NASSAU COUNTY CIVIC ASSOCIATION, INC.
"The government is us, we are the government, you and I." Teddy Roosevelt
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NASSAU COUNTY CIVIC ASSOCIATION, INC. "The government is us, we are the government, you and I." Teddy Roosevelt |
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November 16, 2003
$33 Billion in Losses to New York Pension Plans Means News Taxes For Nassau Residents
The real cost of public pensions
The State of New York has imposed higher penchant rates on municipalities across the State to help fund the massive shortfalls in the municipal employee pension plans. Last year with the poor stock market performance, pension plans for municipal employees lost approximately $33 billion dollars in value.1 The State will also require all municipal agencies including villages, towns, counties, their subdivisions and school districts etc. to pay similar rate increases toward their pension obligations.
For example, the Village of Freeport with approximately 300 employees paid $1 million into the pension fund last December and expects to pay $2,396,185 this year and $4,233,451 next year.2
To understand why there is such a shortfall in the municipal employees penchant plan one must first understand the two different basic methods for funding plans. The first method is called a defined contribution plan while the other type of plan is called a defined benefit plan.
The defined contribution plan is a plan that requires the employer to pay or contribute a certain annual fixed sum of money to each employees pension plan. The pension plan then invests the employees’ pension monies and if the investments are good then the value of each employees’ pension will increase in value. However, if the pension monies are invested in poor investments then the value of the pension may fall or yield little. Either way each employee is guaranteed nothing more than the initial contribution from their employer and any increase or decrease in their portion the pension monies invested.
On the other hand, the defined benefit plan is a plan that requires an employer to pay a fixed penchant benefits for each employee upon retirement when the employee reaches retirement age. The employer will usually make annual contributions to each employees pension plan and will invest the monies hoping to multiple the proceeds so that it can have enough money to pay the fixed defined benefits as they become due at each employees’ retirement. The employer is responsibly to pay a fixed retirement benefit whether or not they were ably to make good investments over time.
Municipalities, ordinarily have defined benefit pension plans for their employees and these plans are usually adequately funded when the stock markets are doing well. The municipalities may estimate a return in the markets of 10-12% over time; and therefore make lower initial contributions to the pension fund anticipating that the large investment returns will continue and help pay the defined benefits as they come due. However, there are some unforeseen periods of time when the stock markets yield little returns and there are little other investments that yield high returns. In these periods of time, the pension investments values will fall or will yield little return and as a result penchant monies will fall short of the current pension obligations that are due. The only way the municipality can usually make up for this immediate shortfall is raise taxes so that it can make greater contributions to its pension plan.
In conclusion, it is likely that with the new State mandated higher rate contributions for municipal employee pension plans, municipalities across the State will have to raise taxes again to fund their under-funded penchant plans. Furthermore, since the municipalities usually have defined benefit employee pension plans, coupled with poor stock market returns, these municipalities will have huge penchant short-falls until the stock markets turn around. The municipalities should change the type of pension plan they offer from a define benefit plan, to a defined contribution plan so that the taxpayers do not have to guarantee each employee a certain fixed benefit many years after the employee first began their employment. The taxpayers should not have to guarantee any employee a fixed benefit at an employee’s retirement when there is no guarantee for the taxpayers that pension investments will be able to yield high returns. With huge losses in the stock markets investments, the only thing the taxpayers are guaranteed is higher taxes and probably financial death!
Footnotes
1 Newsday, Long Island, Nassau Ed., Friday, Nov. 14, 2003, P. A23
2 Newsday, Long Island, Nassau Ed., Friday, Nov. 14, 2003, P. A23