City May Save $300M under UFT Sweetener; Early Retirement Tab Offset by Payments of Future Staff

By MEREDITH KOLODNER

ROBERT NORTH: Reduces city's long-term cost.

The United Federation of Teachers' early retirement plan, despite reports of heavy costs to the city, will easily pay for itself and potentially result in hundreds of millions of dollars in savings to the city in the long run, according to fiscal experts.

If the legislation is signed into law by Governor Spitzer, the city will make up to $100 million in additional pension pay-outs the first year as older Teachers take advantage of the opportunity to retire five years earlier, at age 55 after 25 years of service.

New Teachers' Burden

But two factors will combine over the next two decades to offset the city's increased pension payments. All new Teachers entering the system are mandated to contribute an extra 1.85 percent of their salaries towards their pensions for 27 years. Those payments will more than cover the cost of the pension deal for themselves and for the incumbents.

In addition, senior Teachers who retire at the top of the pay scale will be replaced by those who enter the system at about half of the maximum salary. The Bloomberg administration estimated the resulting salary savings at $43.1 million next year, rising to $101.2 million by 2012.

"The change is expected to reduce the average long-term cost of the plan," said Robert C. North Jr., the city's Chief Actuary. "The rate depends on how rapidly new Teachers are hired to replace older Teachers who leave the system."

The pension bill, negotiated by the UFT with mayoral aides last October, requires Albany's approval. It passed the Senate and Assembly by wide margins and is awaiting the Governor's signature. The deal would allow current Teachers in Tiers II, III and IV to opt into the plan and retire with a full pension at age 55 after 25 years of service, replacing the current deal, which allows fully vested retirement after 30 years of service or at age 62.

Newcomers Work 27 Years

THREADING A NEEDLE: United Federation of Teachers President Randi Weingarten succeeded in getting early retirement for all her members, but to avert costing the city money so as to ensure Mayor Bloomberg's support for the legislation, she had to require future members to contribute more to the pension system throughout a 27-year period.

New Teachers would be mandated to pay into the new plan and would be allowed to retire with full pensions after 27 years of service at age 55. Those who met the service standard but retired younger would have their pension allowances reduced.

The city's fiscal note puts the cost of the 55/25 plan for all current Teachers at about $315 million. That estimate is based on the assumption that everyone who can benefit from the plan will take advantage of it - about 40 percent of the current Teacher population. In the first year, the city expects 1,000 additional Teachers to leave the system as the result of the new plan.

Whether a Teacher benefits from the change depends on how old she was when she entered the system. Only Teachers who began their career between ages 25 and 37, without a break in service, would be better off.

For example, a 25-year-old Teacher would already have 30 years of service when she turned 55, so she would be facing the same retirement age as under the previous plan. Similarly, a Teacher who entered the system at age 37 would have 25 years of service soon after he turned 62.

These ages would change for Teachers who have children or other family obligations and leave the workforce for a number of years to take care of them.

Helps 30% of New Staff

Based on the current age demographics of Teachers entering the system, about 30 percent of future hires would benefit from the new plan, allowing them to retire at age 55 after 27 years of service.

The potential savings come from two financial shifts caused by the change in retirement age.

Mayor Bloomberg's executive budget proposal estimates the salary savings from lower-paid Teachers replacing high-paid ones at more than $300 million over the next four years. That calculation does not take into account, however, the fact that the city will have to pay health-care costs for both the retirees and the new Teachers, which will cut into the savings to some extent.

But while the city will be paying out pensions to current Teachers retiring five years earlier, and to the "unborn" three years earlier, it will begin to receive increased payments of 1.85 percent from both the current Teachers who opt into the system and from every new Teacher hired. That reduces what the city will have to contribute to keep the Teachers' Retirement System flush.

"The additional payments are sufficient," said Mr. North. "I do believe 1.85 percent pays for the additional benefits."

City Nets $300M

Two fiscal experts, who requested anonymity, estimated that the city would save money in the long run, up to $300 million over 25 years. That's because most of the cost of the plan is carried by the unborn, who will eventually pay more into the system than they take out in added benefits. The same was true for the Correction Officers Benevolent Association in 1990 and District Council 37 in 1996 when they got the retirement age reduced for their members.

For current Teachers, there is no retroactive cost, so those who have already reached age 55 and have 25 years of service can retire at full pension. If a current Teacher is 53 years old and has 23 years of service, she pays the 1.85 percent for only two years. A typical active Teacher covered by the new plan will have about 12 years of service, so he will pay the 1.85 percent on average for about 13 years, if he decides he will benefit from the new plan and opts into it. But a new Teacher will pay that extra 1.85 percent for 27 years, regardless of whether she benefits from the change.

All Teachers must pay 3 percent of salary towards their pensions for the first 10 years, regardless of tenure and which plan they are part of. Assuming the bill is enacted, new participants will pay 4.85 percent for the first ten years in the system and 1.85 percent for the next 15.

$900 a Year More

The current starting salary for a Teacher with a master's degree is just under $49,000, making a first-year Teacher's additional contribution about $900 per year.

All current members of the TRS in Tiers II, III and IV, including school administrators, are eligible for the 55/25 plan. Several titles in the Board of Education Retirement System, such as Nurses and Therapists, can also opt in.

But not all budget-watchers are convinced that the plan will be cost-neutral. "Nobody disputes that it will cost more in terms of pension contributions," said Charles Brecher, the executive vice president of the Citizens' Budget Commission. "I assume that the added piece doesn't pay the cost. Basically my assumption is, why would the UFT agree to it if they were paying more to get the benefit?"

The UFT was offered a 55/25 plan around the same time as DC 37, but officials refused because they did not want to raise costs for incumbents.

Protected Those on Job

"We knew that we had to get a cost-neutral stance for the city," said UFT President Randi Weingarten. "We never wanted to do something that mandated payments on current incumbents."

The opt-in clause and the relatively low cost of 1.85 percent made the deal palatable to the union's leadership.

The UFT's delegate assembly voted overwhelmingly in favor of the deal last October. It was coupled with a more controversial initiative, long sought by the Bloomberg administration, to allow school-wide merit pay at a select number of schools whose staff voted to take part.

In terms of the mandated costs for new employees, Ms. Weingarten pointed to the current economic climate, in which companies and local governments have been cutting pension plans and forcing workers to pay substantially more towards their retirement. "If you look at all that we've done," she said, "we are going against the tide in terms of financial plans. Most people can't retire until age 62 or even 67, and defined contribution plans are being cut."

'Can Leave Now After 25'

She added, "We know that 25 years of service is basically the career of a Teacher. It's really hard work to teach, and now, after a career of service, people can leave."

But some Teachers have seen the budget savings projected by the city and have questioned aspects of the deal.

"If they're saving money on our backs, it should come back to us," said James Eterno, the UFT chapter leader at Jamaica High School.

The 22-year teaching veteran believes that Teachers should get something in exchange for the extra revenue being generated by future members' payments.

Ms. Weingarten noted that the Mayor's budget did not present the entire picture, burying the pension costs and savings in another section where they could not be teased out. She argued that if the city saved money, the union would not turn a blind eye because it would work to its advantage. "They have done a version of attrition bargaining by putting in salary savings without putting in offsetting pension costs," she said. "If this is the new process in terms of how they frame out costing issues, that's a terrific step for Teachers in the future, because we will use that in the next bargaining round."