NYC pension payment delay sparks warnings about future costs
Sometimes, when the bills pile up, people find a way to postpone payments and deal with them later. That’s how New York City leaders plan to deal with their city’s multi-billion-dollar budget deficit.
As part of the plan to close the gap, Mayor Zohran Mamdani has proposed restructuring the city’s pension payments.
It’s a tactic that other cities have used in budget balancing. While it may get that budget where it needs to be in the short term, it could end up costing taxpayers significantly more in the long run.
NYC pension plan
“When we came into office, we uncovered a $12 billion budget deficit,” Mamdani wrote on X. “Today, I’m proud to say we brought it down to zero.”
Following the city’s fiscal crisis in the 1970s, the city is required by law to balance the budget every fiscal year.
To make that happen, Mamdani proposed several things, including restructuring pension plan payments.
Major changes were made to the New York City pension plans in 2012 after pension investments failed to generate returns as expected. Much of that came from the dot-com bubble burst and the global financial crisis.
To make up the difference, the city adopted a new repayment plan.
“This change was a big dollar amount up front, and so what was agreed to at that point was that the catch-up would be spread out over 20 years,” Anna Champeny, vice president for research at the Citizens Budget Commission, told Straight Arrow.
What this new plan does is extend those payments out further.
Essentially, the plan is to stop bigger payments in the short term to balance the budget for the next fiscal year, starting in July and then deal with the consequences in the next decade.
Champeny likened it to having a credit card payment where you’re on a two-year plan to pay off the balance. But then, you instead decide to pay less over the next few months and make more payments in the future.
“Most of us would think that’s not smart financial planning, right?” Champeny said. “But that’s what we’re doing.”
Critics of this plan said this will end up costing taxpayers more in interest.
“You’re saddling taxpayers almost a decade into the future with a cost, because elected officials today didn’t want to grapple with trade-offs,” Ken Girardin, fellow with the Manhattan Institute, told Straight Arrow.
Girardin also said bond rating agencies, which closely watch the city’s finances, don’t look fondly at these kinds of tactics.
Both experts Straight Arrow spoke with said this is akin to kicking the can down the road.
This problem could just manifest again over the next decade.
“It will end up costing more, but hopefully we will just pay it and reach that full funding that was the intent when the plan was set up decades ago,” Champeny said.
When bond agencies “downgrade” a city’s bond rating, it typically results in a higher payment to those who purchase the bonds, essentially meaning the city has to pay more to borrow money.
Impact on payments
If you’re receiving money from an NYC pension plan and see this idea, it could get you worried.
But this plan will not impact any payments to people on those plans.
“Their pension is constitutionally guaranteed,” Girardin said. “It cannot go down.”
The city keeps its pension plans funded between 75% and 97%. The average funding ratio is roughly 87%, which is significantly higher than the national average of 62%.
Those pension accounts hold billions of dollars, so retirees are in no danger of seeing their pensions disappear.
“The real risk is to the taxpayers who are funding the pension plans and ensuring that there are enough resources for future pension and retirees, and they’re going to end up having to pay more for that,” Champeny said.
Other cities
New York is far from the first city to pull this move. Although compared to what some other cities have done, NYC’s move is relatively tame.
The most famous example is likely Detroit. More than a decade ago, the city filed for the largest municipal bankruptcy in American history.
As part of an agreement to get Detroit back on track, the city got a reprieve from funding its pension plans. Money came from private parties and the state of Michigan.
About a decade later, that agreement ended, and the city had to restart funding those pension plans, creating new budget pressures and issues.
“You have deferral of payments on a much larger scale, and a much more uncertain or inconsistent pension funding regime to begin with,” Champeny said.
While Detroit’s example is a bit on the extreme side, Chicago’s pension payment plan more closely resembles what NYC is doing.
The Windy City used “pension holidays” to pause contributions to those retirement funds. According to The Chicago Tribune, that ended up costing taxpayers an additional $7,000 each, totaling tens of billions of dollars.
“New York and Chicago are miles apart on this, and this is not a smart move for New York, but it is nothing to the tune of some of the other risks that have been taken in other places,” Champeny said.
San Diego did such a bad job with this that it ended in SEC sanctions.
In the late 1990s and early 2000s, the city repeatedly underfunded pension programs to ease budget pressures but continued to increase retirement benefits.
The pension liabilities ballooned into a major fiscal crisis, resulting in sanctions.
Other options
The law requires New York to have a balanced budget, so what were some other options to get there?
Like an individual on a budget, the first step is to stop spending so much money.
“Bringing your spending down to a level that you can afford with your revenues is the right way to solve this problem,” Champeny said.
Mamdani has also made it clear he believes New York’s wealthiest residents have made things tougher economically on the middle class and has attempted to raise more revenue through higher taxes on the rich.
Among places where the city spends a good bit of money is healthcare.
The city does not require employees to contribute towards their coverage.
“That is one thing that the mayor could have been looking to do,” Girardin said. “He’d have to go through the collective bargaining process to do that, so that’s not a quick fix.”
New York is the most populous city in the country, and education costs are among the highest of any major metro due to a class-size mandate in schools. The state spends more per student than any other state.
Mamdani has also attempted to raise taxes on the wealthiest New Yorkers. The city already has one of the highest tax rates in the country.
Despite solving the issue this year, this budgetary pressure isn’t going anywhere.
“This kicked the can, and so we’re going to have to be back here next year, and hopefully it’s a more sustainable solution,” Champeny said.
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Ella Rae Greene, Editor In Chief
