Public pension costs pushing LI taxes up

April 17, 2010 by JOHN HILDEBRAND / john.hildebrand@newsday.com

Long Island's school districts, already wrestling with potentially steep state aid cuts this year, also face upward of a $100-million increase in employee pension costs as they prepare budgets that could mean hefty tax hikes or layoffs and program cuts.

Making up that amount will require a nearly 40 percent increase in districts' contributions to the state teachers' pension fund, which is one of three state-managed pension funds and represents 280,338 working members statewide. This increase is required because the state guarantees these pensions, even as retirement plans in the private sector have taken a much publicized battering during the recession.

"We really get destroyed on that increase," said Charles J. Murphy, superintendent of the Island Trees school district, which serves a portion of Levittown, where pension costs will rise during the next school year by about $760,000.

Demands on taxpayers to contribute significantly more toward pension costs are not solely to compensate teachers and school administrators. In New York, employer contributions to an even larger state pension fund, which covers most state and municipal workers, could rise by more than 300 percent over the next four years. That represents a potential increase by local governments from the current 7.4 percent of payroll to 23 percent - the highest rate in more than 35 years.

Overall, extra pension payments in the coming year for all eligible public employees, including police and firefighters, are expected to total more than $300 million on the Island, and more than $1.2 billion statewide.

Experts cite three key factors behind the ballooning public pension obligations: The 2008 stock market crash, which dragged down pension-fund values; continuing pay raises for most teachers; and state rules allowing the great majority of public employees to stop contributing to pension plans after their first 10 years on the job.

Part of national trend

This is part of a far larger trend of pension fund values plunging around the country. In New York, the resulting pressure on tax rates has angered voters already weary of lean economic times.

"We're inches away from falling off a financial cliff," Suffolk Executive Steve Levy told taxpayer activists attending a regional forum in Melville this past month. Levy, whose county faces a $50-million increase in pension costs next year, has announced his candidacy for the Republican nomination for governor.

Nassau County also faces a $50-million increase.

Levy's main GOP rival, Rick Lazio, has said he wants to bring pension contributions by state public employees "more in line" with those of workers in private industry. The presumed Democratic candidate for governor, Attorney General Andrew Cuomo, while not speaking on the rising costs of public pensions, recently announced a statewide investigation into alleged pension padding by public officials.

Public employee unions defend their pension system, contending that the privatization pushed by some conservatives could leave retirees in poverty. They point to the beating taken by private 401(k) plans during the 2008 crash.

"We don't apologize for trying to save guaranteed benefits for our members," said Stephen Madarasz, chief spokesman for the Albany-based CSEA. The former Civil Service Employees Association represents 300,000 state and local workers.

These rising costs can be seen in every school district and municipality. Lindenhurst Village decided to cover its $170,000 increase by imposing a 3.4 percent tax hike. Great Neck Village used reserves to cover a $125,000 increase for 2010-11, avoiding a tax increase.

In one Long Island town, North Hempstead, a 4 percent tax increase has already been imposed to cover next year's increase in pension contributions. What might come after that has officials deeply worried.

"If this goes on year after year, spiraling out of control, then the whole system breaks down," said town Supervisor Jon Kaiman.

Budget votes May 18

The extent to which rising pension and salary costs will increase school taxes will become clear by May 18, when voters weigh in on school district budgets.

Some districts are much better equipped than others to deal with tough economic times, because they have set aside large cash reserves that they can now spend down. However, that strategy has been criticized by the state comptroller and taxpayer groups because reserves in many cases have exceeded allowable limits.

Another approach would be to cut expenses. A recent survey by the State Council of School Superintendents found that 1,408 teachers on the Island face potential layoffs next year, due to a combination of higher expenses - including pensions - and sharply reduced state aid. Survey results also indicate that about 50 Island districts expect to raise taxes more than 4 percent next year, compared to fewer than 20 that did so this year.

Newsday's interviews with school officials found that rising pension costs alone would be equivalent to tax hikes of more than 2 percent - more than $100 for the average Long Island home - unless costs were offset by layoffs or other savings.

Threatened layoffs already have shaken districts such as Lindenhurst, where 400 residents and school workers turned out last month for a meeting to hear local officials outline plans for cutting up to 61 jobs - a figure since lowered to 48.

School Superintendent Richard Nathan says he's saddened by the prospect of laying off teachers he personally hired. But he adds that his district faces $1.8 million in extra pension costs next year, along with additional costs for contractual pay raises. Lindenhurst is one of the Island's larger districts, with a $137.1-million budget.

Referring to a state decision in 2000 that allowed most school employees to stop contributing to their pensions after 10 years, Nathan said, "You know, it almost seems like they were being overly generous. But back then, the outlook was so positive."

In December, Gov. David A. Paterson signed a law creating a "Tier V" pension grouping for new government workers. New Tier V rules require newly hired government employees to contribute to pension plans throughout their working lives. About 95 percent of those now working contribute only during the first 10 years of their careers. Under the new law, new teachers contribute 3.5 percent of their salaries; other public employees contribute 3 percent.

Taxpayer representatives say the changes don't go far enough, noting that new public employees can still take early retirement with reduced benefits at age 55.

"If the general public has to work to age 65 or 70 in order to afford to live in retirement, it's inherently unfair that teachers can retire at 55 and travel around the world," said Fred Gorman of Nesconset, a founder of the regional Long Islanders for Educational Reform taxpayer group.

Different strategies

As school officials prepare for the May 18 vote, some districts say they are dealing with rising pension costs in different ways. In the Uniondale school district, for example, officials say they will not raise taxes to cover a $1.5 million increase in pension contributions. They said they found a series of savings - including reducing the number of textbooks and workbooks, summer school and field trips - to cover that amount.

In Island Trees, the district might lay off about 20 teachers and guidance counselors to minimize any possible tax increase while covering its $760,000 pension contribution increase.

And some districts say they are waiting on budget proposals due to be submitted to the state by April 24 to see whether they will get last-minute financial relief from the State Legislature or U.S. Congress.

Some school lobbyists in Albany say they are hoping the jump in pension costs will be less dire if the market continues to recover from its lows of 2008.

But the independent Center for State & Local Government Excellence, a Washington, D.C., think tank, concluded recently that state pension funds across the nation will face growing gaps between revenue and what they owe retirees through the year 2013 - unless they boost contribution rates.

The reason: States base contribution rates largely on growth in fund investments over extended periods - five years, in New York's case. And analysts consider it unlikely that market growth in the near future will match that recorded during the boom that preceded the 2008 bust.

That's underlined by Albany's predictions that contributions to its largest pension fund could triple.

"It's terrifying," said Robert Lowry, deputy director of the state's Council of School Superintendents.

With Denise M. Bonilla and Stacey Altherr

About the pension systems used

These are the three main pension systems used in Newsday's databases and stories.

Employees’ Retirement System

Working members. 530,023 state and local government employees statewide including nonprofessional school workers; 82,938 on Long Island.

Police and Fire Retirement System

Working members. 33,052 police and firefighters statewide; 6,416 on the Island.

Teachers’ Retirement System

Working members. 280,338 school administrators, teachers and other professionals statewide; 60,922 on the Island.