Council Pushes Plan for Corrections' Retirement Benefits

The City Council recently approved and sent to Albany a plan that would provide correction officers with improved retirement benefits. The Giuliani Administration opposes the proposal, calling it bad public policy due to its potential costs to the city and contending that such benefits should be determined through collective bargaining rather than through Council intervention. The plan now requires approval from the state legislature.

Department of Correction (DOC) officers are part of the New York City Employee's Retirement System (NYCERS)*. Currently DOC officers, along with many other city employees, receive a defined pension benefit upon retirement regardless of the performance of any investments made through NYCERS. Roughly 70 percent of NYCERS funds are invested in equities and the surge in stock market performance over the past decade has allowed the city to realize substantial growth in its retirement fund holdings.

The Council's plan would provide an additional benefit over and above the existing defined benefit to DOC officers upon retirement. The benefit would be funded with a portion of the earnings generated through NYCERS' equity investments. Excess earnings from stocks (determined by a pre-set formula) purchased with the correction officers' share of NYCERS would be transferred or "skimmed" and put into a separate fund. The assets and earnings of this separate fund would be used to pay for the additional retirement benefit.

The main fiscal concern from such a plan is that the skimming of earnings would reduce the assets of NYCERS, thereby reducing future investment income, and requiring increased city contributions to make up the difference. Moreover, fund growth for DOC employees' share of NYCERS would be limited because the upside performance of the retirement fund would effectively be capped. Because the city's annual contribution to NYCERS is determined by the performance of the fund's investments, the cap on earnings increases the likelihood that the city will be forced to make higher contributions in the future. Capping earnings also undermines the strength of the fund-by skimming off excess earnings during the times when earnings are high, the city is at risk for having to make higher payments in periods when market performance is low.

In estimating the cost of the plan to the city budget, the Administration and the Council have used different methodologies resulting in dramatically different cost estimates. The city's chief actuary has estimated the cost using a net present value approach that discounts all future added benefits plus foregone investment income to its present value. Depending on market performance, the Administration estimates the plan could cost the city $68 million to as much as $130 million annually in increased city pension contributions. Reflecting the long-term cost of the proposal in present value terms is both a valid and prudent approach in budgeting for this reform. The Council's estimate of $6 million in 2000, rising to $75 million by 2009, and continuing to increase thereafter, reflects costs of the skim as they occur on a year to year basis. That is, the city's contribution would not reflect any of the cost of expected future payments or NYCERS earnings foregone as a result of those payments. Ultimately, however, the methodology chosen and the city's annual contribution to NYCERS would be decided by a board of trustees consisting of a representative of the Mayor, the Comptroller, the Public Advocate, and the five Borough Presidents.

Overall the city is expected to make $1.2 billion in annual pension contributions in 2000 and, due to strong levels of investment earnings, a more modest $672 million in 2003. NYCERS makes up a small portion of the city's pension contributions-projected to be roughly $50 million for 2000 without the proposed benefit for correction officers. DOC officers' pension assets account for slightly less than 10 percent of NYCERS assets.

*NYCERS covers city employees other than Board of Education teachers and non-pedagogical employees, and uniformed police and fire employees.