PENSION LEGISLATION
MEMORANDUM IN SUPPORT

A BUDGET BILL submitted by the Governor in accordance with Article VII of the Constitution

AN ACT to amend the retirement and social security law in relation to options to limit volatility and improve planning for employer contributions

Purpose: This bill would require the State Comptroller to review various options to reform the process of determining employer pension contributions in an effort to address the current pension-funding crisis facing local governments and the State.

Summary of Provisions: Effective immediately, this bill would require the State Comptroller to consider implementation of various options to limit the volatility of employer pension contribution rates and improve the planning process for employer contributions to the New York State and Local Retirement Systems. The Comptroller would be required to evaluate options to: (i) modify current methods of recognizing investment gains and losses; (ii) amortize recent benefit improvements over a 30 year period; (iii) phase in large increases in contribution rates; (iv) cap 2003 contribution rates at previously estimated levels; (v) notify employers of actual contribution rates one year prior to billing; and (vi) provide employers with multiyear projections of contribution rates. The Comptroller would have to report on his determinations to the Governor and the Legislature by June 1, 2003.

Existing Law: Under current law, the State Comptroller, as sole trustee of the Common Retirement Fund, has the administrative authority to implement many of the options presented in the legislation.

Prior Legislative History: None.

Statement in Support: According to revised estimates issued in early February by the State Comptroller, the basic pension contribution rate payable by local governments and the State could increase from one percent of payroll to 11 percent in the coming year. Pension costs for police and fire employees could increase by 15 percent of payroll.

This announcement came after most public employers set their budgets based on substantially lower estimates provided by the State Comptroller in August 2002. Many government jurisdictions followed that advice and budgeted pension costs assuming the basic contribution rate would be four percent of payroll. The most recent projections from the Comptroller would create a $659 million deficiency in the State budget. Other government jurisdictions could have a combined shortfall in excess of $1 billion.

New York State government employers simply cannot afford cost increases of this magnitude. This legislation is intended to assist the Comptroller in finding ways to make these costs more manageable and improve the process of planning for future pension contributions.

Under the bill, the State Comptroller is required to evaluate and consider implementation of several options to mitigate the projected spike in contribution rates. Specifically, the options include:

• Modifying the method of recognizing investment gains and losses. In determining pension contribution rates, the retirement system measures assets by averaging gains and losses of equity investments over a five-year period. This accounting technique, called smoothing, is intended to reduce fluctuations in contribution rates that result from volatile investment returns. However, the retirement system places certain limits on the smoothing of investment gains and losses even though such limits are not required under Government Accounting Standards Board (GASB) standards for public retirement plans. These limitations are a major reason for the huge spike in contribution rates that employers are currently facing. The basic pension contribution rate for 2003 would be much closer to four percent if the Retirement System were to remove the asset smoothing limits as allowable under GASB rules.
• Amortizing the benefit improvements enacted in 2000 over 30 years. Separate amortization of significant benefit improvements is a reasonable option that has been employed by other retirement systems to fund improvements more gradually. It may be especially appropriate to use this approach for the benefit improvements enacted in 2000, such as pension COLA, since the Retirement System had previously indicated such improvements could be funded without additional employer contributions for many years.
• Establishing employer contribution rates that will gradually phase in large increases with 2003 rates capped at a level no higher than what the Retirement System advised local governments to budget in August of 2002. There is precedent for this option. In 1994, after the New York State Court of Appeals overturned a 1990 pension funding law, local governments and the State were facing a six percent of payroll increase in pension contributions. Instead of immediately charging the full six percent, the Comptroller at that time implemented a plan to gradually increase the rates over a five-year period.

To reform the process of estimating pension costs, this bill presents the Comptroller with an option to establish pension contribution rates one year before they are billed. This change would avoid the current situation where actual billing rates turn out to be substantially different than what employers have budgeted. Under this proposal, rates payable by local governments in December of 2004 will be set in the summer of 2003. Employers will know for certain what the contribution rates will be when they budget for the 2004 payment. This billing schedule is common practice in other retirement systems, including the New York State Teachers' Retirement System, and is endorsed by the Government Accounting Standards Board. The bill also calls for the Comptroller to consider providing employers with better information to facilitate multiyear planning for pension costs.

Budget Implications: Enactment of this bill is necessary to implement the 2003-04 Executive Budget because if the modifications to existing pension funding policies that are identified in this bill are implemented, it would enable the State and local governments to avoid 2003-04 budget shortfalls of $659 million and $1.1 billion, respectively.

Effective Date: Immediately.