Cuomo has been trying to rid New York of its reputation as a
high-tax state and has put limits on tax increases by local
governments, reducing their ability to meet their often rising
obligations. The smoothing policy is intended to make it easier for
them to raise money without raising taxes.
At stake is whether the $176 billion state pension fund will be able
to fully meet its obligations, or instead be used as a piggy bank
for municipalities who haven't budgeted or raised money well enough
to meet their present obligations. Though New York's pension system
is 87 percent funded, one of the best in the country, the smoothing
program may undermine its future health, critics said.
"New York has traditionally been a good state as far as funding
policy goes but they have in recent years shown that they are
willing to take steps backwards," said Josh McGee, a pension expert
at the Laura and John Arnold Foundation, a policy group that's
expressed concern about the fiscal dangers presented by pension
plans for public employees. "Giving deferrals in the short run just
means you have to come up with more money in the long run."
Under the policy, introduced in 2010 and called "smoothing," local
and state authorities that need money are permitted to either defer
making pension payments for as long as 12 years, or borrow directly
from the pension fund. So far about $3.3 billion in pension payments
has been deferred, including $1.4 billion in 2013.
The state charges local authorities interest of about 3.7 percent on
the payments they defer. Because the fund's assumed rate of return
is 7.5 percent, the difference between what it expects to earn and
the money it's actually earning from the deferred payments is 3.8
At that rate, the fund stands to have about $735 million less in its
coffers in 2024 based on the $3.3 billion that's already been
deferred, an amount that will rise in coming years as the program
The $735 million figure is an estimate that was calculated with the
aid of Noor Rajah, who runs the actuarial science program at
Columbia University's School of Continuing Education in New York.
The low rate is more about giving municipalities the ability to
borrow cheaply than ensuring the integrity of the pension fund,
McGee said. It also means the fund is taking on greater risk because
it's allowing low or unrated municipalities to defer their pension
payments, he said.
The state says it's justified in charging 3.7 percent interest
because it considers the outstanding balances as a part of its
fixed-income portfolio, which has a lower expected rate of return
than the fund's equity portfolio.
However, the fund's annual report accounts for the deferred payments
and the interest on them as a receivable and doesn't include the
money in the fixed-income part of its portfolio. That matters
because of the fund's asset allocation mix, which as of March 31
devoted 54.5 percent to equities and 27.2 percent to fixed-income
securities, with the rest divided between real estate, private
equity and other investments.
If the deferred payments were included with fixed-income, the fund
would have to adjust its equities holdings higher so as to maintain
its targeted allocation mix.
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Elizabeth Wiley, an actuary at consulting firm Cheiron in McLean,
Virginia, said the deferred balances won't hinder the fund's
performance "if they are actually considering the deferred balances
when they set the asset allocations."
State comptroller Thomas P.
DiNapoli's office, which administers the pension plan, counters that
not including the deferred balance in the overall asset allocation
isn't a drag on the fund.
The program "is fiscally sound, transparent and adequately funds the
Retirement System," a spokeswoman for DiNapoli said. "It provides an
option for state and local employers to manage the budgetary impact
of rising contribution rates in the aftermath of the global
DiNapoli's office didn't comment on the $735 million estimated
The fund's blended fixed income portfolio, divided between "core
fixed income" and Treasury Inflation Protected Securities, fell
about 1.5 percent last year as TIPS slipped 6.5 percent. Its blended
equities gained about 20.3 percent, led by its U.S. stock holdings.
The Standard & Poor's 500 Index rose 30 percent in 2013.
Some local authorities that use the smoothing program said they
could get money cheaper if the state allowed them to sell pension
"We are forced to borrow at a higher rate than we would if we could
go to the market," said Westchester County Executive Rob Astorino,
who is the Republican nominee for state governor in this year's
election. "We were borrowing at twice the market rate from the
pension system which is more wasted money."
Westchester County estimates it will defer $104 million in total and
would save $10 million over 13 years if it could issue bonds instead
of using the state's plan, even though bonds covering pension costs
are usually taxable.
Still, being able to defer more than $40 million in pension
contributions last year allowed the county to avoid laying off 420
employees or raising property taxes by 6 percent, Astorino said.
"To have paid it in full we would either have had to have a very big
tax increase, and we drew the line in the sand that we were not
doing that, or massive layoffs and program cuts, which were not
palatable, especially to the legislature, or reluctantly go into
this, which we did," he said.
(Reporting by Edward Krudy. Editing by Dan Burns and John Pickering)
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