Southampton Town could slash millions in spending in the coming years thanks to a state pension plan proposal floated by Governor Andrew Cuomo’s office—if the town chooses to participate.
In just the first year of the program, if it is ultimately implemented by the state, the town could save some $4 million in pension plan contributions, according to Town Comptroller Leonard Marchese.
The governor’s proposal offers to help small municipalities take advantage of expected long-term savings in pension costs from changes to the state Civil Service retirement program, years before the savings are actually realized.
The plan would allow governments and school districts to lock in their annual contributions to the state-managed pension fund for civil service employees at 12 percent of payroll, 18.5 percent for police officers, rather than the more than 20-percent contributions paid in most recent years and 25 percent or higher for police. The result would be millions in savings in the first years of the plan, in exchange for contributions years down the road that may be somewhat higher than they would be otherwise, as employees hired under new lower-cost state pension guidelines become the bulk of the workforce.
“We were looking at this as far as our costs and it was pretty profound,” Mr. Marchese told the Town Board late last month. “It’s a lot of savings.”
According to the forecasts for the 2013 and 2014 fiscal years, he said, the town is looking at about $8 million in contributions to the fund. Under the governor’s proposal the contribution would drop to just $4.1 million. The town could effectively bank nearly $4 million without any tax impact.
Pension costs have pushed public employers over fiscal cliffs in the last several years, particularly in the period from 2008 to 2011 when declining returns from investments by the fund managers forced governments and schools to ramp up their annual contributions, steeply.
For many years prior, when fund investments were earning healthy returns, required contributions were often zero or just 1 or 2 percent of payrolls for employers. From 2008 to 2012, the contributions leapt from 7 percent of payroll to nearly 21 percent. The climbing costs, coupled with falling tax income, caught many municipalities off guard and pushed them into deep deficits or forced schools into hefty tax hikes and drastic cost cutting, usually through layoffs.
Last year, the state created a new pension plan for civil service workers, one that pushes the retirement eligibility age back from 55 to 62 and demands paycheck deductions from the employee toward the fund rather than 100-percent employer-funding. The new workers will mean lower cost burdens from pensions for public employers years down the road. Taking advantage of some of those anticipated savings now could help municipalities still struggling as the still sluggish economy recovers from recession.
“As the system ages and more of the older employees retire, there’s going to be savings,” Mr. Marchese explained. “Rather than catching up all at once, they’re offering to blend it together and stabilize contributions. It’s not unlike what we do with capital projects, we borrow the money up front and pay it back over a number of years.”
The governor’s plan would, ostensibly, flatten the roller-coaster—saving money now but maybe costing more down the road. The governor’s initial projection calls for a 25-year life to the program, a point that worries some fiscal watchdogs, including members of the Town Board.
“This is a lot of predicting over a quarter of a century,” Councilman Jim Malone said. “There’s a lot of savings up front, but it could wreak havoc … if the next governor, two terms out from Cuomo, does something to change this. My confidence in the numbers as you get out past 2020 is low.”
Mr. Malone noted that the concern of doubters is rooted in the actions of future state lawmakers that could skew the costs of the pension funds in the future, shortchanging the plans when the front-loaded savings are long ago spent.
Board members noted that Southampton, which has erased its deficits and kept tax rates flat in the last two years, is actually in a good position to absorb the higher costs of the pension plans now and look forward to the savings in the future.
But they also noted that if the lump sums of savings from the program were put to good use, it could translate into substantial savings in other areas over the long-term.
“Let’s say we take this $4 million in savings and build a senior center in Bridgehampton—we’re looking at savings of $750,000 a year in rent,” Supervisor Anna Throne-Holst said. “If you do things that add to your surplus and your revenue stream, that offsets [higher costs in the future]. It’s how you invest that money.”