8 billion if the state were to adopt a 5% assumed rate of return, instead of the current 7.5%, the State Budget Crisis Task Force said in a report issued Tuesday.
“Retirement obligations and health care are outdistancing revenues at an ever-increasing pace, and it’s hard to believe New York finances will remain sustainable unless there’s dramatic economic recovery at a 7% to 8% rate,” Mr. Ravitch said in an interview. That’s not likely to happen, he said.
Messrs. Ravitch and Volcker created the task force of former government officials in 2011 to examine U.S. state finances. The group released a main report in July on California, Illinois, New Jersey, New York, Texas and Virginia, and is preparing reports on individual states.
Their Dec. 13 report on New Jersey said that state’s pension contribution may consume almost one-fifth of its annual budget by 2018, under a law enacted by Gov. Chris Christie to compensate for underfunding its obligations since the mid-1990s. The state’s contribution must rise by about $4.5 billion over the next five years, from $1.03 billion in 2013, which Mr. Ravitch said might require “a Draconian tax increase.”
To balance New York’s budget, state officials have relied on about $25 billion in non-recurring, or “one-shot,” revenue actions, over the past 10 years, according to Tuesday’s report. The budget is $132.6 billion for this fiscal year.
“New York’s structural deficit, papered over with gimmicks, has existed for decades,” according to the report.
Morris Peters, a spokesman for New York Gov. Andrew Cuomo’s budget office, responded to the report by saying that the governor has gotten rid of “many of the budget gimmicks made by previous administrations.”
The report contains a warning for local officials who amortize pension costs. The practice, which the report describes as a “gimmick,” stretches contributions over 10 years by borrowing, at 3.75% interest this year, and treating the transaction as if the obligation has been paid in full.
That form of borrowing allows lower payments by the state and participating municipalities in the short term and higher total payments by future generations, the report said. It also means the pension funds’ assets need to earn higher returns to make up for amortized interest paid.
New York state Comptroller Thomas DiNapoli, sole trustee of the $150.1 billion New York State Common Retirement Fund, Albany, attended Messrs. Ravitch’s and Volcker’s presentation of the report Tuesday in Manhattan. He praised it as an “objective look from top to bottom of New York’s financial condition.”
At the same time, Mr. DiNapoli defended the use of amortization to reduce yearly pension contributions, describing the tactic as “an effort to deal with real-life budget challenges.”