While the decisions, non-decisions and deals that led to the current public employee pension crisis were made over the course of nearly 20 years, that crisis has only attracted public attention for less than four years. The crisis has two causes. Using inflated asset prices due to the 1990s stock market bubble and later the mid-2000s housing bubble as an excuse, politicians both underfunded the pension promises that had been made to public employees, and retroactively enhanced those promises in exchange for union political support. The extent of blame for the disaster varies from place to place, with unjust retroactive pension deals more responsible in some cases and taxpayer underfunding more responsible in others. But New York City taxpayers have contributed far more than taxpayers elsewhere to their public employee pension plans, according to long-term Census Bureau data that can be downloaded from this post.

During the entire 20-year period of pension irresponsibility, Robert North has been the New York City actuary. According to a New York Times article from February 1990 “Mr. North, a 39-year-old investment banker with the Ocwen Financial Corporation, was selected by a four-member search committee appointed by former Mayor Edward I. Koch and the municipal unions….As chief actuary, Mr. North would head a department of 42 employees, managing pension systems whose combined funds amount to $35 billion. The salary of $175,000 a year makes the chief actuary the second highest-paid city official, surpassing the Mayor.” Apparently Mr. North is 61 years old today.

When North took office, New York City had finally recovered from the massive cost of the Tier I pensions retroactively granted by former Mayor Lindsay, to curry favor with the public employee unions while running for President. The soaring costs of retirees had led to huge cuts in the number of workers still on the job and big cuts in the pay and benefits of new hires. City workers were less qualified and less motivated as a result, and public services still haven’t recovered. Having reached 28.6% of active employee payroll in 1982, New York City’s taxpayer pension contributions had reached a more manageable 12.4% by 1990. Nationally, taxpayer public employee pension contributions have generally been around 9.9%. When Mr. North arrived, New York City’s residents had paid a huge price to get its pension plans out of the hole. Its infrastructure had deteriorated, its schools were bad, its police did not stop crime, and its taxes were far, far higher than the U.S. average, as they still are today.

As City Actuary, it was North’s job to ensure the terrible consequences of severely unfunded pension plans did not happen again, by telling politicians and unions looking to cash in that the money would be needed for later. He, and the City and State Comptrollers, were supposed to guard future taxpayers and service recipients from being robbed by older generations, or at least force those older generations to admit to the consequences of what they were doing before and as they were doing it. So how did Mr. North meet his responsibilities?

People disagree with the severity of the public employee pension crisis, depending on their interests and their assumptions. But every comparative analysis of public employee pension funds that includes large local government pension funds as well as state government pension funds, based on any such assumptions, shows that New York City’s pension funds are among the most underfunded in the U.S. Despite all the additional money New York City taxpayers have paid in, and the higher tax burden in the city compared with other places. As bad as in New Jersey and Illinois, where taxpayers didn’t put a dime into those funds for years, so politicians could win votes by keeping taxes far lower than in NYC.

The latest such analysis, by the Center for Retirement Research at Boston College, may be found here. That report was covered by independent actuary Girard Miller, who writes for Governing magazine. The CRR is generally a public pension fund apologist, and downplays the nationwide crisis by asserting that only some plans are in really bad trouble, such as those in New York City. An earlier analysis, by independent actuary John Bury can be found here.

The consequences of that underfunding have already been felt, with ongoing cuts in services, tax increases and New York City taxpayer pension contributions that already exceed those of the post-Lindsay debacle, as a share of the wages of those still on the job. There are fewer police officers, fewer teachers, and fewer sanitation workers. How did the city get into the same mess?

By repeating the same kind of retroactive pension deals. From 1991 to 2008, the New York State legislature passed one retroactive pension enhancement after another, always asserting that the deals cost nothing. The basis for those assumptions was discovered by the New York Times and reported in this article on the analysis of a pension actuary paid by the unions to provide biased estimates of the cost of the deals they wanted. “Lawmakers have cited Mr. Schwartz’s analysis on hundreds of bills in recent years, with billions of dollars worth of potential costs. His projections were used to fulfill a legal requirement that every piece of legislation be accompanied by a ‘fiscal note’ that examines its impact on spending” according to the Times. “Mr. Schwartz, a former city actuary, said that he routinely skewed his projections to favor the unions — he called his job ‘a step above voodoo.’” The state legislature didn’t pay for the analyses. The union did. “The Legislature knows full well I’m being paid by the unions. If they choose not to disclose that, that’s on them, not me.”

So what did the replacement city actuary have to say about all those deals foisted on the city by the New York State legislature? Not much publicly, as I recall, and I’ve been following state and local finance fairly closely for all the years Robert North has been in charge. He certainly didn’t call a press conference to defend the future of the pension funds he was responsible for, and the general public whose future public services relied on those funds, from the unions who had recommended his appointment. He didn’t condemn those unions, and the politicians who could rescind his appointment.

Moreover, not every retroactive pension enhancement of the past 20 years was foisted on the city by the state legislature. I can think of three, all described as costing nothing, that the city itself proposed during North’s watch. In 1995, the Giuliani Administration asked the New York State Legislature to enact a “retirement incentive” that allowed thousands of city workers to retire years earlier, inflating the payout from the city’s pension funds but temporarily cutting the city payroll. No money was set aside for this. State legislators would go on to proposed many more early retirement “incentives” over the city’s objections, even when it wasn’t trying to cut is workforce. Some of these, I believe, passed as well.

In addition to those who walked out the door at the time, as part of the 1995 deal, city workers were allowed to retire at age 57 after 25 years of work rather than age 62 after 30 years of work, as long as they paid an additional 1.85% into the pension plans (for a total of 4.85%, at least at first), including buying back all the years of extra contributions before the deal. This was also held to cost nothing. My own calculations show that was not the case, the earlier retirement cost far more than the additional pension contributions by the workers. Especially the catch up contributions for past years, for which there was no return on investment for past years.

In 2000, then-Mayor Giulani wanted some extra cash to spread around during his campaign for Senator, and he once again turned to the pension funds to get it. He offered the unions a chance to eliminate the required 3.0% employee pension contribution after ten years of seniority. This reduced the employee contribution to zero for those not in on the 25/57 deal, and 1.85% for those in on the deal. In the former case, this cut the amount employees contributed to their own pensions by 75.0%, because they earn more later in their careers. In exchange, the unions agreed to allow the city to underfund the pension plans as well, temporarily. The cost of this little deal according to Giuliani? Zero.

At the same time as it passed the Giuliani deal, the state imposed a bunch of retroactive pension enhancements, including a big increase in benefits for workers who were already retired, over the city’s objections. The state legislature had been passing that deal for years, but Governor Pataki had been vetoing it. But when it came to selling out the future for short-term political advantage, George (MTA debt) Pataki was not about to be outdone by Giuliani. Needless to say, the state said the cost of its portion of the retroactive pension deal would cost zero.

In 2007 Mayor Bloomberg, seeking support from the teacher’s union for his efforts to sell himself as a pension reformer, cut deal to allow teachers not in on the 1995 deal to retire at age 55 after 25 years of work rather than at 62 after 30 years of work. While future teachers would have to contribute an extra 1.85% of their pay for the privilege, those close to 55 were allowed to retire without buying back the past years (unlike under the 1995 deal). The deal passed the state legislature and was signed in 2008. The city claimed its cost would be zero, as I recall, but the state made the city put $100 million extra into the pension fund. A pittance compared with the actual cost.

In Milwaukee County, Wisconsin similar deals to these that passed in 2000, with similarly bad consequences, led to a scandal that forced the County Executive to resign and elevated the career of Scott Walker, now the Governor of that state. After years of slashing county services to pay for the cost of the “backdrop” pension deal he inherited, Walker sued the county’s pension actuary, a private firm, for $100 million. “Key bits of evidence include the failure of Mercer consultants to speak up at an Oct. 27, 2000, meeting of the county's Pension Study Commission. The county's lawsuit argues the Mercer employees should have contradicted a presentation stating that the backdrop would not cost the county anything and admitted that they hadn't yet studied the backdrop's cost.” The case was later settled for $45 million, “among the largest recoveries of its kind by a government entity based on claims of actuarial malpractice.” But the dollar value of the damage to the people of Milwaukee County was a fraction of the damage to the people of New York.

I don’t recall City Actuary Robert North condemning these deals and their purported cost publicly, or threatening to resign and then doing so. Moreover, if the deals could not be stopped there was another option. As City Actuary, North could have required that they be paid for. The amount that New York City is contributing to its pension funds right now, even according to my more conservative assumptions, is more than would have been required to pay for even the retroactively enhanced pensions, if that amount of money had been paid in all along. The reason is that because those enhancements were not paid for at the time, the pension funds are deep in the hole, and thus money that should be there earning a rate of return to pay future benefits isn’t there. The expected rate of return on the half of the city’s pension assets that aren’t there is zero.

The funds are close to a death spiral, one that could have been avoided. New York City had two economic booms during the time Robert North was actuary, from 1995 to 2000 and from 2003 to 2007. Tax money was rolling in during those booms. North could have demanded that the city use the additional tax money to pay for all the retroactive pension deals, and fill the holes in the pension fund. He clearly did not choose to demand enough.

And now, Governor Cuomo has decided that to help pay for the pension enrichments for his generation, which is Bloomberg’s generation, and North’s generation, and the generation of most members of the New York State legislature, future public employees should receive retirement benefits that are drastically less valuable than Generation Greed had been promised to begin with. The unions have started to pretend to object to their own cycle of undeserved benefits for those cashing in, and moving out and lower pay and benefits for their future members. But just to be sure those future members aren’t in a position to object, the United Federation of Teachers is pushing through a plan to increase the voting power of the growing number of advantaged retirees relative to shrinking number of ripped off future workers. The very day after Cuomo made his proposal, which did not include any suggestion that existing workers and retirees give back anything to offset the huge increase in their privileges at the expense of everyone else.

Mayor Bloomberg agrees that only future employees should be sacrificed. So do all the major media outlets. No one will dare to question why it is that future workers should be so much worse off than those coming earlier. Were the earlier deals fair? Then the future workers are being cheated. Are the proposed rules fair? Then the general public has been cheated by the current workers and, to a greater extent, today’s retirees. Are younger generations worth less in general than Generation Greed? Are they worse of in other ways? Should they be? Is that the legacy of that generation and its leaders? No one talks about it.

Just as future government workers are the ones who will be sacrificed to make up for 20 years of self dealing according to the Governor’s proposal, so future taxpayers will be made to pay for yesterday’s pensions according to a proposal from the Mayor recently endorsed by City Actuary Robert North.

A year ago, Mayor Bloomberg proposed a budget to add another $1 billion, and no more, to what the city will contribute to public employee pensions, bringing the total to around $8 billion (plus contributions by New York City Transit). Meanwhile, actuary Robert North dragged out a study of how much more money was actually required. His assumptions, including a 7.0% future return, were extremely optimistic given present circumstances, not in compliance with the proposed rules by the General Accounting Standards Board, and seemingly designed to allow the city to underfund its pensions. But even so, the actual requirement according to the City Actuary, after all the pension funding increases of the past decade but also after all those retroactive pension deals, is more than an additional $1 billion. Perhaps much more. We don’t know how much more, because the City Actuary declined to make the report available to the public that pays his bills. We know about this at all because the report was leaked to the New York Post.

And then there is this. “The cash-starved city will be allowed to pass on to future generations the bills it gets for some of its massive new pension debts, The Post has learned. In confidential memos distributed to City Hall and the boards of New York’s five pension systems, Chief Actuary Robert North said he wants to lower the assumed ‘rate of return’ on pension investments from 8 percent to 7 percent, as The Post first reported in October” but “in addition to revising the rate of return, North is also recommending a change in key accounting practices for the $120 billion pension funds, which would allow the city to pass some of the costs to Bloomberg’s successors.” He is going to recommend that the city intentionally underfund the pensions, leading to even more devastating costs later.

“Sources involved in the pension analysis said North’s staff was concerned that too big a hit all at once could cause a budget catastrophe at City Hall” according to the Post. “The impact would be too great,” said one analyst involved in the discussions between the actuary and the administration. “You have to look at the [city’s] ability to pay.”

“No you don’t,” asserts independent pension actuary John Bury. “The actuary should be able to to determine the cost of a promised defined benefit based on his professional judgment. If a government is unable or unwilling to make that payment they have options since there is no authority forcing them to put in that money.” The City actuary’s job, according to Bury, is to tell the truth.

The actuary should not be covering for the politicians. Just recently, in response to questions about the health of the pension funds, Comptroller John Liu said that the city had always put in the pension contributions recommended by the actuary. But not it proposes not to do so, on the recommendation of the City Actuary to underfund his own recommendations, and only pay an amount that the Mayor had decided to pay one year earlier – until years more have passed and the hole is even bigger, the sacrifices even greater, and the younger generations who will be paying more even poorer. And the politicians, seeking to rationalize what they have done, are already hiding behind the City Actuary. “’The $1 billion is enough. It looks like we’re in good shape,’ said City Council Finance Chairman Domenic Recchia (D-Brooklyn).” Wrong and wrong. It isn’t enough, but the City Actuary agrees that you should stick it to younger generations who will be even worse off. If the wealthiest geneations in U.S. history cannot afford to fund their pension promised to themselves, how can those coming after, who are worse off?

Quick aside: in my view the city pension funds are so deep in the hole that the minimum that should be put in each year should be the amount that is paid out to beneficiaries, allowing any earnings by pension fund investments to be used to allow the funds to recover – for perhaps 20 years. I don’t know exactly how much that is, but it could be as much as $3 billion more, not $1 billion more, with additional increase in each and every year. The pensions are guaranteed and have to be paid? That is what they cost. Or, rather, what they cost now because they weren’t paid for before.

New York City Chief Actuary Robert North has one of worst record imaginable for someone in his profession. He has worked for a city that suffered dearly to restore its pension funds to health after the retroactive pension deals and underfunding of the 1960s and 1970s, a city whose residents have among the highest state and local tax burdens in the U.S. and have paid more of their tax dollars in to the pension funds, rather than using that money for better services for themselves. While there have been two stock market downturns on his watch, there have also been two bubbles, and the investment rate of return for the entire period from 1990 to today was probably better than the return that can be expected in the next decade. New York City’s pension funds had solid investment returns and got massive taxpayer contributions.

And yet the pension funds North is responsible for are once again among the most underfunded in the country, with severe consequences for anyone who will be living and working in New York City in the future. After a 20 year period in which North failed to publicly force politicians deal beneficiaries to acknowledge or obtain funding for what they were doing. That is why he should be fired.

And this is why he should be fired now. There is no way that someone in North’s position should be receiving a city pension. That is a conflict of interest with regard to retroactive pension deals that could benefit the actuary himself. But I don’t doubt that he is earning a pension. And I don’t doubt that he did benefit from the retroactive pension deal to allow retirement with full benefits after 25 years of work. Which would mean he could walk out the door with that retroactively enriched pension in February or March 2015, about three years from now.

If that is the case, no wonder he is willing to go along with whatever the Mayor wants, to keep his seat. Mayor Bloomberg wants to postpone some of the devastation from all the retroactive pension deals on North’s watch until after he leaves office. Perhaps North has decided it is best to postpone the rest of the devastation until after he retires, just in case some of the devastation will be in the form of higher taxes. Because the pension he may be in line to receive, which may very well exceed $100,000, would be completely free of state and local income taxes.

Is it fair to single North out? Well, as far as I’m concerned everyone involved with those deals over the years deserves to be fired. But most of them were not specifically tasked with telling the possibly unpopular truth. Our society has created a variety of those “truth telling” professions in order to prevent victimization in secret from happening, from the accountants to the actuaries to the bond raters, etc. That whole structure has failed, while doing very well for itself from a strictly money point of view. It didn’t create the institutional collapse, but it certainly enabled it. I don’t consider any warnings North might have issued in secret to be a sufficient rationalization. The trappings and honor of a profession were in exchange for more than that.

The upshot on revenues? In FY 2009 New York City’s state and local tax burden, as a percent of its residents’ personal income, was 53.2% higher than the national average, up from 34.4% above average in FY 2002. This despite the fact that the U.S. average increased as well, from just under 10.2% of personal income to just over 10.4% of personal income. New York City, based on long term Census Bureau data attached to this post, had not been that far above the U.S. average since 1987 – it had been more than 50.0% above average from 1977 to that year. The combined state and local tax burden for the rest of New York State, taken together, increased from 22.2% higher than the U.S. average to 34.4% higher. The rest of the state had never been that high above average according to the data I have available, for 1972 and all years from 1977 to 2009 (except a couple when the Bureau did not collect it). The tax burden of New Jersey had been about average in FY 2002, as it had been for some time before, but was 12.2% above average in FY 2009.

Let’s begin our overview of revenues with taxes, and start with the totals. Hopefully, the reader has already printed out the table linked from this post and printed the output, and read that post to understand how the data was compiled and what it means. The data show a slight decline in the total U.S. state tax burden as a share of personal income, from about 6.0% in FY 2002 to about 5.9% in FY 2009, more than balanced by a slight increase in local taxes. Both state and local taxes increased substantially as a percentage of personal income from FY 2002 to FY 2009 in New York City, the rest of New York State, and New Jersey, reaching 16.0%, 14.0%, and 11.7% of income respectively in the latter year. Although, as in the past, most of the excess tax burden in New York State is at the local level, in FY 2009 it was significantly above the U.S. average at the state level as well, at 7.1% of income in New York compared with 5.9% for income for the U.S. and 6.25% of income in New Jersey.

I didn’t break out the state data by type of tax, but best as I can figure out the state “millionaire’s tax” surcharge associated with the 2001 to 2003 recessions was not in place at any time in FY 2002, going into effect in 2003. But it was in effect in part of FY 2009, having been in force during for 2009. That might explain some of the increase in New York’s state tax burden.

But state income taxes may be increasing as a percentage of personal income for another reason: in New York, as elsewhere in the country, a rising share of total income is concentrated at the top, where it is taxed at a higher rate. The ongoing loss of manufacturing jobs in Upstate New York and back office “pink collar” jobs Downstate is reducing the size of the middle class, as people fall into or are replaced by those in lower tax brackets who pay little in income taxes. Meanwhile, more people are wealthy, and paying a great deal. According to this report (figure 2), the share of total state income taxes paid by the wealthy as soared, presumably because of an increase in their share of total income. 

More taxable wealth at the top, and taxes collected from Wall Street, is certainly the reason why New York City’s local personal income tax and corporate income tax revenues were higher as a percent of city residents’ income in FY 2009 than they had been in FY 2002. I don’t recall the city’s tax rates increasing between those years – in fact, the unincorporated business tax was liberalized so this second income tax would fall less heavily on the city’s growing band of self-employed “freelancers” (or de-facto employees without benefits). New York City’s local income tax, on top of the federal and state income taxes, is virtually unique, and it falls heavily on those working since all of the income of retired public employees, and some of the income of retired private sector employees, is exempt. The new MTA payroll tax similarly only falls on those who are working. So does the unincorporated business tax, still in force for freelance, small business self-employment and partnership income in excess of $100,000.

This growing dependence on taxes on the wealthy, and on Wall Street, is a threat to New York’s public financial future, because the evidence suggests much of it was not really earned. And because it was not really earned, it is possible that it may go away due to regulation, due to a revolt by shareholders demanding a higher share of company income for investors rather than executives, or due to a revolt by customers moving their money to companies those fees bear a closer relationship to their returns, companies located in other cities with less predatory financial cultures. Dependence on these tax revenues has caused New York politicians such as Mayor Bloomberg, Senator Schumer, and Governor Paterson to defend the indefensible – the soaring pay on Wall Street initially rationalized by higher investor returns during the stock market bubble, but today not even explained at all.

City residents might remember an 18.0% property tax rate increase by Mayor Bloomberg to improve the city’s public schools when he first came into office. And New York City’s property tax burden, as a percentage of its residents’ personal income, was in fact 19.8% higher in FY 2009 than in FY 2002.

In addition to the tax increase, other factors affect the city’s property taxes as a percent of personal income. As a result of assessment increase limits put in during 1982, when New York area housing prices were below the U.S. average (believe it or not that is true), the property tax burden as a share of income tends to fall for the city’s one to four family homes, as the permitted increase per year and per five years is generally lower than the inflation rate. The homeowner break is by far the greatest in gentrifying “yuppie” neighborhoods, where the low housing prices of 1982 were locked in for property tax purposes, even as the income of the people living those neighborhoods – and their actual property values -- continues to rise relative to the rest of the city. In the case of two- to four-family houses, these lucky homeowners benefit from higher rents even as their property tax burden is kept down. Meanwhile, rising rents in larger buildings mean higher property assessments, and higher taxes passed on to renters, particularly those in non-rent regulated buildings.

In much of New York City, new buildings have been exempted from property taxes for years, an artifact of the dark days when people were fleeing the city and no one wanted to invest here. Over time, however, those buildings become taxable, and with the city having experienced an office boom in the 1980s and a housing and retail boom starting in the late 1990s, some of the increase in property tax revenue may be due to previously exempt buildings finally coming onto the tax rolls.

Despite the revenue from its virtually unique local personal and business income taxes, New York City’s property tax revenues were above the U.S. average. Property tax revenues totaled 3.6% of city residents’ income in FY 2009, up from 2.9% in FY 2002 and above the U.S. average of 3.4%. For those not benefitting from the break for 1 to 4 family homes, the city’s property taxes are probably significantly higher than average. Without the benefit of a local income tax, but with the same high spending and costs shifted to the local level, the FY 2009 property tax burden in the Rest of New York State, at 5.3% of personal income, was much higher than the U.S. average and much higher than the 4.7% of income it had been in the rest of the state in FY 2002. New Jersey’s property tax burden was about the same as the part of New York State outside New York City.

One state cost shifted to local governments is Medicaid, for which New York State has a virtually unique local matching share. It was originally intended to shift the burden of the poor, old and sick, concentrated in New York City at the time, onto city taxpayers and away from taxpayers in the rest of the state. New York State accounts for most of the local government to state government “aid” in the U.S., and most of this is for Medicaid.

My recollection is that the increase in the amount New York’s local governments have to pay to the state for Medicaid was somehow limited by legislation passed after the issue was raised by candidate for Governor Tom Suozzi in 2006. And in the rest of New York State, in fact, the local to state aid in the Welfare and Hospital categories, all of which is for Medicaid, fell from $5.18 per $1,000 of personal income in FY 2002 to $4.08 in FY 2009. In New York City, in contrast, local to state aid in this category increased from $9.99 per $1,000 of city residents’ personal income in FY 2002 to $17.20 in FY 2009. That’s 1.7% of city residents income collected in local taxes and sent to New York State for Medicaid, over and above the federal and state taxes city residents pay for the program.

Meanwhile, federal and state aid to welfare, health and hospital programs administered by the city fell as a share of city residents’ income from FY 2002 to FY 2009, from 2.35% of income to 1.9% of income. There was a large decrease in federal and state funding as a share of total personal income in these “aid to the poor” categories in the U.S. and the rest of New York State as well. On the other hand, federal and state aid and charges for services (such as rent at public housing projects and health insurance payments at public hospitals) covered 78.6% of total New York City spending in these categories in FY 2009, up from 65.1% in FY 2002 and similar to the U.S. average of 78.1%. Or course New York City taxpayers are covering just over 20.0% of a much larger social service burden that local government taxpayers elsewhere.

As these trends – less federal and state aid for health, housing and social services to the poor, but federal and state aid covering rising share of total NYC spending in these categories--seem to conflict. Someone with more knowledge of changes in social services, public hospital and social housing funding policies over the past decade will have to explain them. One possible explanation is less New York City spending on “only in New York” programs that the federal government, and perhaps the state government, do not cover part of the cost of.

The data shows that state (and federal via state) aid to New York City’s public schools was below the U.S. average as a percentage of personal income in FY 2002, but above average in FY 2009. But the “fiscal equity” promised by the “Campaign for Fiscal Equity” was not achieved. State aid to the high spending schools in the rest of the state, as a percentage of the income of those living there, increased as well, from already above average levels. School aid as a percentage of personal income totaled 2.66% of personal income in the U.S. in FY 2009, compared with 2.72% in New York City, 3.53% in the rest of the state, and 1.9% in New Jersey.

Meanwhile, the local government resources invested in public schools decreased slightly in the U.S. and the Rest of New York State, as a percent of personal income from FY 2002 to FY 2009, and increased hugely in New Jersey. Local government tax resources for education actually fell in New York City, from 2.34% to $2.25% of personal income, and the share of NYC school spending covered by federal and state aid rose from 52.1% to 54.2%. But wait a minute, didn’t New York City increase property taxes for the schools, and doesn’t the education finance-specific Census Bureau database show a huge increase in spending in the city?

Yes. But remember, in THIS database spending on the pensions and health benefits of retired teachers is NOT included in public school spending. It is tabulated separately, under pension fund revenues and under “other” expenditures. Therefore, more than 100 percent of New York City’s additional school spending from FY 2002 to FY 2009 went to retired teachers and, perhaps, health benefits for those working. Spending in the city’s schools had previously increased substantially from the lows of FY 1997 to FY 2002, but after FY 2002 and with the bursting of the stock market bubble the retroactive pension enhancements of the past 18 years started to be paid for. That sucked up all the higher taxes for schools and much else.

The city to state transit aid, and state to city transit aid, may confuse people. Remember that all the mass transit revenues in the rest of New York State are counted in this database as state government, so state aid the LIRR or MetroNorth is NOT included. Federal and state aid to New York City Transit increased from FY 2002 to FY 2009 as a percentage of city residents’ income, but much of that is from dedicated taxes collected only downstate. In fact some of that is sent by New York City to the MTA (state government) before being passed down to its New York City Transit subsidiary (counted here as part of New York City). The city had slashed its contribution to the MTA in the early 1990s recession, when New York State did, and never restored it even when tax revenues were rolling in. But the city did increase payments to the MTA, as part of a deal to have it take over what had been private bus lines, now MTA Bus.

One of the criticisms of the Bloomberg Administration is that it has nickled and dimed city residents to death with fee increases. But New York City’s charges for services, as a percent of its residents’ personal income, were virtually unchanged from FY 2002 to FY 2009. At 3.7% of personal income in the latter year, New York City’s fee for service revenues were above the average of 2.95% for all local governments in the U.S., but remember that New York City operates many enterprises that other local governments do not, including the transit system, a vast public housing system where 600,000 people live, and a vast public hospital system. On the other hand, it is common for local governments elsewhere in the country to charge for solid waste removal, which New York City does not, and some local governments operate electric or gas utilities. Charges for services accounted for about 1.0% of New York City spending on Solid Waste services in FY 2009, compared with 66.8% for local governments in the U.S. as a whole.

If a public service operated by a local government isn’t funded by federal and state aid, or charges for services, one other possibility is that it is funded by local tax revenues. Another possibility is that it is funded by borrowing. New York City’s water and sewer charges covered 79.0% if spending on the city’s water and sewer system in FY 2002, but just 53.0% in FY 2009. The reason, as described in the last post, is a big increase in capital spending paid for by bonds, with retention tanks to prevent combined sewer overflows and a filtration plant for city water joining work on the third water tunnel. With a $2 billion repair required for a leaky aqueduct, more borrowing is coming.

Including the Port Authority, New York City Transit, and the Triboro Bridge and Tunnel Authority as well as the New York City Department of Transportation, the share of New York City transportation expenditures covered by motor vehicle taxes, federal and state aid (including dedicated MTA taxes sent to NYC Transit), fares and tolls increased from 58.1% of total spending in FY 2002 to 76.2% of total spending in FY 2009. The share covered by other taxes – and by borrowing – presumably fell.

FY 2002 was the end of a long period in which effective transit fares were deeply cut due to the creation of the Metrocard and associated discounts, tolls were frozen and some were removed, and transportation capital spending (though perhaps not what is received in exchange for capital spending) sharply increased. To make up for this sweet deal, money was borrowed. Now both the MTA and the state’s transportation trust fund are broke, and money all these funding sources are more are going to the past, with less in return.

The data show, in fact, that New York’s state and local debts rose enormously in New York City from FY 2002 to FY 2009, from 38.4% of the personal income of city residents to 42.5% of that income. The largest gains were at the local level. In the Rest of New York State, the debt burden edged up from 23.8% of income to 24.0% of income and the local debt burden actually fell. The pension funds that cover public employees in the rest of the state are also better funded than those for New York City public employees.

This, perhaps, might put the city’s higher tax burden in a different perspective. Taxes were high in the late 1970s and 1980s, during the Koch, Carey and Cuomo administrations, because the city and state had to pay back the debts and pay for the pension enhancements of the Lindsay, Wagner, Beame, and Rockefeller administrations. Money also had to be spent to repair the infrastructure neglected by those earlier leaders in favor of more glamorous spending priorities. Subsequent tax reductions, it seems, were funded by borrowed money, and subsequent pension deals were not paid for either. And New Yorkers are now paying more and getting less again as a result, modestly at present, potentially catastrophically soon.

Unfortunately, the part of the Room Eight program that allows spreadsheets to be attached no longer works, so I had to ask the site owners to post the new data here. The “output” worksheet was set up to print on two 8 ½ by 11 inch pages; the other worksheet show what I did with the data, step by step after downloading, to not only present it but also to make it comparable across areas to the extent possible, as described after the break.  I suggest downloading the data, printing it, and then reading on.

This post contains background information to help the reader understand the tables. Much of it is repeated from previous posts with earlier data, so if you have taken the trouble to study my compilations of Census Bureau Governments data in the past, you can skim through this. Otherwise, it should be read carefully.

I express government finance data as a share of personal income because places where average personal income is high also tend to have a high cost of living. With their higher incomes, residents of such places can afford to pay higher taxes per person without it reducing their income as much, but local governments must pay their public employees and contractors more to attract workers of equal quality, given the higher cost of living. Measuring revenues and expenditures as a share of personal income adjusts for both these factors. So the fact that New York is expensive has already been taken into account in these comparisons, in a fair way.

Bear I mind, however, that spending per $1,000 in personal income can change due to both factors: changes in spending, and changes in income. If a part of the state becomes poorer but still employs the same number of local government workers at the same level of pay, adjusted for inflation, it will have to raise taxes on the falling income of other residents to pay fund the same cost of government. Taxes and spending per $1,000 of personal income will rise even if inflation-adjusted spending does not. Removing the effect of the business cycle on personal income is one reason to use comparable economic years.

Every five years, the U.S. Census Bureau conducts a Census of Governments, adding up public finance and employment information on every state and local government in the United States, and presenting the local government totals for every county in the country. The last was 2007. The next is 2012.

In general, between census years the Bureau surveys some of the local governments to produce estimates of total state and local government activity, for each state and the national average. It also, however, provides individual government data for those included in the survey. New York City and the Port Authority of New York and New Jersey are always included, and (other than a harbor commission with virtually no employment or spending) they are the only local governments in New York City. So by adding the two up one can get data on local government in New York City between census years, and by subtracting New York City from the state total one can get an estimate of the rest of New York State as well. For other states, the estimate for all local governments in the state is all that is available for FY 2009. In some past years I had divided up the Port Authority, allocating some of its spending to New Jersey, but I did not do so this year, to save time. Bear in mind that all the revenues, expenditures and debts of the Port Authority are assigned to New York City in this data set.

There are several government functions that are generally local government activities, but are sometimes state activities. Some states, notably New Jersey, operate local schools in districts they have taken over, and virtually all the mass transit in New Jersey and New York State outside New York City is counted as state government, not local government. To adjust for this, I compare the state and local totals with New York City in these categories. State and local government totals for the U.S. and New Jersey are also compared with New York local government for cash welfare, which is recorded as local government spending in New York and most other places, even though most of the funding comes from federal and state taxes.

I focus on local government because local governments do most of the work of government, while state governments generally just collect and then pass on money to either local governments as aid, or the private sector as payment for public services (ie. the health care and social services industries), or individuals (unemployment compensation). States are generally directly responsible for public universities, state prisons, and state unemployment and worker compensation insurance programs.

The Census Bureau distinguishes between “direct” expenditures and “inter-governmental” expenditures -- the latter are simply transfers between one government and another. Based on total expenditures, one can count the same dollar multiple times. For example, if a dollar is spent in a New York City public hospital, it is counted as “direct” local government public hospital spending. But if that dollar came from Medicaid, it is also “spent” as state to local aid for public hospitals. But since New York State requires New York City to fund part of its Medicaid program, which it is credited for administering, that same dollar may be counted a third time as local to state aid for public welfare. Money is only spent “directly” once. The data shows direct expenditures except where specified.

Nearly all Medicaid payments to private health care providers, classified as “Medical Vendor Payments,” take place at the state level. Some Medicaid funding, however, is used to pay for services at public hospitals, including those of the New York City Health and Hospitals Corporation. This data, therefore, includes just part of the Medicaid spending in New York City.

One of the advantages of accessing detailed data from the Bureau, as opposed to the spreadsheets it publishes, is that more detail is available on revenues. In summary tables, charges for services and revenues from other governments are summed to totals. Using the details, I’m able to figure out how much of NYC’s local government transportation expenditures are paid for by charges for services and motor vehicle taxes, and how much of its social services spending is paid for by federal and state aid. Local government to state government aid, generally not reported in summary tables because New York State is the only state with very much of it, can also be analyzed.

Another quirk of the data concerns pensions, which the Census Bureau records from the point of view of the pension plans. Thus what are “expenditures” from the point of view of New York City’s budget, contributions to its pension plans, are tabulated as pension plan “revenues” in this data. The pension plan “expenditures” are actual benefits payments, according to the Census Bureau. In general, local government workers are covered by pension plans administered by states. The New York State plan covers all the local government workers outside New York City, while New York City has its own plans. It is possible to tabulate the contribution of local governments outside the city to the state plan, but not the benefit payments to former local government workers in the rest of the state, because that is mixed with the benefits paid to former New York State workers. For a detailed comparative analysis of state and local pensions over time, see this post.

One key point about pensions for the data presented here is that the data on expenditures by function excludes them. Thus, New York City’s police and education spending, in this dataset, does not include the money the city has to pay into the pension plans for its retired teachers and police. That is tabulated as a single number, for all city employees, down at the bottom of the expenditures table. Other data, for example another Census Bureau data series specifically on public schools, shows that in general New York City’s pension and other benefits spending is far higher than just about anywhere else, one factor keeping its funding for workers on the job lower than it would otherwise be.  That data was analyzed in this post.

Speaking of benefits, if local governments do not provide the Census Bureau with sufficient detail on, for example, employee and retiree health insurance by function, the health insurance for all employees and retirees ends up lumped together under “other.” That is the case for New York City, one reason its “other” spending is so high. In other places, with multiple local governments each doing perhaps one function, that health insurance spending may be included with the individual spending by function. So New York City’s spending for a given function compared to the average may be higher than it seems. Health Insurance and Judgments and Claims are not tabulated separately by the Census Bureau’s Government Finance series because that series was designed in the 1950s, when those categories of costs were less significant. The series have not been updated to include them because the work of the Governments Division has been gradually de-funded, with data items lost but not added.

In a couple of cases, for total taxes and for debts, I elected to produce a combined state and local government figure. So how does one produce a state tax and state debt figure for New York City compared with the rest of the state? I assume that the burden of state taxes is distributed in proportion to personal income, and thus the burden of repaying state debts will be as well. But that isn’t quite true, as MTA taxes are only collected in Downstate New York, but are tabulated as New York State taxes in this data. With some of those “dedicated” taxes having been spent in Upstate New York in recent years, it may be fair to say that there are two different levels of state taxes in the state.

Finally, anyone viewing the data should bear in mind the effects of 9/11. Police, Fire, and to a lesser extent Sanitation spending was inflated in FY 2002 by massive overtime in the wake of the attack. The spending by character shows that capital spending in New York City was vastly higher in FY 2009 than in FY 2002, but capital construction spending on infrastructure was not. Where did the money go? One other possibility is buildings, and one such building site is the World Trade Center site.

A post or two with my interpretation of the data will follow, but if you read this much you are in a position to print out the tables and make up your own mind

This is just one example of what has happened in the city’s “non-profit” “charities” over the years. They have become a big part of the reason that New Yorkers pay so much in taxes, and receive so little in return. What is particularly disturbing is that this problem has infected a type of organization that was thought of as the solution 40 to 50 years ago, due the failures and ripoffs of public employee unions, government bureaucracies, and government contractors.

It’s hard to believe now, but at one time government agencies, from the military on down, were considered examples of well-run, efficient organizations with dedicated staff. Prior to the progressive era of the early 1900s, all government was, and was assumed to be, corrupt due to patronage appointments for government workers and kickbacks for government contractors. Progressive Democrats, however, challenged the corruption of political machines because they wanted the government to do more to meet people’s needs. Progressive Republicans worked toward the same goals, because they wanted government to do the limited number of things everyone believed had to be done, at a lower tax rate.

During the Great Depression, with fewer quality employment opportunities in business, hundreds of thousands of dedicated workers flocked to government service. When the federal government successfully organized victory in World War II, the reputation of government agencies soared further. A golden age of public service followed.

Which was then ended by the public employee unions. After reversing a perceived imbalance in the well being of public employees relative to their private sector counterparts, they quickly moved on to decreasing the amount of work government workers did. Protecting sloth with procedural impediments to termination, reducing the number of days worked in a year and hours in a day, and increasing the years in retirement relative to the years actually worked.

As a result, in the 1970s taxes soared and services collapsed in whatever places the unions had the most power, particularly New York City. In a triumph of union power, most recently repeated, soaring pension costs led to soaring taxes that drove businesses out of town, while collapsing services did the same to residents. The schools stopped educating the children, the police stopped protecting people from crime, the transit system became dirty and unreliable, and garbage filled the streets, as all the money was diverted to the early retired. What people paid for government and received in return is far more for less than the public employees themselves would have tolerated when they went shopping, and used their power of choice to ensure private sector workers gave them a good deal. The public employees, in fact, exercised their right to move out of town, to suburbs with lower taxes and better services.

The consequences of public sloth extended to the social services sphere, where public agencies were thought to be incapable of actually helping the poor, or even uninterested in doing so. That perception was reinforced by the 1972 Willowbrook scandal, where the mentally retarded were found to be living in horrific conditions in state institutions as indifferent government employees did little.

The right wing response to government agency sloth has been “privitization,” having the government contract with for-profit businesses to provide the services that governments used to provide directly. But government contracting has been rife with sloth and corruption as well, and in the same era that people were finding out that the mentally retarded were being neglected by government agencies, they were also finding out that senior citizens were being abused by for-profit nursing home companies, during the 1970s nursing home scandals.

Robbed by public employee unions and by businesses, New York City turned, en masse, to the non-profit sector. The public employees and their unions stayed, and eventually collected their pensions, but the actual work would be done by others. Surely people could trust those who would dedicate their lives to charities in exchange for the modest pay they provide? Perhaps this era explains the “non-profit good, for profit bad” reporting of the Times up until a few years ago.

As a result of all the non-profit contracting, New York is one of the most contracted out local governments in the entire United States. For FY 2011 at the New York City Administration for Children’s Services, according to the FY 2012 budget proposal, just $529 million of $2.9 billion in total spending went to the wages and benefits of government workers. The rest went to contracts with the agencies that actually do the work of caring for needy children, almost entirely non-profits. The wages and benefits of public employees similarly accounted for only $175 million of the $903 million at the Department of Homeless Services, $582 million of the $1.9 billion spent by the Department of Health and Mental Hygene, and $1.2 billion of the $8.7 billion spent by the Department of Social Services. Most of the rest went for contracts, generally to “non-profit” health and social service providers, with much of the money passing through the Medicaid program.

But it isn’t just health and social services. Almost all of the New York City’s major cultural institutions, its zoos and botanic gardens and museums, though generally owned by the city and partially funded by the city, are run by non-profit organizations. So are the city’s libraries. After Parks Department workers were unable or unwilling to maintain Prospect and Central Parks in the wake of the 1970s fiscal crises, non-profit organizations were formed to do some of the work for them. The new High Line, Hudson River, Governor’s Island and Brooklyn waterfront parks are operated as non-profits from the get go.

It worked for a while, as new organizations inspired the same kind of dedication and sense of mission found in public agencies a generation or two before. But then the rot began to set in, founders were replaced by careerists, and non-profit executive pay began to soar. I recall reading the in the 1990s, when the dot.comers were getting rich off stock options, that the non-profit sector also needed to offer stock options to attract qualified workers. Perhaps the organizations could purchase options in unrelated for-profit companies so they too could receive big payoffs taxed at just 15.0% under the federal income tax rules? They were serious.

Many non-profits came to be essentially owned and operated by state legislators, their relatives and cronies, with an exchange of funds for support with the collection of signatures and other political assistance. Whatever good work they might have done at one time has become less and less a part of the mission.

And many “non-profit” “charities” now get almost none of their funding from actual donations. They rely on government funding instead, funding that is collected from people in taxes and does not have to be justified to (increasingly, given various non-profit scandals) skeptical donors.

Aside from buildings with rich people’s names on it, the absence of donations shows the attitude of New Yorkers toward the “non-profit” sector. For example, although New York’s private hospitals, by law, remain non-profit “charities,” how many would consider making a donation to one of them? You might as well donate to Exxon. As the Times reported in another previously un-Times like article, many hospital executives make salaries well into the seven figures, and rising.

What is the broader lesson of this sad history? One might conclude that there is no end-run around the hard work of reforming corrupt existing institutions by replacing them, as New York replaced government employees with non-profit contracts. That is a lesson that could perhaps be applied to charter schools. Sure, they might outperform regular public schools while motivated founders are in charge, but after 20 years receiving government money taxpayers have no choice but to contribute, they will surely devolve until just another self-interest group.

Past attempts at reform, however, have only increased my respect for “creative destruction.” Eventually, a culture of entitlement sets in that can only be ended when the exchange once again between those who pay and those who receive payment once again becomes voluntary. Consider the New York City public schools. There was a huge increase in funding. The central entire administration was mostly sacked and reorganized, along with many principals. Teacher aides were wiped out, along with untenured teachers. But since the schools were not declared “bankrupt,” the United Federation of Teachers contract remained, and within seven years the UFT had ensured that all the additional funding went to earlier retirement for its members. Again. Does anyone really believe the Long Island Railroad, where nearly all the workers AND managers were claiming disability pensions, can be reformed with that culture in place?

In business, consider the case of respected businessman Warren Buffet’s Berkshire Hathaway. He had a successor all picked out, but that successor suddenly resigned after it was discovered he was doing insider information side deals front running Berkshire Hathaway’s own trades. Buffet, according to a recent 60 Minutes report, has now asked his son, a farmer with no interest in finance, to replace him as Chairman of the Board. Perhaps because his soon is the only person he trusts.

Our institutions, it seem, cannot be reformed. They can only be replaced, preferably after bankruptcies that divest the vested interests entirely. But eventually the replacement organizations will also be corrupted, as founders with dreams are replaced with careerists with self interest in mind. That seems to be true in business, in government, and yes, even in charities.

Perhaps the lesson here is the saddest one. Self dealers have seized all our institutions, public and private and non-profit, and for the most part cannot be dislodged because of the power they have obtained. The result is a society in decline. How bad will things get before a re-boot becomes possible? Does the struggle to prevent collapse just allow those who have made deals with themselves to take more out?  There may be no good choices in the era of Generation Greed.

Today pre-K, tomorrow grade school and more. Not because it is better or even good, not because teachers aren’t needed or wanted, but because that is what will be left in the aftermath of Generation Greed. With the benefit of information technology and unemployed would-be teachers with no choice but to help out and work for peanuts, it might work for children with educated parents. For the rest, forget it, and kiss equal opportunity goodbye.

Let’s quote from my original post, Education in an Era of Institutional Collapse. “I have described the future of public services and benefits as ‘privatization’ and ‘placardization.’ By placardization, I mean that to the extent that public sector has anything worthwhile to offer, it will not be able to afford to offer it universally, and it will be allocated instead to insiders and those with connections by a variety of means. The way scarce parking is allocated to those with the connections to get placards, legal and illegal. By “privatization” I do not mean that the government will provide universal, equal benefits by hiring private contractors rather than public employees, as it does in the Medicare program or under a school voucher program. I mean that those who have the resources to provide what were once public services for themselves will be permitted to do so (as long as they are grateful for that permission), while those who lack such resources will be left to do without.”

Speaking of the need for permission and gratitude, according to the Times “in New York, advertisements for co-op schools pepper online parent groups once every month or two, especially in spring or early summer. But you will mostly hear about them quietly, on the playground or on play dates. Sometimes the groups are low-key because the school is formed by a circle of friends and there is no need for other children to join. The other big reason is their questionable legality…and in many cases, forming a co-op school is illegal, because getting the required permits and passing background checks can be so prohibitively expensive and time-consuming that most co-ops simply don’t.”

Hint hint. Campaign contributions to incumbent state legislators, and possibly “donations” to the UFT in exchange for "assistance."

Again, from the post several years ago. “The second difference between the future and the 1970s is that more middle-class families without connections and special deals, as a result of other social trends, might choose to live in New York City rather than flee to the suburbs, and the collapsing parochial school system, which was a lifeboat for the past 40 years, will not be there to serve them at anything like the current tuition levels. Here the ‘privatization’ half of the projected future comes in. Of course those who are sufficiently affluent will be able to afford expensive private schools, but there is likely to be a shortage of positions in such schools in addition to, for most families, a shortage of cash to pay for them. For the middle class, the only option -- one I thought about myself back in the previous semi-institutional collapse of the mid-1990s when my children were denied the public school education we had paid for -- is assisted home schooling.”

“As I described previously, if New York City’s current instructional spending per child of $11,400 in FY 2006 was used to hire home-based teachers who lived in their neighborhood and taught children in their homes, the way people hire music teachers and tutors, those teachers could be given $136,800 to teach 12 children -- for their wages, health insurance, IRA contribution, and teaching materials. If the parents were willing to pay for after-school and summer care, and the teachers were willing to provide it, they could earn additional money over and above the $136,800 just to sit in the park while the kids played or be around as the did their homework or played games. And they would have a class size of 12. There will be no such public funds for homeschoolers in the future, however, because the public retirement crisis in the school system will drain all the money off. Instead, in addition to facing a much higher tax burden, tomorrow’s parents will have to fund such arrangements themselves.”

“The support of employers for flexible schedules will be critical, because having one parent stay home to educate their children, like a ‘Gossip Girl’ private school, is a luxury few middle class parents will be able to afford -- especially at tomorrow’s tax levels. Instead, expect parents to band together in groups of eight to ten, with one parent from each family working a four day week or nine days in two weeks. These parents could educate the children as a group, they way supplemental child care was provided by the babysitting co-op we were in during our children’s pres-school days. In addition to supervising the children’s education on their non-work days, the parents would each pay perhaps $3,000 per year (in today’s money) for a professional teacher -- who wouldn’t get anything like the $136,800 per year described above -- to provide assistance. Assisting 25 such children in this way, such a teacher could earn $75,000 per year, with some perhaps under the table in cash or handed over as ‘gifts.’” Without health or retirement benefits of course, and probably without Social Security of Medicare the way the federal government is going.

I predicted that those who went this route would be at first persecuted and then supported by a city desperate to avoid the cost of providing services while continuing to have residents to tax. And acknowledging that given the quality of education it could afford to provide, parents would have no choice. “Expect the NYC public schools to eventually provide their own textbooks and lesson plans to willing parents, with a far more demanding schedule of student assignments than its teachers will be required to assign.” And according to the New York Times, one City Councilmember is already ahead of the curve. “There’s a fairly stringent code and byzantine process for getting certified and code-compliant,” said City Councilman Brad Lander, a Democrat from Brooklyn, whose office held a meeting over the summer for any co-ops interested in pooling their resources and securing permits. “Some are genuinely for the safety of kids, and some are more debatable.”

The diminished future will not be announced, nor will there be a "decision" to bring it into being.  Just a series of non-decisions to pay for the past deals, followed by adaptations.  Ah well, this transit buff and former New York City Transit employee has completed his work for the week here at the office. It’s time to take the nine mile trip home. On a bike I pedal myself.

Noted actuary Girard Miller who writes for Governing Magazine, for those plans scheduled to run out of money in less than 25 years “without causing a panic, it's clear that the time has come for stakeholders, trustees and plan sponsors in these systems to ask penetrating questions and get to work on solutions -- pronto. That includes the unions whose members must contribute to the solutions and stop playing the ‘not me’ entitlement game.” He lists 28 plans among those in desperate shape, including the New York City Teachers and New York City Employees, but the Boston College report only included larger plans. Other analyses have shown the NYC Police and Fire pension plans to be worse off than the NYC Employees retirement plan, though not as bad off as the Teachers. “This abyss,” said Miller, “is the result of a decade or more of benign neglect by all parties at the table.” Actually in New York, there have been additional retroactive pension enhancements in the past decade, and deals to borrow money from the pension plans to pay pension contributions, which is much worse than benign neglect.

The data presented in the table in the rear of the BC report is stark. According to the analysis, the New York City Employee Retirement System, which also includes workers in New York City Transit, claims to be 76.2% funded. But based on money it actually has, not money it pretends it has on the assumption that past market declines didn’t happen, it is only 64.4% funded. And if one uses the blended rate of return recommended by GASB it is only 38.8% funded, and will run out of money in 2034. That is, none left, and with all those tax-free pensions still owed, and guaranteed by the state constitution. The situation for the New York City Teacher’s retirement fund is drastically worse – a claim of 64.9% funded, but only 54.1% funded based on money that actually exists, and schedule to run out of money in 2023 if future returns as are GASB expects.

The most controversial aspect of the GASB proposal concerns the expected future rate of return. GASB has proposed a “blended rate” in which “each plan will project the number of future years in which assets on hand, investment returns, and certain future employer and employee contributions will be sufficient to pay annual benefit payments. The payments made in those years are discounted by the expected return on assets. Meanwhile, benefit payments that occur in years after assets have run out will be discounted by the high-grade municipal bond yield.”

Accordingly, since the New York City Teacher’s retirement plan is expected to drain all its assets to pay benefits in the short run, leaving nothing after 2023, it can no longer assume that risky investments will be held for the long term, so its expected return is just 4.7%. Meanwhile, since the New York State Teacher’s retirement plan is closer to fully funded, it can hold assets longer and can assume a rate of 7.4%.

In reality, the expected rate of return has no effect on how much must be contributed in the long run. That is determined by the money paid out. But it does determine the extent to which politicians and unions can lie about what the situation is in the short run, and defer costs to a future they don’t care about, for “another decade of benign neglect” in the words of actuary Miller, until nothing is left.

Given that all assets continue to be overpriced, and the income on those assets remains limited relative to those prices, the expected rate of return is likely to be low. Until asset values fall, meaning there is theoretically less money in the pension funds. I don’t find the 4.7% assumption for the NYC Teacher’s plan to be low for the period through 2023, though higher returns might resume thereafter. The 7.4% is unlikely given current interest rates and dividend yields. The assumed 8.0% return could only occur if the Fed succeeds in inflating away our debts and gets the inflation rate up to more than 4.0% per year. That is not the way things look today.

The one certainty about the rate of return, moreover, is that when you have nothing you have no earnings. Consider the funded status right now – just 54.1% for the New York City Teacher’s retirement plan based on assets that actually exist. That is, past taxpayers funded half of the retroactively enriched pensions NYC teachers are now entitled to receive, while those teachers were working. And future NYC taxpayers will have to pay the other half, PLUS the cost of the pensions of teachers working from now on, and the retiree health benefits of both groups. Perhaps by eliminating education. Game over, the UFT wins, as in the 1970s. Now will someone make them fess up?

It is clear that the value of the NYC Teachers’ pension plans cannot be allowed to go any lower. NYC should be paying in more than the ever-escalating amount the retired are taking out for the next decade or two. That means assume huge cuts to the classroom, despite sky high school spending overall and high taxes, for decades. Perhaps an end to pre-K. Perhaps an end to K. Perhaps the elimination of the senior year of high school. Perhaps on-line high school taught by computers. Certainly after school activities and sports have to go, along with any attempt to educate the poor. The alternative is even more sweeping things under the rug, followed by even more massive cuts in school spending, despite even higher taxes, in a decade or two.

And how about New York City Transit, included in the New York City Employees retirement system? In 2000, then-Mayor Giuliani cut a deal to slash New York City’s contributions to the pension plans for two years (giving him extra money to throw around while running for Mayor), in exchange for the employees getting to slash there own contributions (by 75% over their careers) permanently. Now MTA head Joe Lhota was Giuliani’s budget director at the time. Was he involved with that deal? How did he justify it then, and what does he think of it now? Is a huge increase in pension spending, and a huge cut in transportation, in the MTA’s plans?

With multiple actuaries finding that New York City’s public services are doomed thanks to Generation Greed, what does the official New York City actuary have to say? He was supposed to issue a report on the status of the pension funds last June. But didn’t. Where is it?

We have two former New York City Comptrollers running for Mayor. One is Bill Thompson, who oversaw the diversification of the New York City pension funds into “alternative assets” such as hedge funds and private equity, on the grounds that riskier investments were required to achieve the rate of return needed to pay for all the pension enhancements around 2000. My response was this post: Hedge Funds, Kiss Our Assets Goodbye. Now the Financial Times is reporting that U.S. pension plans have $billions trapped in “zombie funds” with no prospect of a positive outcome. Thompson, meanwhile, was silent when Mayor Bloomberg and UFT head Randi Weingarten said cutting the retirement age for teachers would “save money.”

Then there is John Liu, the pension deceiver himself, who issues a press release saying that NYC pensions cost almost nothing and are not a problem, based on a report that has pension costs in small print tables in the rear that are many, many times those in bold print in the front. Despite the numbers in the back being based on vastly more optimistic assumptions than GASB is prepared to accept. What does he have to say about this?

What about the recent deal to change the way the pension funds are managed? Is the plan to claim that future returns will be higher under the new system, so not as much money has to be contributed to the pension plans? That is baloney, unless the city has been lying when it claimed that over the long term its returns have been good.

And what about the press? The top priority, according to the Daily News, is for current and retired workers to get everything they and the state legislators they control have promised themselves. The entire hole they created it to be filled by drastic service cuts, since the rich don’t require public services, and lower pay and benefits for future public employees, since younger generations don’t matter either. The News presumably also likes the Ryan plan at the federal level – even more Medicare benefits and no change in Social Security for those 55 and over, paid for by borrowing to keep taxes low, and offset by drastic reductions leading to poverty and ill health for those 54 and younger. And then in other publications, Mort Zuckerman tut tuts about the future younger generations are being left with.

It’s past time to be honest about what the future will be like for those living in New York City, New York State, and the U.S. Generation Greed doesn’t want to talk about it. And no wonder.

In San Francisco, on the other hand, there is a higher minimum wage for everyone – now $10.20 per hour. Not just for those with a special relationship with the government, who are then made better off than those with no such relationship. Now San Francisco is not the equivalent of New York City. It is the equivalent of Manhattan. So I wouldn’t argue that all of New York City should have a higher minimum wage. But perhaps Manhattan and the downstate suburban towns that zone out the working poor should. To offset the cost of getting to work on a transit system that New York’s political class is sending back to the 1970s. Or the risk of long bicycle rides on suburban roads where the Lexus SUVs might just cement your low status by running you over. The political class and the executive class do pretty well in SF also, but I guess they have some money left over for the serfs.