ALBANY – After four straight years of localities having to make higher contributions to their employees’ pension fund, the state’s towns, villages, and cities will get a slight breather in the coming year, thanks to the improving fiscal health of the state’s pension system.
Pension costs have been fueling higher property taxes in Western New York and elsewhere since the beginning of the Great Recession.
While the average contribution rate for state and local governments across New York is already set to rise to the highest level since 1974, State Comptroller Thomas DiNapoli surprised local officials Tuesday with his estimate that their pension costs will then dip slightly for the first time in four years for the 2014-15 fiscal year.
“The good news is rising pension costs are no longer rising,” DiNapoli said in an interview. After Wall Street’s meltdown in 2008 and 2009, DiNapoli said he thought at the time it would take five years, not the four years it turned out to take, for the fund to shake off the losses and for public employers to get relief.
“Although it’s a modest decrease, we have turned the corner on the upward pressure on rates,’’ he said.
The slight reduction will save Erie County alone more than $1 million, local officials said Tuesday.
Celebrations by local officials were muted, though, given that the average municipality will still be paying one-fifth of its payroll costs as a contribution to the state pension fund. Moreover, the reductions come as schools are finding out that their pension costs will rise between this year and next. That will put additional pressure on property tax levels by schools, which charge the highest, by far, of that levy in New York.
Municipal officials were at least upbeat that hundreds of units of local government across New York will see a reversal in pension expenses.
“The comptroller’s announcement that rates will be slightly reduced in 2015 is good news for counties and local governments across the state. That means the impact of the recession that began in 2008 has peaked at $941 million for counties and local taxpayers, and we will start to see those state-mandated costs reduced in future years,” said Stephen Acquario, executive director of the New York State Association of Counties.
The decline signals a halt for now in sharply rising pension expenses for local governments.
The good news has its limits, though. Word of a drop in pension obligations for the state and most levels of local government comes as nearly 700 school districts across the state are getting notified of an increase in what they have to pay into the New York State Teachers Retirement System, the second-largest public retirement system in the state. That pension system’s board last month approved a 16.25 percent contribution rate to be collected in the fall of 2014. That is up from the 11.84 percent rate districts will pay this fall.
The differences between the funds DiNapoli controls and the teachers pension system, which has 277,000 active members, are not easily explained since they are two different systems that base contributions on different formulas and can be the result of everything from different pay levels to the demographic composition of employee members.
The level localities must pay into the pension system is far higher than seen historically in New York. As recently as 2010, localities were paying 7.4 percent of their payrolls into the pension system. In 2001, they were paying only 0.7 percent of their payroll costs.
To ensure the pension fund has the money to meet its obligations, more money in recent years had to be diverted from state and local budgets into the fund to make up for declines on Wall Street that affected the net worth of the retirement system, which now has a balance of about $160 billion.
The contributions by governments to the fund are based on a “smoothing out” formula that takes into account the system’s investment performance over a five-year period. That’s why the contribution rate did not suddenly turn around a few years ago when Wall Street’s performance improved.
Tuesday’s projection from DiNapoli affects the payment that localities – most local government employees belong to the big state pension fund – must pay into the system in December 2014. The payment due this December reflects the higher, 20.9 percent level.
Tuesday’s news also means the contribution levels are expected to continue falling for at least the next couple of years.
Rising pension costs have been a major headache for struggling localities. Short of sharply reducing their payroll expenses, they have no choice but to pay the level set by the State Comptroller’s Office.
A group representing cities and villages across the state said the pension contribution drop is welcome news after four years of large increases.
“But make no mistake, despite today’s announcement, pension bills will continue to inflict pain at the local level,’’ said Peter Baynes, executive director of the New York Conference of Mayors and Municipal Officials. He said that the new rates are 90 percent higher than the average rate over the past 40 years and that localities will still be under pressure to raise taxes or cut programs given the mandated costs they face.
The pension tab for just New York’s counties has risen from $66 million in 2003 to $941 million this year.
What localities pay into the pension system depends on numerous variables, including salary levels and age of the workforce, that determine which of six retirement tiers they belong to. While localities whose employees belong to the Employee Retirement System will see a 0.8 percent decrease in pension payments, the costs for fire and police employees will be slightly larger. The average contribution rate for the Police and Fire Retirement System will go from 28.9 percent of payroll to 27.6 percent.
Peter Anderson, a spokesman for Erie County Executive Mark Poloncarz, said the county’s expects its pension contribution will fall from 20.8 percent in 2013 to 19.8 percent in 2014. That will save $1.1 million; moreover, Erie Community College is looking at a $230,000 savings by the rate drop.
Erie County in 2013 is paying $45.6 million to the pension fund, up from $20 million in 2006.
DiNapoli said he is hopeful the downward trend will continue, but any number of factors, from mortality rates of pension fund members to level of wage increases by employers, can affect the contribution rate.
“The expectation is, if the market holds up, we can probably see another rate decrease next year as well,’’ he said.