Report Reveals Benefit to Teachers Costs NYC Taxpayers $1.2 Billion Annually
Teachers Guaranteed a 7 Percent Return on Deferred Compensation Investments
New York, NY – The Citizens Budget Commission (CBC) today released a report on a benefit provided only to New York City public school employees and to no other City employees: a guaranteed return of 7 percent on certain investments in their tax-deferred compensation plans. Titled “An Expensive and Risky Benefit,” the report shows that the benefit costs taxpayers about $1.2 billion annually.
Like many public and private sector workers, New York City teachers can contribute to a voluntary tax-deferred compensation plan, available in addition to their regular pension plan. However the teachers’ plan is unique in its guarantee of a fixed rate of return; all other deferred compensation plans, including that available to all other municipal employees, have a rate of return that varies with interest rates and stock market conditions. The teachers’ current guaranteed rate of 7 percent far exceeds interest rates on comparable fixed income securities. Taxpayers are making up the difference at an annual cost of $1.2 billion.
Not surprisingly teachers are pouring money into this fund and keeping it there rather than using it as retirement income. The fund grew from $7.4 billion in 2007 to $18.7 billion in 2015. About 137,000 teachers participate in the fund; of these about 51,000 are retired, but only 3,000 are drawing income from the fund.
This unique, and uniquely expensive, benefit should be reformed, and the report offers several models. The deferred compensation plan is not a pension benefit protected by the State constitution and can be changed with State legislation.
“The guaranteed 7 percent return, in addition to the cost of the teachers’ pension plan, is simply too expensive in the current economic environment,” said CBC President Carol Kellermann. “It’s an unreasonable burden on taxpayers, many of whom struggle to save for their own retirements.”
“This guaranteed return should be replaced with a more reasonable arrangement,” said CBC Research Director Charles Brecher. “Unless reformed, it will be an increasingly expensive and risky benefit.”