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State Legislature Passes 'Tier VI' Pension Overhaul

Package includes creation of a defined contribution alternative, raising retirement age.

Dealing a significant victory for local governments and school boards, the New York state legislature approved the creation of a new pension tier that includes a 401(k)-style optional plan, a higher retirement age and a longer vesting period, among others.

The change, called Tier VI, is projected to save more than $80 billion over the next 30 years, Gov. Andrew Cuomo's office announced Thursday. He is expected to sign it into law. The savings, however, will likely be seen over the long term because the new tier only applies to new employees. Current employees will still be covered under the more expensive existing tiers.

"For years, local governments have struggled to cope with soaring retirement costs, driving up taxes on New York families and small businesses," Cuomo, a New Castle Democrat, said in a press release. "This bold and transformational pension reform plan is a historic win for New York taxpayers and municipalities that will save more than $80 billion over the next 30 years, while preserving retirement security for public workers. Without this critical reform, New Yorkers would have seen significant tax increases, as well as layoffs to teachers, firefighters and police."

Public employee pension contributions, large unfunded mandates, have frequently been voiced as a source of financial frustration among town, village and school district officials, with the item being among the most expensive in annual budgets. This in turn has contributed to rises in property taxes, which fund municipal, county and school budgets.

The desire for changing unfunded mandates has only increased since the legislature and Cuomo , which was criticized because it did not include major changes to required expenditures, while restricting revenues to pay for them.

The establishment of Tier VI is controversial among labor unions, who feel it is unfair for public employees.

The Huffington Post, Patch's sister publication, reports the following statement from the AFL-CIO: "We strongly condemn the Tier 6 plan as it would cut pension benefits for new hires by 40 percent and pull billions of dollars out of the state and city pension systems to turn over to Wall Street financial firms. Tier 6 is simply unfair to public workers who have already made significant sacrifices."

Below is a list of the changes, according to a statement from Cuomo's office:

  • New Employee Contribution Rates: The new tier increases employee contribution rates in a progressive fashion to ensure lower paid state and local workers are not seriously affected. Employee contribution rates vary depending on salary:
    • $0 - $45,000: 3%
    • $45,000 - $55,000: 3.5%
    • $55,000 - $75,000: 4.5%
    • $75,000 - $100,000: 5.75%
    • $100,000+: 6%
  • These rates remain substantially lower than the large majority of similar state systems around the country. The new tier impacts only newly hired employees. Existing employees and retirees retain all benefits.
  • Increase of the Retirement Age: The pension reform includes an increase in the retirement age from 62 to 63 and includes provisions allowing early retirement with penalties. For each year of retirement prior to 63, employee pension allowances will be permanently reduced by 6.5%.
  • Readjustment of Pension Multiplier: Under Tier VI, the new pension multiplier will be 1.75% for the first 20 years of service, and 2% starting in the 21st year. For an employee who works 30 years, their pension will be 55% of final average salary under Tier VI, instead of 60% under Tier V. This readjustment brings New York more in line with most other states and will save billions of dollars for taxpayers and local governments.
  • Vesting: Under Tier VI, employees will vest after 10 years of service.
  • Protect Local Governments From State Pension Sweeteners: The agreement requires the state to pre-fund any pension enhancers, ensuring that these costs are no longer passed to local governments.
  • Adjustments to Final Average Salary Calculation to Help Reducing Pension Padding: The agreement changes the time period for final average salary calculation from 3 years to 5 years. To limit how much overtime can be used to determine an employee's pension, pensionable overtime for civilian and non-uniformed employees will be capped at $15,000 plus inflation, and for uniformed employees outside of New York City capped at 15% of base pay. Tier VI puts in place new anti-spiking measures which cap growth in salary used to determine pension allowances at 10% for all employees statewide. These reforms will take major steps toward addressing instances of abuse and pension padding. Tier VI also eliminates lump sum payments of unused sick and vacation time from the calculation of final average salary.
  • Voluntary and Portable Defined Contribution Option: The legislation includes an optional defined contribution plan for new non-union employees with salaries $75,000 and above. In the modern economy, employees often change jobs multiple times and need pension portability. Many states, the federal government, and most private employers provide some form of defined contribution plans to their employees. The state will make an 8% contribution to employee contribution accounts. Currently, SUNY and CUNY offer such an option through TIAA-CREF that has been successful and popular. This is a voluntary option for those employees who prefer the portability and vesting feature not available with defined benefit options, and will help attract top talent to state government.
  • Adjustments to SUNY/CUNY TIAA-CREF Plan: Under Tier VI, SUNY and CUNY employees who elect the TIAA-CREF plan will receive an employer contribution of 8% of salary for the first 7 years of service and 10% thereafter.
  • Limiting Number of Sick and Leave Days that Can Pad Pensions: Tier VI reduces by half- from 200 to 100- the number of sick and leave days that can be used for retirement service credit.
  • Salary Reform: Previous tiers allowed salaries from an unlimited amount of employers for calculating retirement benefits. Tier VI allows only two salaries for the calculation.
  • Limiting Pension Benefit of High Paid Employees: For new higher paid employees, the amount earned above the Governor's salary (currently $179,000) will not be eligible for pension calculation under Tier VI.
Billy March 16, 2012 at 06:27 PM
How'd our local politicians vote? They always leave the most important/relevant information out, but I don't think any of our state senaors from this region voted for this & that says a lot about why we need NEW state senators to represent us. Klien, Carlucci, Stewart-Cousins all no. Oppenheimer- mia. Paulin aye, Latimer ? who knows if he bothered to show but I don't think he voted so that's kind of like voting against it. Remember come election time in November who's looking out for your interests and it isn't the Democrats, they seem more interested in protecting their union friends than lending a helping hand to the struggling taxpayer. This legislation's been pretty watered down, like the tax cap that really isn't. But hey, its a small step in the right direction and a lot better than the Tier V our local rerpresentatives were championing 2 years ago.
Jerry March 16, 2012 at 06:49 PM
Despite the fact that the unions conceded on a Tier V in mid-2010 which doubled the number of years it takes to vest, and raised the minimum retirement age by seven years Cuomo claimed to need 'pension reform' in the form of Tier VI. Most incredibly, he exempts police and firefighters, by far the two biggest abusers of pension padding from this 'reform' (most non-uniformed state employees are not even eligible for overtime.) Yet the public somehow believes that Cuomo is brilliant.
Tom Auchterlonie March 16, 2012 at 09:15 PM
Watching a broadcast of Cuomo's signing and presser, Bloomberg seemed pleased with the decision when he spoke.
Aidan March 16, 2012 at 09:16 PM
Yup, uniformed union members drew a walk. Pure politics. Cuomo did just enough to wax his national image without bruisin' an important base. Taxpayers get sold out again.
McKey Rivers March 16, 2012 at 10:25 PM
The gutted Tier VI pension changes, which can be restored by future Legislatures (like the 3% employee contribution was eliminated after 10 years in 2001 by the Legislature and George Pataki), coupled with the incumbent protection system (a/k/a redistricting), marks this legislative session "The Year of Missed Opportunities". More and more it is looking like Andrew Cuomo's shining moment as Governor will be bringing slots and roulette to Aqueduct Raceway.

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