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THE IMPACT OF OVERTIME ON THE PENSION TIME BOMB

This White Paper explores the extent to which the inclusion of overtime into the pension calculation of retired government employees impacts the taxpayers.

It is our conclusion that the factoring of overtime into the final pension figure inflates taxpayer obligations to the tune of tens of billions of dollars over the next two decades.

There are few, if any, spending reforms that can have a greater impact on state and local budgets then passing legislation that would eliminate overtime from pension calculations.

SUMMARY

1. Base salaries in the public sector now exceed salaries in the private sector for comparable jobs. 

2. Pensions are typically based on the average of the highest three years of earnings (usually the last three years of service).

3. Pensions are not limited to just base pay. Overtime (OT) earnings are included as well.

4. Traditionally, senior employees who have announced their intention to retire, load up on overtime to inflate their pensions. Many contracts actually require that senior members get first shot at the overtime. 

5. The final pension received by an employee ranges from 50% to over 60% of the total earnings, which include base pay and overtime. This creates an incentive for employees to maximize overtime in their final years.

6. Many fire and police employees retire on a disability pension, which provides for a pension that is 75% of the final earnings. 

7. In 2010, in the midst of the Great Recession, state legislators acknowledged the deleterious impact overtime being factored into pensions was having on taxpayers and government budgets. Consequently, the state passed legislation creating a new Tier 6 in the retirement system, which limits the amount of overtime that can be factored into the pension to approximately 15% of the base salary. 

8. While this sounded like a major reform, it does little, to nothing, to stop the hemorrhaging we are presently experiencing, because the limits only apply to employees hired after April, 2012. 

9. There are hundreds of thousands of active employees in the New York State and New York City Retirement Systems who are yet to retire. The vast majority were hired prior to the Tier 6 reforms.

10. While the method of determining the number of retirements, and the amounts the retirees will earn in overtime in their highest three years, is not an exact science, we can attain a ballpark figure as to what these figures will be, based upon past performance. 

11. If typical retirements and overtime earnings materialize, we can project that the cost to taxpayers associated with overtime being calculated into the pensions of the still active public sector employees over the next 20 to 25 years will be as follows:

12. For the employees in the New York State Employee Retirement System (NYSERS), excluding Police and Fire, the cost will be $14.12 billion over 20 years and $21.86 billion over 25 years (if utilize average overtime for all employees). But, if we use the average overtime of workers who are nearing retirement, those numbers will be even more mind boggling: $24.84 billion and $38.45 billion, respectively.     

13. For the 35,000 Police Officers and Fire Fighters outside New York City, the cost will be $5.14 billion over 20 years and $7.95 billion over 25 years.

14. For 34,000 New York City Police Officers, the cost will be $2.65 billion over the next 20 years, and $4.11 billion over 25 years, if we incorporate the average overtime amount of $14,000. If we factor in the same overtime of $37,000 for senior officers nearing retirement, as seen in other law enforcement departments, the numbers increase to $6.74 billion and $10.43 billion respectively.

15. For 11,000 New York City Fire Fighters, the cost will be $796 million over 20 years, and $1.23 billion over 25 years, when factoring in the average overtime of $20,000 for all employees. If we factor in the estimated amount for senior employees near retirement, the numbers increase to $1.05 billion and $1.6 billion, respectively.

16. For New York City Corrections Officers, the cost will be $3.15 billion over 20 years and $4.87 billion over 25 years.

17. For MTA employees, the taxpayer burden will exceed $5.69 billion over 20 years and $8.816 billion over 25 years.

18. For New York City Sanitation employees, the cost will be $567.12 million over 20 years and $877.69 million over 25 years. 

19. For Port Authority workers, the cost over 20 years will be $851.2 million, while over 25 years it will cost $1.317 billion. (Split between New York and New Jersey.)

20. For New York City employees, excluding Transit workers (who are incorporated into the MTA numbers herein) and other city departments cited above, it will cost $5.78 billion over 20 years and $8.95 billion over 25 year.

21. It is important to note that these figures are not adjusted to account for wage inflation. Thus, the astounding numbers cited herein are much lower than they will actually be once the cost of living is taken into consideration. 

22. The Consumer Price index increased by 73% over the past 25 years and by 54% over the past 20. Assuming the years to come follow a similar pattern, the actual burden to taxpayers would increase significantly.

23. Adjusted to inflation, the amount taxpayers will be obligated to cover is as follows:

NYSERS: $21.74 billion over 20 yesar and $37.8 billion over 25 years if use average of all employees.  If use average for those retiring, it equals $38.25 billion over 20 years and $66.52 billion over 25 years.

24. Police and Fire (outside New York City): $7.92 billion over 20 years and $13.75 billion.

25. New York City Police:  if using average overtime for all employees, it would be $4.08 over 20 years and $7.11 billion over 25 years. If use amount for employees closer to retirement, it would be $10.38 billion over 20 years and $18.04 billion over 25 years. 

26. New York City Fire Department: $1.62 billion over 20 years and $2.77 billion over 25 years.

27. New York City Correction Officers: $4.85 billion over 20 years and. $8.43 billion over 25 years.

28. MTA Workers: $8.76 billion over 20 years and $15.25 billion over 25 years.

29. New York City Sanitation: $873 million over 20 years and $1.52 billion over 25 years.

30. Port Authority: $1.31 billion over 20 years and $2.28 billion over 25 years.

31. New York City Employee Retirement System, excluding Transit and departments cited above: $8.9 billion over 20 years, and $15.48 billion over 25 years.

32. THE TOTAL AMOUNT THAT TAXPAYERS WILL PAY OVER THE NEXT 20 YEARS FOR OVERTIME FACTORED INTO PENSIONS IS ESTIMATED TO RANGE FROM A LOW OF $32.91 BILLION (when using primarily average salaries from all employees) TO $54.48 BILLION (when using the average overtime for those senior employees actually retiring).

33. Upon factoring in an inflation rate of 54% over the next 20 years, those numbers jump to $50.68 billion and $83.9 billion respectfully.

34. To reverse the unsustainable burden being placed on taxpayers, the Center recommends passing legislation or a constitutional amendment that would bar overtime from being factored into the future pensions for all public sector employees, including those hired prior to the implementation of Tier 6.

35. The Center also recommends considering the establishment of more financial control boards, that can restructure outlandish contractual provisions, and the expanded use of Chapter 9 bankruptcy filings for overburdened government entities. 

NEW YORK STATE’S TEN WORST LAWS FOR TAXPAYERS

In the recent past, this Center has published its list of the 10 worst laws in New York State from the perspective of the over-beleaguered taxpayer, When we say over-beleaguered, we mean the most heavily taxed residents in the nation. New York has the highest combined state and local property taxes of all the 50 states.¹ While income taxes for the middle class is a relatively modest 6.65%² (though numerous states, including Florida and Texas have no state income tax at all), surcharges on higher earners can lead to total income taxes of almost 9%. Those living in New York City can add on an additional 3.65%³ in income taxes. Combined state and local sales taxes hover near 9%.

But, perhaps the biggest complaint emanating from the New York taxpayer is the dreaded property tax. New York’s Westchester County holds the dubious distinction of being at the top of the list of the most expensive property taxes in America. The average property tax in this suburban county just north of New York City is an astounding $17,000 per year. Nassau County on Long Island in sixth on the list at almost $12,000 per year per household.⁴ 

There are numerous factors contributing to those confiscatory tax levels, including multiple overlapping levels of government and the high labor costs and related benefits and perks distributed to public employees. This is in large part due to the extraordinary strength of municipal unions in the state.

In most New York schools and governments, personnel costs constitute 60 to 70% of the entire budget. These costs are not only the result of generous annual percentage increases obtained at the bargaining table, but also are attributable to state imposed regulations and directives, more commonly known as mandates. 

The New York State Legislature is notorious for dictating that local governments abide by these costly requirements, while usually leaving it to the municipalities and schools to come up  the money to carry out the mandates. Since local governments are so highly dependent on property taxes. mandates are largely responsible for giving New York it’s reputation as a high cost state.

Below is a list of New York State’s 10 worst laws that our center has published in the past, along with our proposed reform. It is noteworthy that almost all of these are a form of a mandate:

Enact pension reform by installing a 401K–type defined contribution pension for the public sector, as opposed to the present defined benefit pension, which keeps taxpayers on the hook for a guaranteed rate of return. 

Cap mandatory arbitration awards that have propelled law enforcement salaries over the $200,000 mark.

Eliminate overtime from being factored into the base of a pension. This practice has allowed for pensions to be dramatically inflated. Six figure pensions are now quite common.

End the Triborough Amendment that provides for automatic step salary increases in the public sector, even after a contract has expired. 

Control Medicaid benefits in New York to levels no greater than required by the federal government. New York taxpayers expend more than a billion dollars above the standards established by the Feds. For instance, while the Feds allow Medicaid to be made available to legal immigrants here more than five years, New York voluntarily waived the five year threshold. 

End the Wicks Law.  This relic from the early 1900s was originally enacted as a way to supposedly counter fraud in the letting of contracts. Instead of allowing the general contractor on public works projects to choose certain sub-contractors, the Wicks Law mandates that the subs be hired through a bidding process outside the control of the general contractor. It has been estimated by numerous budget experts that the law increases by up to 30% the cost of constructing public buildings in the state. 

End the Scaffold Law that holds building owners liable for accidents occurring at their construction sites even though they might not have been negligent in any way. Any employee contributory negligence is discounted.  New York is the only state that has such absolute liability.

End disability abuse that allows for some workers to get 3/4 of their pay tax-free if injured on the job. This has resulted in some employees (mostly in law enforcement) getting more staying home than if they are actually working, thereby eroding incentive to get back to work.  Also end the “presumption” that heart and lung ailments are necessarily job related.

End sick day abuse. Some local governments allow for employees to cash out huge amounts of unused sick days upon retirement. Some Long Island police, for example, get 26 sick days a year, and many of those not used can be banked for payment upon retirement. The employee is paid for the day at the salary rate he or she has in the last year of service. This has led to some employees getting severance packages of almost a half-million dollars. The New York City policy for sick days of “use it or lose it” should apply.  

End 20 year retirements.  While the idea of allowing “20 years and out” policies in New York may have in the past been palatable, it is hard to justify such a policy with folks living so much longer today. By the time an officer age 23 reaches 83, the taxpayer could be funding one active and three retired officers (through their pensions) for that one position. It is simply unsustainable.       

As noted above, higher salaries for public employees play a huge roll in requiring a higher property taxes level to support them.

Teachers’ salaries in some districts on Long Island average well above six figures. Average salaries in the Central Islip district exceed $120,000, with veteran teachers bringing in over $160,000 annually.⁵ 

Most schools’ superintendents and school board members will tell you that a key contributor to the rising salaries is the aforementioned Triborough Amendment, 

The Triborough Amendment provides for automatic step salary increases even after a contract has expired. A step is a 2 to 4% annual raise above that of the percentage increase negotiated into the contract. In essence, it is a double raise, since union members will get increases in their paychecks whether or not a contract has expired, there is little incentive for the union to offer givebacks or to compromise to any great extent with management. They can wait it out, and usually do, quite successfully. The Triborough Amendment is a mandate unique to the Empire State.

MANDATORY ARBITRATION’S DELETERIOUS IMPACT

Law enforcement salaries are another factor leading to high taxes, especially on Long Island, where state ordered mandatory arbitration is in effect. 

In the late 1960s, the New York State Legislature passed the Taylor Law, which banned law-enforcement personnel from striking, but also required management and the union, upon an impasse in negotiations, to submit their bargaining proposals to an arbitrator, whose decision will be binding on both parties.

On Long Island, these arbitration panels have traditionally been extraordinarily generous in granting wage and benefit increases. Nassau and Suffolk police had the good fortune of having arbitrators use one of the counties as a base upon which to award a salary increase for the other. Thereafter, that newly established salary became the base for the previous county’s award when their time came around..So, if an arbitrator had previously granted a 4% wage increase to Suffolk officers, that new base, rather than inflation or the public’s ability to pay, was often used as a benchmark for Nassau’s subsequent increase. This became known as the “leapfrog effect.”

A 2015 Empire Center report⁶ stated:

The Suffolk County government’s 2,387 employees belonging to the Police and Fire Retirement System (PFRS)—consisting almost exclusively of Suffolk County police officers—were paid an average of $154,474 while Nassau County’s PFRS members averaged $149,645.

The ten highest-paid local government employees on Long Island were:

According to the Empire Center, Nassau County Police Department led the way in high pension costs in 2019, with three-quarters of its 242 new retirees receiving annual pensions above $100,000.

Arbitration explains why salaries on Long Island were far more lucrative than salaries for New York City officers. – even though city cops often were dealing with a much more dangerous and hostile patrol environment. 

Around the turn of the new century, the state legislature finally authorized mandatory arbitration for New York City police as well. City cops are now starting to see their salaries slowly climb. However, mandatory arbitration for Suffolk and Nassau cops for decades before had so distorted salaries on Long Island that at one point, the $57,000 starting salary in Suffolk County was higher than the peak base salary for their New York City counterparts. (Since then, Suffolk starting salaries have been lowered.)

By 2018, the average Suffolk detective on top step had a salary of over $225,000 per year. ⁷

THE TIER SYSTEMS AND THE HIGHEST THREE YEAR AVERAGE

The burden on taxpayers stems not just from the salary itself, but from the fact that pensions are based on the highest consecutive three-year salaries. Employee’s pensions usually fall in the range of 50 to 60% of the average of their last three years’ salaries, depending on the years of service logged and the tier to which that employee belongs. 

New York State pensioners fall into one of six tiers developed by the state legislature over the past several decades. Those employees hired into the system in the 60s and 70s were usually Tier 1 employees, while those hired after 2012 are part of Tier 6. Generally, the lower the tier, the more generous the benefits. ^{8 link2}

Below is a chart detailing which tier an employee would belong to, depending upon the employee’s hiring date:

ERS Tiers of Membership (as of March 31, 2018)

Tier 1 joined before July 1, 1973 (0.4% of members)

Tier 2 joined between July 1, 1973 and July 26, 1976 (0.5% of members)

Tier 3 joined between July 27, 1976 and August 31, 1983

Tier 4 joined between September 1, 1983 and December 31, 2009 (58.3% of members are in Tiers 3 & 4)

Tier 5 joined between January 1, 2010 and March 31, 2012 (7.6% of members)

Tier 6 joined on or after April 1, 2012 (33.2% of members)

PFRS (Police and Fire Departments outside New York City)Tiers of Membership (as of March 31, 2018)

Tier 1 joined before July 31, 1973 (0.1% of members)

Tier 2 joined between July 31, 1973 and June 30, 2009 (67.6% of members)

Tier 3 joined between July 1, 2009 and January 8, 2010 (0.6% of members)

Tier 5 joined between January 9, 2010 and March 31, 2012 (5.5% of members)

Tier 6 joined on or after April 1, 2012 (26.2% of members)

_________________________________________________________________________

As time went by, and officials became cognizant of how unsustainable the generous perks were in the early days, they gradually pulled back on some of the more extravagant provisions as new tiers were enacted for future employees.

Tier 1 employees are capable of retiring with the most lavish pensions. Not only was the base salary in play, but so was compensation for overtime, and even other perks such as vacation days. 8A

While the bonus for vacation days was eventually modified in future tiers, overtime continues to be factored into pension calculations.

In 2011,  the New York State Legislature – in the midst of a brutal recession – limited the amount of overtime that can be factored into an employee’s pension to 15% above the base salary.⁹ The catch is that the limitation only applies to employees hired after April, 2012. It will take decades for taxpayers to see the impact of this reform. In the meantime, there are hundreds of thousands of employees hired prior to that date who will be retiring in the next few decades, while still having overtime factored in to their pensions. 

It is also noteworthy that as of 2018, the cap for some workers has begun to rise along with the Consumer Price Index.

THE INCENTIVE TO MAXIMIZE OVERTIME

Understandably, this creates a large incentive for those employees to maximize the amount of overtime worked and earned in their final three years.

It is standard in many municipal contracts to give overtime preference to senior members. Moreover, there is often a wink and a nod system in place whereby employees and management understand that the overtime will be steered to the near retirees. As to the new employees, they are taught to sit tight, because their day will come..

The extent to which the provision allows final pensions to be artificially inflated was exemplified by the Empire Center for Public Policy’s exposure of outlandish overtime and pensions earned by various MTA employees in 2018 and 19. In one notorious case, employee Thomas Caputo earned an unfathomable $344,000 in overtime in his final year of service, thereby bulking his final year earnings to an astounding $460,000 and his annual pension of approximately $162,000 per year. ¹¹ 

Since these revelations, the governor, state legislature, editorial boards and political pundits have been calling for criminal investigations to determine how these overtime earnings could’ have gotten so out of control.¹² Our Center respectfully suggests that this focus is misplaced.   

It is not the illegal overtime that is killing taxpayers – it is the legal variety.

This paper will show just how much an obligation overtime is placing on taxpayers who must foot the bill for these inflated pensions.

UNLESS THE STATE LEGISLATURE TAKES ACTION TO PREVENT OVERTIME FROM BEING FACTORED INTO THE PENSIONS OF THOSE EMPLOYEES HIRED PRIOR TO APRIL 2012, STATE AND LOCAL GOVERNMENTS WILL FACE A SPENDING TIME BOMB THAT COULD SPELL IMMENSE FINANCIAL HARDSHIP FOR NEW YORK TAXPAYERS.

PREVIOUS EXPOSE’S OF THE PENSION TIME BOMB

The impact of overtime on taxpayer obligations has been documented elaborately in the past.  

A New York Times article ¹³, as far back as May 20, 2010, exposed the abusive manner in which overtime was padding pensions. It is remarkable to consider that almost a decade ago there were over 100 law enforcement and retired firefighters in just one small city earning more in retirement than when they were working. 

The article noted:

In Yonkers more than 100 retired police officers and firefighters are collecting pensions 

greater than their pay when they were working. One of the youngest, Hugo Tassone, 

retired at 44 with a base pay of about $74,000 a year. His pension is now $101,333 a 

year. 

It’s what the system promised, said Mr. Tassone, now 47, adding that he did nothing 

wrong by adding lots of overtime to his base pay shortly before retiring…

The city has even arranged for its police to put in overtime as flagmen on Consolidated 

Edison construction sites. Though a company is paying the bill, the city is actually 

reporting the work as city overtime to the New York State pension fund, padding future 

payouts – an arrangement at odds with the spirit of public employment, if not the law…

According to pension data collected by the New York Times from the city and state, 

about 3,700 retired public workers in New York are now getting pensions of more than 

$100,000 a year, exempt from state and local taxes. The data belie official reports that 

the average state pension is a modest $18,000, or 38,000 for retired police offices and 

            firefighters. (The average is low, in part, because it includes people who worked in 

government only part time, or just a few years, as well as surviving spouses getting 

partial benefits.)…

David Simpson, a spokesman for the mayor of Yonkers, said pension cost projections 

were ‘often lowballs’ so the city could get stuck. “Once you give something you can’t 

take it away,” he said.

Police pension and overtime have been a sore point in Yonkers for many years… 

“The system encourages police to take as much overtime as they can in the last 

year before retirement. (Emphasis added.) That’s the way the system is structured” he 

            said. “There’s nothing illegal or unethical about this.”

Census data from 2008 show that the typical state or municipal pension is substantially 

richer than the typical company pension – $15,941 versus $7,904 – for retirees 65 and 

older. By tradition, public employees have said they accepted lower salaries in                exchange for better benefits, but the Census data show this has not been true for a         number of years. In 2008 the median pay for a worker in the private sector was $39,877, compared with $45,124 for a state or local employee.

An updated article on Yonkers’ runaway pensions paints an even more dire predicament.  Citing a recent Empire Center report, the USA Today Network, noted:

A majority of the newly retired members of the Yonkers Police Department are eligible to receive annual pensions in excess of $100,000, well above the state average, according to a new data released Tuesday…Of the 39 police officers retiring from the department this year, 26 will be receiving annual pensions of more than $100,000. ¹⁴

A 2014 Newsday article¹⁵ cited the large number of retirements experienced because of high overtime earnings:

(Police Commissioner) Krumpter said between 55 and 65 percent of the police force is eligible to retire, which doesn’t include the department’s 1,201 civilian employees. Police officers are eligible to retire after 20 years with an annual pension equaling 50 percent of their salary.

The projected increase is being generated by the millions in overtime pay officers have earned in recent years as the department has dealt with workforce reductions meant to close budget gaps, coupled with state pension rules dictating payments based on the three highest salary years, department officials said.

Nassau police reported 134 retirements in 2013 — 85 officers and 49 civilian employees. In 2012, 211 employees retired — 138 officers and 73 civilians; in 2011 there were 123 retirements — 43 officers and 80 civilians. And in 2010 there were 242 officers — 148 officers and 94 civilians, according to department statistics.

To date this year, 120 Nassau officers have retired, and 135 left in 2014, Krumpter said. The expected 325 total retirements in the past two years would account for nearly 15 percent of the department’s 2,235-member workforce. Since 1999, an average of 130 officers a year have retired. (Empire Center)

A New York Post article¹⁶ in 2019 reported that:

The suburban cop with the fattest pension who retired last year is Nassau County Officer Jeff Fabre, 52, who walked into the sunset with a $221,086 package, the report said.

According to payroll records, Fabre had total pay of $326,950 in 2017. But he had just a base salary of $122,514, according to records previously posted by Newsday. He more than doubled his income through overtime and other supplemental pay and benefits.

Another Nassau officer, Thomas Papaccio, 59, retired with a $179,440 pension. Papaccio also had a base salary of $122,000 but raked in $85,246 in overtime in 2017, as well as other supplemental benefits that boosted his total salary to $234,903. His 2018 salary was $254,991.

FUTURE OBLIGATIONS

NASSAU POLICE DEPARTMENT

To illustrate the dramatic impact overtime will have on future pensions, the Center examined the base salaries, overtime earnings and pension amounts for 37 police officers who retired from the Nassau County Police Department in 2018. These figures are available online through postings from Newsday, the Empire Center’s See Through NY post and the New York State Pension System. ^{17 18}

Though there were far more retirements that year, we focused our review on the 37 who started collecting their respective pensions in January, so we could avoid examining pensions that received less than a full year’s award.

The chart, seen in full in the attached Appendix, shows that the total annual cost to taxpayers for the 37 newly minted pensioners is $4,327,993.

The Center reassembled previously published lists to create a chart to spotlight the 37 Nassau Police retirees in 2018. We listed the name of the retiring officer, followed by his or her overall salary in 2017, his or her overall overtime earned in 2017 and the pension collected in 2018. (2017 was his or her final full year of service. Pension payments commenced in January 2018.)

For example, we list officer Joseph A. His 2017 salary was $244,909. He earned $58,441.03 in overtime that led to an annual pension of $133,189.  The full list can be seen in the Appendix.

As noted above, the total annual pension cost for the 37 employees is $4,327,993.

The total overtime earned by the 37 in 2017 – their last year of service – was $1,370,942. That comes out to an annual average of $37,052 of overtime for each officer. (This is on par with average overtime earned by a Port Authority police officer.) ¹⁹ 

Assuming, conservatively, that the pension came out to be 50% of the final salaries, the actual amount taxpayers must bear is an additional $685,471 each year (50% of the total overtime cost for the 37 retirees) above what they would have paid were overtime discounted when calculating the final pension costs.

It is assumed that the average age of retirement is 55 and retirees have a life expectancy of an additional 25 years. ²⁰

For just this crop of 37 employees, taxpayers will be exposed to an additional expense of $17,136,775 over the next 25 years to cover expenses related to the fact that overtime was part of the pension calculations. If there were 37 more retirees in each of the next 25 years, the total for all the retirees due to overtime over this period would amount to $222,778,075.

That figure was derived by using the following formula:

Those retiring in 2018 will collect 25 years of pension payments through 2043, assuming they live an average lifespan. Those retiring in 2019 will collect for 24 years through 2043, so we multiplied the annual additional pension award due to overtime by a factor of 24. The pension due to overtime for the 2020 retirees was multiplied by 23 years. And so on. 

But the actual taxpayer burden is far more than the $222 million, since the average annual retirements in the Nassau Police Department over the past 20 years, as noted in the Newsday article cited above, is closer to 130.²¹

If we divide the $685,471 of additional annual taxpayer obligation (for overtime attributable to the 37) by each of the 37 retirees, it comes out to $18,526 per employee. Thus, the average retirement class of 130 will result in an additional annual taxpayer burden of $2,408,380 due to the overtime inclusion. (130 multiplied by the $18,526.) The 25 year total for one class of 130 retirees equals $60,209,500. 

25 retiring classes of 130 over the next 25 years will result in a $782,723,500 burden for taxpayers due to overtime being factored into the pension. 

To put it another way, if we wanted to find a quick way to save $782 million over the next 25 years, all we have to do is take overtime out of the pension equation for Nassau officers yet to retire.

Imagine the savings we could materialize if we did this across the board for all future public sector retirees.

This number doesn’t even account for inflation of salaries over the 25 year period from the 2018 baseline. Nor does it include the cost of living adjustments given to each retiree annually.

Nassau police salaries have been known to escalate at a pace far exceeding inflation. But even if we assumed that salaries over the next 25 years would increase at a level no greater than the Consumer Price Index (CPI) it would still be an enormous hit to the taxpayers.

The CPI increased by 73% since 1993.²²  It increased 54% over the past 20 years. Applying a similar projected increase into the next 25 years would show a truer picture of overtime’s actual impact. The total wouldn’t be the $782 million listed above, but rather, a staggering  $1.35 billion.  

We specifically looked at the overtime garnered by those Nassau officers nearing retirement because they are likely to log in far more overtime than newer hires. The Nassau Comptroller noted that in 2016 there were18 officers slated to earn more than $100,000 in overtime as of Nov. 30, and another seven toeing the line, ranging from $96,000 to $99,000 in overtime payment.²³ 

But even if we assumed all officers earned the same amount, the taxpayer burden related to padded pensions would still be shocking. 

The county expended $54 million in overtime on its approximately 2,400 uniformed officers. ²⁴  Assuming they all earned the same amount of overtime, we would come up with an average of about $22,500 per officer. Even if the retirees’ pensions were based on just 50% of their three year average (though many are getting over 60%, while those with disability pensions get up to 75%), we could attribute $11,250 to each officer. That would equate to a yearly taxpayer overtime pension burden of $1,482,000 for a class of 130. That’s $37,050,000 over 25 years, just for that class. Once we look at the burden related to the next 25 retirement classes, it leads to a bill to taxpayers of $475,392,500.

We showed the $475,392,500 figure just to illustrate the most conservative numbers possible. It’s not an exact science as to how much overtime a retiree will earn. As noted above, it is far more likely that future retirees will match the average $37,000 that the 37 officers we listed actually earned, rather than the average of $22,500, assuming the overtime was spread out evenly across all employees. We know senior members get priority. Our point in showing this lower number, is that even if one were to assume the lower overtime for the retiring officer, the taxpayer burden is still almost a half billion dollars.

THE IMPACT OF TIER 6

We must remain cognizant of the fact hat once we hit year 2032, some of the first retirements may be seen from the Tier 6 employees hired in 2012 and thereafter. State law makes numerous employees, primarily police officers, eligible for retirement (and the collection of at least 50% of one’s salary) after just twenty years, regardless of their age.

It is unknown at this point what impact the limit on overtime being factored into the pension will have on an employee’s decision as to when to retire. It is logical to surmise that the number of retirements after just twenty years of service will decline, and possibly by a significant margin, due to the fact that the size of the pension will be lower than was the case for employees from lower tiers. Many Tier 6 employees will need to log in more years of service to augment their pensions, which will be less inflated by overtime earnings.

Thus, the impact of Tier 6 reforms on the overall numbers we calculated above will not be that large. At least in the first few years after 2032, the percentage of overall retirees emanating from Tier 6 will be relatively low. Nevertheless, below we provide savings that will be accumulated if we just looked 20 years out, thereby largely bypassing the Tier 6 impact. 

The 20 year impact of maintaining overtime in pension calculations for these Nassau officers still amounts to a daunting $505.76 million.

BEYOND NASSAU

Let’s not forget that this is the tax burden relating just to one police department in just one county on Long Island. 

Of all the employees in the state retirement system, 35,124 (5%) are active employees in the Police and Fire Retirement System (PFRS). 26% of that total were hired after April of 2012, while 74% were hired prior to that date.

That means there are almost 26,000 government employees in the PFRS  (outside of New York City) who were hired prior to Tier 6 and are yet to retire. ²⁵

There are over 413,000 government employees in the Employee Retirement System (ERS) –  the system other than police and fire – who were hired prior to April, 2012. These include corrections officers and employees working in mental health and developmental disabilities, who earn huge volumes of overtime. ^26.

And then there are the thousands of workers in the separate New York City retirement system. 

This is the time bomb we are referring to. 

Elected officials will crow about the limits they placed on overtime in Tier 6, but how will we survive the explosion of huge pensions – fueled by overtime – for these hundreds of thousands of employees in the first five tiers yet to retire?

POLICE AND FIRE OUTSIDE NEW YORK CITY

As noted above, there are 26,000 current police and fire employees (outside of New York City) in Tiers 1-5 who are yet to retire. 

In 2018, there were 1,322 retirements from the PFRS. ²⁷

The Empire Center, which collects data regarding overtime expenditures, noted that average overtime in this retirement system was not reported, nor was it readily attainable, though efforts persists to obtain these numbers. 

Yet, we do know, as noted above, that the average overtime collected by the Nassau police retirees was $37,000 in their final years. If we apply that amount as an approximation for the amount of overtime that may be earned for future retirees (while not even factoring in wage inflation), each new retiring class of 1,322 employees would have an additional $37,000 tacked on to their pension calculations. That amounts to $48,914,000 per year for these retirees. But only 50-60% of it would be added to the pension, leaving us with a figure of at least $24,457,000 of additional annual funding that must be borne by the taxpayers to pay these pensioners due to the overtime. 

Over 25 years, the overtime related to that single class of 1,322 retirees will cost $611,425,000. 

We thereafter used the same formula as we did in calculating the 25-year obligation to pay for the 37 Nassau employees. That is, those retiring in 2019 would have 25 years of pension collection over the next 25 years. Those retiring in 2020 would have 24 years of collection over the next 25 years. And so on. 

The sum total of additional dollars borne by the taxpayers for these employees in the PFRS system over the next 25 years is an astounding $7.95 billion, due solely to overtime being factored into their pensions. 

This does not even account for an increase in salaries, which is inevitable.

Over just a 20 year period, the total would be $489.14 million for the one class and $5.14 billion

for all classes over the next 20 years.

NEW YORK EMPLOYEE RETIREMENT SYSTEM (ERS) – EXCLUSIVE OF POLICE AND FIRE

The 35,000 employees referred to above are in a fund solely for police and firefighters throughout New York State, excluding New York City. Yet, as of March 31, 2018, there were 616,906 active employees within the New York State Employee Retirement System. This is a system separate from the police and fire pension fund. Of that amount, well over 400,000 were hired in Tiers 1-5.

The amount of overtime earned will vary significantly from one union to another and from one region to another. For instance, teachers, for the most part, receive little to no overtime. (After school coaching, for example, is a flat fee.)

Not all public employees in New York State have wage and benefit packages as lucrative as law-enforcement personnel on Long Island. In fact, the average state employee, especially in the white and pink collar sectors, makes very little overtime. 

The average pension for a member of Public Employee Federation (PEF) Union or with the Civil Service Employee Association (CSEA) is one half that of their counterparts retiring in the PFRS. For the newly retired, police and fire employees earn two and a half times that of those in the ERS system.

Like the FPRS, this system does not distribute data regarding average overtime. Yet we can get a ballpark figure if we look to the average cited by the Empire Center for New York City non-uniformed employees, which was $6,596 in 2018. Linked here is the data provided by the Empire Center for the average number of retirements and average overtime earned in the various job classifications. 28

According to the Empire Center, there were 20,392 retirements from the system in 2018. That would amount to an additional $67,252,816 that taxpayers would have to bear annually because of the overtime for just that one average retiring class in the ERS. 

Over 25 years, it would cost the taxpayers $1.68 billion for just that class. When added onto the costs associated with the remaining 24 retirement classes over the next 25 years, the total cost to taxpayers would be $21.86 billion.

Over a 20-year period, the cost of the class would be $1.35 billion for that single class.

20 such classes would cost $14.12 billion.

But as we have seen in all retirement systems, those employees closest to retirement will incur the most overtime. The Empire Center notes that New York City non-uniformed employees about to retire earn an average of $11,599.  One half of that amount ($5,800) would be added to each retiree’s pension. Over 20 years, the cumulative cost the taxpayers would be $24.84 billion . Over 25 years, the cost would be $38.44 billion.

OVERTIME FOR NEW YORK CITY FIREFIGHTERS 

While our initial analysis focused on 37 police officers in one county, it would be a mistake to believe that only police officers have such advantageous overtime sweeteners. New York City firefighters, while receiving far less in base pay than Nassau or Suffolk police officers, are still retiring with pensions that would make the average private sector employee quite envious.

A study conducted by the Empire Center reports that most retiring New York City firefighters who left employment after 2014 are receiving six-figure pensions. As noted above, their base salaries are not eye-catching, but substantive overtime payments doled out in three years prior to retirement inflate the final pensions dramatically.

Nearly 3/4 of the 416 firefighters and fire officers who retired from the fire department of New York during 2017 are eligible to collect pensions of at least $100,000. The average pension was $126,993, up from 2016 average of $117,914. 25 new retirees are eligible for pensions over of $200,000. In the past the high average level of pensions has reflected the number of firefighters receiving line of duty disability pension which is 75% of salary as opposed to 50% available on the normal service retirements.

There are over 11,000 uniformed officers active in the New York City.

According to the Empire Center, there were 378 retirements in 2018.

Approximately $243 million was budgeted for overtime in the department in 2018. ²⁹

In 2016, the average amount of overtime earned by each employee was $27,898. ³⁰ 

At least one half of that ($13,949) will be added onto their pension awards. For a class of 407 who retired that year, it amounts to $5,677,243 per year. Over 25 years that amounts to $141,931,075 million for just that class. 25 such classes would amount to an additional $1.845 billion that must be paid out in pension awards because of this overtime.

Over the next 20 retirement classes, the total would be $1.192 billion.

Overtime was lower in 2018, coming in at $20,053, according to the Empire Center. There were 378 Retirements that year. The total cost resulting from overtime being factored into the pensions over the next 20 years for a single class, assuming average overtime of this amount, would be $75,800,340. 20 retirement classes will cost $795,903,570.

The cost for one class over the  next 25 years would be $94,750,425 million. 25 classes would cost $1.23 billion.

But these numbers are probably well under the reality, because, like police officers, it is highly unlikely that a senior firefighter nearing retirement will earn the same overtime as his junior colleagues. (We are not even factoring in that many would be disability pensions, allowing 75% of the overtime to be added to the pensions. More than one-thirdt of NYPD retirees collect disability payouts.) ³¹ 

This senior level hoarding of the overtime is quite common. According to the Nassau Comptroller, 16 percent of the Nassau Police officers (375 out of 2,300) earned 41 percent of the overtime payouts. ³² 

According to the Empire Center, retirees in 2018 earned an average overtime of $26,412 in the last year of retirement. For one class of 378 retirees that results in an annual cost of $4,991,000 due to the overtime. Over 20 years, that one class would cost $99,837,360. 

20 such classes over the next 20 years  would cost $1.05 billion. 

Over 25 years that one class would cost $124,796,700.  25 such classes would cost $1.62 billion.    

NEW YORK CITY POLICE OFFICERS

As for the New York City Police Department, there are over 34,000 active uniformed officers.³³

The police department did not publish the number of retirees over the last two years. Consequently, the Center will utilize an average of the last five classes that were published by the department. That average is 1,735 retirees.

If each employee earns $37,000 in overtime, as was the case with Nassau County, it would result in a total of $32.1 million annually for that class. (We are not even factoring in that many would be disability pensions, allowing 75% of the overtime to be added to the pensions.)

Over 25 years, it would cost taxpayers $802.44 million for that one class due to the overtime.  For the 25 retiring classes over the next 25 years, it would total $10.43 billion    

For 20 such retiring classes, it would have a cumulative cost of $6.74 billion..

But let us, for the sake of conversation, once again analyze these numbers under the unlikely scenario that all officers earn an equal amount of overtime. In 2018, The Empire Center states that $14,569 was expanded per officer for overtime. If this seems low, it is in large part due to the fact that all employees, including civilians, were added to the mix, thereby diluting the cost for the uniform officers, especially those near retirement. ($16,098 was expended in 2016.) ³⁴

Assuming, conservatively, that retiring officers would garner just 50% of their highest three years, the overtime factored into the pension would be $7,285 per officer.  

That amount multiplied by the 1,735 average retirement class would cost taxpayers $10.96 million each year due to the overtime.

Over 25 years, taxpayers would expend $313 million for the class. When we add in all 25 retirement classes, over the next 25 years, the total leaps to $4.11 billion, even under this ultra conservative calculation. 

Over the next 20 years the cumulative cost would be $2.65 billion. 

NEW YORK CITY CORRECTIONS OFFICERS

There are approximately 9,832 active uniformed correction officers in the New York City Corrections System.  The Independent Budget Office notes that since 2011 there has been an average of 750 officers leaving each year. ³⁵

The total overtime budgeted for the system in 2018 was $165 million.³⁶ The average amount of  earned per employee in 2018 was $19,094.

If an additional $9,547 (50% of the overtime figure listed above) is added to the pensions of each of the 750 annual retirees, it will cost taxpayers $7,160,250 million due to overtime for just that class. Over 20 years, that one class will cost $143,205,000 million due to the overtime.  20 such classes will lead to a taxpayer burden of $1.504 billion.

Over the course of the next 25 years, it will cost taxpayers $179,006,250 million for this extra overtime. All 25 classes will lead to an additional taxpayer burden due to overtime of $2.327 billion.

Yet, those nearing retirement would gobble up far higher than the average. In fact, in fiscal year 2016, 82 Department of Correction employees – who undoubtedly were the more senior members nearing retirement, – earned over $100,000 each in overtime. 37

According to the Empire Center, correction officers about to retire in 2018 earned an average of $39,988 in overtime. Half of that amount ($19,994) which is added on to each of the 750 typical retirees.  A single class over 20 years would cost taxpayers $299,910,000.          

20 such classes over the next 20 years would cost taxpayer $3.149 billion.

A single class over 25 years would cost $374,887,500. 25 such classes would cost $4.874 billion.          

The MTA

The Metropolitan Transit Authority (MTA) is a quasi-governmental entity that, for the most part, follows rules similar to those existing in state government. That means they are very generous with their benefits and pension programs. In fact, the poster child for overtime and pension abuse is Thomas Caputo, a Long Island Rail Road supervisor who earned $344,000 in overtime in a single year. This massive trove accumulated as he approached retirement, helped him retire with an annual pension of $162,000.

There are approximately 80,000 employees working for the MTA. 38

The Authority is broken down into several divisions including: the New York City system. Staten Island, the MTA Bus System, the Long Island Rail Road, Metro North and the MTA Bridge and Tunnel Authority.

Approximately 50,000 employees are in the New York City Transit system. The Empire Center notes that there were 1,688 retirements from this division in 2018. 39

The total overtime cost for all employees within the MTA system in 2018 was $1,324,000,000.  ⁴⁰ 

The Empire Center noted that the average overtime earned in the MTA in 2018 was $20,107.  That is far less than the average overtime of $34,000 earned by Long Island Rail Road  employees.⁴¹

Of course, there may be some employees, such as a secretary, who earn little or no overtime, while some railroad conductors might earn six-figure overtime. This is simply an average. As stressed above, the individuals close to retirement will, in actuality, be receiving far more overtime than this average listed herein.

Each employee in the class of 1,688 retirees will have an additional overtime amount of  $10,054 (50% of the average amount incurred) added to their pensions. That is an average of $16,971,152 per class. Over 25 years, taxpayers will incur an overtime obligation of $424,278,800 for  that one class. For 25 classes over the next 25 years, this will amount to an eye-popping $5.516 billion.

Over the next 20 years, over which almost all of the retirees will hail from the first five tiers, the costs are as follows:

$339,423,040 million over 20 years for a single class. 20 such retiring classes over the next two decades would cost $3.564 billion ddue to the overtime inclusion. 

As stated above, in the state’s Early Retirement System (ERS), 67% of the active employees are in tiers one through five. This is to be distinguished from the PFRS, where 74% are in these tiers. If we were to assume that civilians in the MTA follow a pattern similar to that of those in the ERS in general, it would result in approximately 48,500 employees hires prior to the creation of Tier 6.

There are 50,129 employees in the New York City Transit system. 1,688 retirees equates to a level of 3.37% of retirements each year. There are approximately 30,000 remaining employees outside of the New York City Transit system. Using the same 3.37% ratio would lead to an average of 1010 additional MTA employees retiring each year. 

Those 1010 retirees collecting an additional $10,054 in overtime in their pension will cost taxpayers an annual amount of $10,156,487. Over 25 years that class will cost taxpayers 253,912,175. Looking out at 25 such classes, would result in a cost of $3.3 billion.

Over 20 years, it would cost $2.133 billion.           

IT IS IMPORTANT TO NOTE THAT THESE HUGE NUMBERS DO NOT EVEN ISOLATE  THE HIGHER OVERTIME EARNED BY THOSE SENIOR EMPLOYEES ABOUT TO RETIRE.

The total for all dvisions is $5.69 billion over 20 years and 8.82 billion over 25 years.

PORT AUTHORITY

The Port Authority of New York and New Jersey, like the MTA, is a quasi-governmental entity with rules and contractual provisions similar to those seen in New York’s public sector unions. As of 2018, it employed 8,169 workers, 1,776 of whom are Authority police officers. ⁴²

According to the Empire Center, the average worker in 2017 earned $16,009 annually in overtime, while its police officers raked in an average of $37,053. 43

More alarming is the fact that many approaching retirement are embellishing their base pay by over $100,000 in overtime, thereby inflating their pensions to outlandish levels. In fact, the average overtime earned for those about to retire was in excess of $56,000 per employee.

In a 2016 article for the City Journal entitled, Bloated, Broke and Bullied, Steven Malagna of the Manhattan Institute, highlighted the extravagant pensions within the Authority and the impact overtime had on inflating the ultimate amount a retiree would collect. Amazingly, employees were making more upon retirement than when they were working:

In 2013, a police lieutenant at the Port Authority of New York and New Jersey retired with an annual salary of $129,000; the next year, he began collecting a lifetime pension of $172,000, or one-third above his base pay. The officer had managed to juice up his annual pension through pay sweeteners provided by the Port Authority, including lots of overtime work (emphasis added). He was far from alone. An assistant operations manager at one of the Port Authority–controlled New York airports retired at a salary of $89,000, but soon began collecting a pension of $103,000, 16 percent above annual pay. An electrician quit working with a base salary of $76,000 and started collecting a pension of $79,000. These are extraordinary numbers, culled from a database of Port Authority pay practices provided by OpenTheBooks.com.

Only cops working for Nassau and Suffolk Counties receive more generous compensation (and the jaw-dropping cost of Nassau’s police force is a major reason that the state has placed the county, one of the nation’s richest, under a financial control board). The average base pay of a Port Authority officer after six years is $90,000, but officers (like other authority workers) have many ways of increasing compensation, including longevity pay based on years of service, extra payments for work done under non-regular conditions (such as night or holiday shifts), uniform allowances, and the most lucrative category—overtime pay. In 2014, the 870 Port Authority officers earning the top-tier base pay of $90,000 annually enjoyed an average of $153,784 in total cash compensation, with $46,192 per officer in overtime pay, nearly $5,500 per worker in longevity compensation, and $7,511 per worker in extra pay for working under unusual circumstances.

The Port Authority has an even tougher time managing the overtime of its senior public-safety staff. The department’s 123 full-time sergeants earned a base-salary average of $102,532 in 2014, but total compensation for these workers was an astounding $182,133 per officer, thanks to $56,539 per worker in overtime and $9,492 per worker in pay differentials for unusual shifts.

Given the large overtime differential between the Port Authority police and the other rank and file employees, we will consider the future overtime obligations separately.

Assuming there are 71 annual P.A. Police retirements earning an average of $56,539 in overtime, a typical retiring class would obligate taxpayers with a bill of $2.01 million related to the overtime being factored into the pension. (And this assumes they will only be collecting 50% of their final pay averages.) Over 20 years, that class would cost $40.1 million. due to the overtime. Over 20 years, the cumulative cost for all future retirement classes will be $421,498,350

Over 25 years, it would cost 5.03 million for the class and $652.32 million for 25 classes.

The remaining 6391 employees would average out to approximately 256 retirements each year. Once factoring in the average overtime of $16,009 per employee (and factoring in 50% of that amount into the pension award), the annual cost to taxpayers due to overtime is $2.05 million. 

Over 20 years that number inflates to $41 million. 20 retiring classes would lead to a cost of $429.7 million.

Over the next 25 years, the cost for a single class would be $51.25 million. 25 such retiring classes would cost $665 million due to the overtme inclusion.

These costs would relate to taxpayers and transit users in both New York and New Jersey. If one wishes to limit the impact just to New Yorkers, the figure can be halved (though New Yorkers use the metropolitan transportation system in greater volume).

The total 20 year cost for the overtime for all PA employees, including their police employees, will be approximately $864.2 million. Over 25 years it is $1.32 billion.

If we looked at all employees regardless of division, the sum attributable to overtime is still significant. According to the Empire Center, there were 301 retirements in the Port Authority in 2018. They also noted that the average overtime earned for employees nearing retirement was $28,082. This is for all employees, including the non-uniformed. One half of that amount factored into the pensions for that class of retirees equates to $4,226,341 in additional pension costs due to the overtime. Over 20 years, that single class will cost $84,526,820. 20 such classes would cost $887,531,610. 

A class over 25 years would cost $105,658,520 in extra money due to overtime. 25 such classes would cost $1.374 billion.

NEW YORK CITY EMPLOYEE RETIREMENT SYSTEM

In New York City, the police and fire departments have their own retirement systems. Teachers also have a separate system, but we did not include teachers in this analysis, since their use of overtime is not of relatively significant levels. Most remaining city employees are part of the New York City Retirement System.

There are numerous subsets within this system:

Transit, Sanitation, Corrections, the Triborough Bridge and Tunnel Authority, and General.

There were 132,270 active employees in the General retirement group. ⁴⁴ 

There were 6,376 retirees in the class of 2018, exclusive of the major uniformed departments, according to the Empire Center. Since the 1630 retiring Transit Authority workers (technically within the NYCERS) were already factored into the figures in the section entitled MTA, we will remove that number from the NYCERS, leaving a total of 4,746 remaining. 

The City Comptroller reported that, as of June 2017, overtime spending for fiscal year 2017 was projected to be $1.8 billion, a 4.5 percent increase over the prior year. ⁴⁵ 

That figure includes high overtime users such as Police, Fire, and Corrections. Those in the General subset have positions similar to non-uniform employees. The average overtime for employees excluding those in Fire, Police, Corrections, and Sanitation, was $6,596.

So, if $3,298 (50% of the average listed above)  additional pension payments are made each year to a retiring class of 4,746, the annual impact on taxpayers would be $15,652,308. Over 20 years that would amount to $313,046.160 for that class. 20 such classes would cost $3.29 billion.

25 classes would cost $5.09 billion over the next 25 years.

But these numbers increase significantly when we factor in the reality that those closer to retirement earn much more. 

According to the Empire Center, the average overtime earned for those were about to retire in 2018 equaled $11,599, meaning 1/2 of that ($5,800 would be calcuted into the pensions for the 4,746  retirees. A single class would cost $27,524,427 Over 20 years, that class would cost  $550,488,540. Over 20 years, 20 such classes would cost $5.78 billion.  

Over 25 years, it would cost that one class $688,110,675. Looking at 25 such classes, it would cost $8.945 billion.      

NEW YORK CITY SANITATION

Both the departments of Corrections and Sanitation in New York City were looked at separately from other city employees in the ERS because they were high users of overtime.

In Sanitation, $100 million of overtime was budgeted for 2018. ⁴⁶

According to the 2019 City Council Sanitation Report, there were 2,247 civilian and 7,799 uniformed employees in 2018 ⁴⁷  

According to the Empire Center, there were 304 retirements from the department in 2018. Those nearing retirement had an average overtime earning of $17,767. A single class would cost the taxpayer $2,700,584, Over 20 years, that single class would cost over $54,011,680.  20 such classes would costs would $567,122,640.

Over 25 years it would cost $67,514,600 for one class. 25 such classes would cost $877,689,800.          

THE SOLUTION

It is difficult to fathom any reform that could be proposed on the state legislative level that could have a more profound effect on protecting taxpayers than to eliminate overtime from being factored into pensions.

Now that we have your attention, the next question is: How do we do it?

Assemblyman Michael Fitzpatrick (Smithtown) has introduced legislation (A5361 48), drafted with the assistance of this Center, that would make overtime limits apply to all current employees. Unfortunately, not a single majority member of the assembly or senate has joined as a cosponsor. Had they done so and passed the bill when it was first introduced in 2015, taxpayers would’ve been spared shelling out billions of dollars in these inflated pensions.          

Some will say that the state Constitution prohibits the legislature from limiting overtime from being factored into the pension calculations for employees hired prior to the April, 2012 threshold that placed new employees into Tier 6. They cite the clause in the Constitution that states a pension shall not be “diminished or impaired.”

While the matter is unsettled and subject to differing rulings, there is some case law that can lead one to conclude that the change can be made without resorting to a constitutional amendment. 

First off, there’s a difference between taking away a benefit once the employee is retired, and simply changing rules related to overtime while still an active employee.

The magnitude of the proposed change is also relevant. Take, for instance, an overhaul that tells an employee who was hired into a defined benefit program that he or she will suddenly be removed from that program and, instead, be placed into a defined benefit system. That goes to the very core of the pension itself, which is why such a change would likely necessitate a constitutional amendment for current employees. But changing rules for overtime for employees not yet retired, or altering rules for cost of living adjustments for future retirees, is quite different. 

In a wide sweeping analysis of pension adjustment cases, a report written for The Hutchins Center on Fiscal and Monetary Policy Municiipal Finance Conference  (July 16-17, 2018) ^48A cited numerous court decisions throughout the nation that heard challenges to states tweaking pension rules and/or benefits. The article referenced a case from the state of California that noted how dealing with anticipated benefits is different than benefits received upon retirement:

The Appellate Court in the Marin County case also declared: ‘… while a public employee does have a ‘vested right’ to a pension, that right is only to a ‘reasonable’ pension – not an immutable entitlement to the most optimal formula of calculating the pension. And the Legislature may, prior to the employee’s retirement, alter the formula, thereby reducing the anticipated pension. So long as the Legislature’s modifications do not deprive the employee of a ‘reasonable’ pension, there is no constitutional violation.

The article noted that decisions vary from state to state, depending on the wording of the respective state’s existing laws and constitutions. Some states, like New York, have very restrictive constitutional protective language (benefits cannot be diminished or impaired) while others are less stringent. But it is clear that there is not an absolute prohibition on obtaining an overruling of these restrictive clauses. 

The report continued:

Between 2009-2016, there were 20 states with courts that ruled in favor of pension reform out of over 26 states that had courts that ruled on pension reform issues. These decisions dealt with increased employee contributions, suspended or reduced cost of living adjustments, elimination of spiking, plan conversion, elimination of early retirement incentives, changes in final salary calculation and elimination of gainsharing. Some of the states that ruled favorably on some form of pension reform were Alabama, California, Colorado, Florida, Georgia, Idaho, Kentucky, Maine, Massachusetts, Michigan, New Hampshire, New Jersey, New Mexico, Ohio, Rhode Island, South Dakota, Tennessee, Texas, Washington, and Wisconsin. Also, the territory of Puerto Rico had a favorable ruling on pension reform. Hernandez v. Commonwealth, 188 D.P.R. 828 (2013) (translation).

And where a government is teetering on financial collapse, opportunities have to exist to allow for a restructuring of overburdensome obligations that could potentially inhibit the government from delivering the services necessary to protect the public health and/or safety. Even though the government may have committed to provide outlandish benefits to employees, it cannot contract itself to the point that it causes a collapse of the government. Stated another way, the government may contract to it, but it may not be enforceable in every instance.

The article added:

For nearly 200 years, courts have held that legislatures lack the power to ‘surrende[r] an essential attribute of [their] sovereignty’or ‘bargain away the police power of a State’ U.S. Trust Co. of N.Y. v. N.J., 431 U.S. 1, 23 (1977) (quoting Stone v. Miss., 101 U.S. 814, 817 (1880)). As the U.S. Supreme Court explained in Butchers’ Union Slaughter-House & Live-Stock Landing Co. v. Crescent City Live-Stock Landing & Slaughter-House Co., 111 U.S. 746, 751 (1884), ‘[t]he preservation of [the public health and morals] is so necessary to the best interests of social organization, that a wise policy forbids the legislative body to divest itself of the power to enact laws for the preservation of health and the repression of crime.’ See also Home Bldg. & Loan Ass’n v. Blaisdell, 290 U.S. 398, 436-437 (1934) (collecting Supreme Court authority). This has been recognized by recent state court rulings. See e.g. Justus v. State of Colo., 336 P.3d 202 (Colo. 2014) (distinguishing true contract obligations from public policy to be changed by the legislature). Hernandez v. Commonwealth, 188 D.P.R. 828 (2013) (translation) (recognizing U.S. Supreme Court precedent for impairing pension contractual rights for a higher public purpose).-5-

governmental power such as the police power to protect the health, safety and welfare of its citizens.15

This has led many governmental entities to seek bankruptcy, where courts have repeatedly upheld the ability to reduce certain pension benefits – not just for simple matters such as eliminating overtime from being calculated into pensions – but to actually cut benefits for those currently retired.

The article states:

C. Treatment of Public Pension Obligations in Chapter 9

The bankruptcy proceedings involving the City of Stockton, California and the City of Detroit, Michigan have brought to the forefront the treatment of municipal pensions as a matter of law in a Chapter 9 bankruptcy proceeding. In these proceedings, the bankruptcy court determined that the pension agreements were executory contracts and thus a municipality could alter its pension obligations in a Chapter 9 proceeding, even if a constitutional provision existed providing that such contractual obligations could not be altered.35 These cases have shown that, absent a settlement, pension obligations of a municipality, as a matter of law, can be treated equally with other unsecured debt with limited recovery…

The bankruptcy court in the Detroit, Michigan Chapter 9 proceeding specifically held that, in Chapter 9, the bankruptcy court had the power “to impair contracts and to impair contractual rights relating to accrued vested pension benefits. Impairing contracts is what the bankruptcy process does.

AMEND THE CONSTITUTION

Since the question is unsettled as to whether legislation alone in New York could prevent overtime from being factored into pensions for existing employees, it seems sensible to avoid the controversy altogether by going straight to the constitutional amendment route.

Assemblyman Fitzpatrick, therefore, introduced a companion bill (A5368) 49 that would simply amend the Constitution to erase all doubt. It would require the legislature to place the proposition before the public in a referendum. Over the past decade, constitutional amendments were passed to allow gambling at designated sites throughout the state and to withhold pensions from elected officials convicted of a felony.

DECLARING INSOLVENCY AND STARTING FROM SCRATCH

In the absence of obtaining the type of legislative reform suggested above, there is yet another alternative that the state and local governments can pursue to avoid the fiscal Armageddon that is approaching. Governments can declare fiscal emergencies and call for the state to impose fiscal control boards. It is imperative to distinguish the type of weak control board set up for Nassau County, which has demanded little from Nassau officials, and the type of strong and decisive control board that saved New York City from economic collapse in the 1970s. A properly constituted control board can have the power to alter existing contractual provisions, including pension obligations. 

And, as we’ve seen, yet another avenue to protect taxpayers is the seeking of a Chapter 9 municipal bankruptcy. New York is one of several states that permits its municipalities to seek bankruptcy protection. 50

Bankruptcy doesn’t mean the end of government, it is designed to save the government services the citizenry expects and requires to maintain a civilized, safe and humane society. 

It is baffling to the Center as to why officials have not seriously considered declaring the MTA insolvent – since its structural deficit is so enormous – and moved to restructure its abhorrent contracts and Byzantine rules and regulations via either a bankruptcy proceeding, if permitted, or in the alternative, through a financial control board. It certainly seems to be a more viable option than continuing to raise payroll taxes, phone bill surcharges and congestion pricing schemes, while experiencing further and further decline of transportation service.

LIMITING TOTAL OVERTIME FOR ANY ONE EMPLOYEE

Another alternative to the outright ban of overtime being incorporated into pensions has been floated by the Empire Center for Policy. Rather than dealing with the constitutional controversy, they recommend pursuing limits on the amount of overtime that could be earned by any one individual, especially in the later years of service as the pension is approaching.

The concept is now being employed in New York City’s Police department, and some other departments, albeit in a rather tepid manner.  The cap in 2018 was still a rather robust $85,000. 51

The cap in the NYPD was effectuated in 2016. followed by Fire and Correction in 2018. 52

And according to the Citizen’s Budget Commission, the caps have already been exceeded. Real overtime control, according to the commission, will not be effectuated until overtime rules and regulations are reformed. 53 

The Poughkeepsie Journal came to a similar conclusion on the ineffectiveness of the caps. 54

Yet, according to one source, even that may have at least had an initial impact.

A New York Daily News article of May 8, 2019 stated:

A cap on NYPD overtime has scores of cops checking their pensions and considering retirement, sources said Wednesday.

Since overtime was slashed last week, limiting officers to a specific amount of hours a month, various sources said there has been a spike in the number of cops who are planning to put in their papers.

It is uncertain at this point what, if any, long term effects will be.

SHIFTING TO DEFINED CONTRIBUTION PENSION SYSTEM

When a pension is based on the size of one’s salary, there will always be an incentive to maximize the total amount earned in the years heading toward retirement. That would change, however, if the state shifted from the present defined benefit pension system to a defined contribution system. The defined contribution system is not directly tied to final salary averages, but rather, to the amount a worker and his employer will deposit into a 401K type account on a paycheck to paycheck basis. The pension grows or diminishes with the trends in the stock market. This is the system most commonly utilized in the private sector. Earning more overtime would be irrelevant, except to the extent that the employee deposits that extra money earned into his growth account. 

Efforts to legislate the shift to the contribution system have thus far been stymied in the state Capitol. It is uncertain if such a reform would ever be applied.

CONCLUSION

As we have seen, pension costs have already started to explode. The six-figure pension, which was once seen as an extravagant anomaly, is now becoming the norm for members of the most powerful unions. This has huge implications on the average taxpayer and is simply unsustainable.

In an August 10, 2018 editorial, the New York Post, noted:

As the Empire Center reported this week, the number of six-figure pensioners in the state pension system is nearing 5,000— up 756, or 20%, from 3,817 in fiscal 2017. Of those, 20 rake in more than $200,000 a year; three get 300 grand-plus.

In yet another New York Post article, published on September 3, 2018, The Manhattan Institute’s Nicolle Gelinus reported:

Fifteen years ago, pension and health benefits cost Gotham taxpayers $7.4 billion. If they had merely kept up with inflation, like most raises, they would cost $10 billion today. Instead, they’ll cost $20.6 billion, having more than doubled.

And, a January 12, 2019 New York Post editorial emphasized that:

State and local governments must shift tax revenues to the state retirement funds to cover them. And those amounts have soared from $164.5 million in 2000 to $4.8 billion in 2017 — a 2,900 percent jump (emphasis added).

The problem of overtime inflating pensions is not unique to New York. The ultimate landing pad for governments refusing to confront the exponential increase in pension costs can very well be fiscal collapse and outright bankruptcy.

In a July 29, 2012 article, Reuter’s wrote:

In the mid-sized California cities of Stockton and San Bernardino, officials say public safety costs were among the factors that forced both to declare bankruptcy. In Vallejo, a former U.S. Navy town near San Francisco that emerged from a three-year bankruptcy last year, public safety pay and benefits were consuming three-quarters of the city’s general fund.

When governments become insolvent, ultimately, the pensioners will have their benefits cut back. Elected official who are hesitant to implement needed reforms to the system need to become cognizant of the fact that reforms will actually protect the system and help ensure that the pension fund remains viable for future retirees. We already know what failure to act will lead to. All we have to do is look back to see what unfolded in Detroit and San Bernardino. The time to act is NOW.

ADDITIONAL NOTES

1. The Center took the conservative approach of assuming that the retirees discussed in this White Paper will retire with a pension that was just 50% of the employee’s final salaries. In reality, many employees will retire with pensions closer to 60% of their highest three-year salaries, while still others will earn even more. Many police and fire employees retire on disability pensions, which can provide pensions of up to 75% of the highest years’ salaries.

2. A Tier 2 employee retiring at age 60 with 25 years of service will receive 58.3% of the final average salary. Therefore, for a salary of $200,000 the annual service single life allowance would be $116,600. 

3. According to the NYSLRS, a nurse or a police officer making $200,000 would have a pension of $116,000 after 25 years of service. After 30 years, he or she would make $133,200, which is 66%. After 35 years he or she would make $140,000 per year. 

4. The calculations herein do not account for the CPI adjustments given to each retiree on an annual basis. It does calculate the impact of wage inflation in the Summary. However, wages in the public sector have tended to exceed the CPI.

5. So the numbers we highlight as the taxpayers’ future burden are actually much lower that it will wind up costing.

6. Our Center also notes that once we hit year 2032, some of the first retirements may be seen from the Tier 6 employees hired in 2012 and thereafter. State law makes numerous employees, primarily police officers, eligible for retirement after just twenty years. It is unknown at this point what impact the limit on overtime being factored into the pension will have on an employee’s decision as to when to retire. 

7. It is logical to surmise that the number of retirements after just twenty years of service will decline, and possibly by a significant margin, due to the fact that the size of the pension will be lower than was the case for employees from lower tiers. Many Tier 6 employees will be required to log in more years of service to augment their pensions, which will be less inflated by overtime earnings. It is only in the year 2037, a good 25 years from the advent of the new Tier 6 that its member will begin to retire in any significant numbers. Thus, the impact on the overall numbers we calculated above will not be that large. We estimate that it is years later when the number of Tier 6 retirements will begin to exceed those retirements from members from the lower tiers.

8. Effective January 1, 2018, the overtime cap for some employees increases each calendar year. The amount of the increase is based on the increase in the Consumer Price Index for the one-year period ending September 30 of the previous year. Prior to January 1, 2018, the overtime cap increased each fiscal year. 55

9. It is simply not possible to forecast an exact amount of overtime that will be incurred over the next two decades. Nor can it be determined with certainty how many employees will retire in any one year. There are numerous factors that can alter the numbers predicted over a significant period of time. Economic conditions, wage increases, change in life expectancy, and intervening legislation can all have an impact. 

10. Thus, this white paper can only provide a range of potential costs that may be incurred.  One is free to apply these numbers from either the most conservative or worst-case scenario. Our purpose is to focus on the fact that even from the most conservative premise, the cost over the next decade related to these overtime costs can cripple the ability of governments to provide basic services or taxpayers to avoid unimaginable levels of taxation.

11. Our assumption was based on a retirement age at 55, yet many employees within systems that permit retirement after just 20 years, may have a large percentage of their retirees leaving government well before their 55th birthday. This means they will be collecting for years beyond the 25 years of ife expectancy for a 55 year old.

12. The projections for the MTA are probably much lower than the actual figures  since the only overtime averages available were for all employees. Had data been available for those employees about to retire, the pension obligation would have been significantly higher than what is presented herein.

13. This analysis did not include the huge pension obligations related to the New York State Teachers Retirement System, due to the fact that overtime for teachers is relatively small compared to other public sector employee units. 

SPECIAL ACKNOWLEDGMENT

A note of thanks must go out to the Empire Center on Public Policy. This Albany based think tank has shed light on salaries, benefits, pensions and perks within New York’s public sector. Problems unknown to the people are unfixable by the people. Empire’s research in this area has given us an advantageous starting point from which to prepare this white paper. It is our hope to build off this outstanding work to focus attention on the need to implement new reforms to avoid the pension time bomb awaiting, especially as it relates to overtime abuse and excesses.

Special thanks are also needed for several students at SUNY at Stony Brook, including Aaron Gibbings, Brandon Lew, Kyle Pilotti, Katy Rebollo and Gabrielle Silverstein, who have provided invaluable research on this project.

APPENDIX

Retiree data provided by the Empire Center for Public Policy

Number of New Retirees

Average Overtime

Average Overtime of New Retirees

Nassau County Retirees In January, 2018

Names	Salary	Overtime	Pension
ADAMO, VINCENT A	$192,765.49	$40,364.15	$100,820
AQUILINA, JOSEPH C.	$244,909.27	$58,441.03	$133,189
ARMSTRONG, CHRISTOPHER H	$246,668.77	$45,375.71	$169,262
BESTHOFF, ERIC A	$166,069.42	$23,103.88	$95,432
BLACK, FREDERICK W	$216,240.62	$48,534.01	$127,315
BORGIA, VINCENT	$230,417.08	$64,373.06	$148,039
BOURGADE, CHARLES	$177,892.51	$13,427.27	$97,133
BYRNE, MICHAEL G	$230,838.19	$58,283.30	$119,774
CIPOLLA, THOMAS L	$251,620.23	$49,282.42	$149,143
CONDON, JOHN C	$177,372.26	$19,823.05	$111,525
COSTELLO, THOMAS M	$218,630.51	$59,177.23	$136,226
DANIELS, WALTER	$154,929.30	$11,936.00	$87,758
DEMEO, GLENN D	$185,604.67	$29,286.60	$114,406
DISANTI, JAMES	$141,353.40	$523.05	$75,202
DOUGLAS, JEFFREY D	$209,690.01	$12,625.70	$143,059
DUNN, THOMAS F	$230,159.29	$24,520.56	$115,036
ESPINOSA, JEIVER	$219,098.61	$9,047.21	$126,013
GIBBS, TYLER	$18,159.47	$31.66	—–
GREULICH, ROBERT M	$164,334.57	$10,106.23	$114,543
HURTLE, JOHN J	$188,137.79	$14,971.37	$117,048
INNELLA, ANTHONY W	$174,302.89	$16,139.85	$116,830
KLINDWORTH, JOHN M	$237,477.13	$36,016.88	$152,596
MCKENZIE, BETH A	$191,116.14	$137,495.72	$89,173
MULLER, FREDDIE J	$157,375.41	$12,078.89	$92,643
MURPHY, BRIAN J	$253,935.59	$62,745.89	$140,209
NEUMAN, GLENN J	$177,536.86	$23,076.37	$117,654
OMEIS, STEVEN	$229,705.42	$26,170.33	$153,762
ONEILL JR, WILLIAM	$236,059.77	$59,222.87	$133,665
PLATE, JAMES C	$297,180.79	$92,073.66	$140,013
PUGLISI, STEVEN M	$239,580.97	$65,591.74	$126,703
RUSS, WILLIAM R	$175,868.87	$41,083.85	$105,872
SAGER, KENNETH F	$180,766.57	$28,456.99	$103,441
SCHARTNER, ROGER A	$179,095.14	$7,445.00	$88,297
SCHUCHMAN III, WILLIAM L	$230,823.44	$73,655.71	$115,979
SWANY, CHARLES W	$173,450.65	$31,347.69	$120,358
WEBB, RICHARD A	$185,674.27	$29,074.46	$121,496
WELLER, JOSEPH S	$188,328.33	$36,033.04	$128,379

FOOTNOTES

1.  https://www.cnbc.com/2018/04/10/us-states-with-the-highest-tax-burdens.html, (Pg. 6), “The 15 US states where taxes take the most out of your paycheck” by Emmie Martin, Apr. 10, 2018

2.  https://www.tax-brackets.org/newyorktaxtable, (Pg. 6)

3.  https://www.thebalance.com/new-york-city-income-tax-3193280, (Pg. 6), “The New York City Income Tax—Rates and Available Credits” by Tonya Moreno, Oct. 31, 2018

4. https://www.cbsnews.com/news/property-tax-which-homeowners-around-the-u-s-pay-the-highest/, (Pg. 6), “Which homeowners around the U.S. pay the highest property taxes?” by Aimee Picchi, April 4, 2019

5. https://onenewsnow.com/education/2017/06/05/ny-teachers-on-long-island-avg-161kyr, (Pg. 8), “NY teachers on Long Island avg. $161K/yr.” by Michael F. Haverluck, June 5, 2017

6. https://www.empirecenter.org/publications/wtm15-li/, (Pg. 9), “LI Cops Top Pay List”, Dec. 9, 2015

7. https://www.newsday.com/long-island/suffolk/top-pay-for-suffolk-detectives-in-2018-227-000-1.7093344, (Pg. 10), “Top pay for Suffolk detectives in 2018: $227,000” by Tania Lopez, Feb. 15, 2014

8. https://www.osc.state.ny.us/retire/word_and_pdf_documents/publications/cafr/cafr_18.pdf, (Pg. 10),

a. [LINK2] https://www.osc.state.ny.us/retire/members/find_your_tier.php, (Pg. 10)

b. [8A] https://www.osc.state.ny.us/retire/publications/vo1861.php, (Pg. 11)

9. https://www.osc.state.ny.us/retire/members/overtime-limits-tier-6.php, (Pg. 11)

10. https://www.osc.state.ny.us/retire/members/overtime-limits-tier-6.php, (Pg. 11

11. https://www.empirecenter.org/publications/report-mta-paid-railroad-employee-more-than-344000-in-overtime-for-2018/, “Report: MTA paid railroad employee more than $344,000 in overtime for 2018”, April 25, 2019

12. https://www.amny.com/news/mta-overtime-investigation-1.30972455/, “Cuomo calls for investigation into possible overtime fraud at MTA” by Allison Fox, May 12, 2019

13. https://www.nytimes.com/2010/05/21/business/economy/21pension.html, “Padded Pensions Add to New York Fiscal Woes” by Mary Williams Walsh and Amy Schoenfeld, May 20, 2010

14. https://www.lohud.com/story/news/politics/elections/2019/08/06/these-new-york-police-officers-recently-retired-100-000-pensions/1933375001/, “These New York police officers recently retired with $100,000 a year pensions” by Chad Arnold, August 6, 2019 

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