Moody’s Investors Services is warning that the state’s new pension-smoothing plan is a “a stopgap with long-term risks” that could endanger the state’s pension fund and the credit of local governments.
The plan, part of the state budget approved last month, allows for local governments and schools to essentially pay a flat rate for pension costs over 12 years, avoiding the steep cost increases that the municipalities have faced.
Comptroller Thomas DiNapoli has signed off on the plan, and the state’s Teacher Retirement System is meeting Tuesday to do the same. Moody’s says in its weekly credit outlook that the plan has dangers.
“The deferral of pension contributions would increase the unfunded pension liabilities of participating local governments, a credit negative,” the report said. “The positive short-term budgetary relief will outweigh the cost of increasing unfunded pension liabilities for only the most financially stressed local governments.”
The report says that cash-strapped localities such as Nassau and Rockland counties would have immediate benefit from the program, but other municipalities should enter the initiative cautiously.
Moody’s says that the concern is the flat-rate payments could underfund the state’s roughly $150 billion pension fund, which provides benefits to 1 million retirees and current local and state workers. That could lead to higher costs for municipalities and schools in future years, the credit agency said.
“For example, a local government with $100 million in ERS salaries would have to pay $20.9 million in pension contributions for 2014. If the local government opts into the plan, it will gain $8.9 million in budgetary relief, but also create an unfunded liability of the same amount. This unfunded liability will grow in each successive year that the local government is part of the new deferral program, which will have to be met with future contributions,” Moody’s report says.
“Participating local governments exacerbate their risks if investment returns are below projections. In addition, unfunded liabilities could increase above expectations if more local governments participate than the state currently anticipates,” the report continues.
Gov. Andrew Cuomo has touted the system as a way to limit pension costs in the near future and provide relief to local governments before the savings from a new pension tier, enacted in 2011, is fully realized.
Many local governments and schools said they expect to enter the program, but fiscal conservatives have knocked it, as well has Syracuse Mayor Stephanie Miner, the state’s co-chair of the Democratic Committee.