The “20-20-20-20” Dilemma: Legacy Costs in the New York City Budget
An alarming and little known fact is a large slice of the New York City budget pie does not pay for current services. This giant slice, dedicated to “legacy costs,” claims more than 20 percent of the budget and will grow by 20 percent to more than $20 billion in annual spending by fiscal year 2020.
Legacy costs are bills paid today for commitments made in the past. Unlike other expenses, which can be adjusted depending on necessity, priorities, and available resources, legacy costs are not easily shaped or curtailed by current policy makers. The rapid growth of legacy costs far outpaces that of the rest of the budget: between fiscal years 2016 and 2020, legacy costs will grow 20 percent from $17.4 billion to $20.9 billion while all other spending will grow less than 11 percent.1
Legacy costs include debt service, pension contributions, and retiree health benefits:
- Debt service payments repay bonds issued for past capital projects. In fiscal year 2016, debt service for the City’s debt obligations totaled $6.1 billion and will increase by one-third to $8.4 billion by fiscal year 2020.2
- Pension contributions are made by the City to the public employee pension funds to support benefits of current and future retirees. Annual pension contributions are determined by a number of factors, including prior decisions to offer relatively generous pension benefits for the public workforce. Pension contributions will rise from $9.2 billion to $9.7 billion between fiscal years 2016 and 2020—assuming the funds meet their annual investment target of 7 percent.
- Retiree health benefits include comprehensive health insurance with no cost sharing for the premiums, additional per-member contributions to union welfare funds to supplement this insurance, and reimbursements to retirees and their spouses over the age of 65 for the cost of Medicare Part B premiums.The annual cost of these benefits will be $2.9 billion by fiscal year 2020 – almost $700 million more than in fiscal year 2016.
Can city leaders undo decisions of the past? Debt service payments are made according to a predetermined schedule, and failure to make a payment can lead to credit downgrades that make future borrowing more costly. Pensions are constitutionally protected; benefits cannot be reduced, and the City must make its payments each year to keep the funds solvent. While little can be done to significantly reduce these expenses in the short term, good fiscal stewardship can slow their growth over the long term. For example, some infrastructure improvements can be funded through current year resources and annual proposals to enhance benefits can be rejected.
Greater discretion is available to curtail meaningfully retiree health benefit costs; changes can be made legislatively by the City Council and Mayor, although changes have historically also been negotiated to obtain the consent of the Municipal Labor Committee (MLC). Fortunately, a forum exists for these changes to be adopted. The City and the MLC have partnered to achieve savings in the city’s health care costs expected to total $3.4 billion. To date, they have announced savings totaling $2.1 billion; while some savings have reduced the costs of health plans, most of the recognized savings come from a national slowdown in the growth of health care premiums.
City-MLC negotiations should focus on reducing health care costs further and bringing retiree health costs in line with those of other state and local governments.3 First, retirees should share the cost of health premiums. Currently, most retirees are enrolled in plans that do not require a premium contribution; benefit eligibility kicks in with as little as 10 years of service and begins when you collect your pension, regardless of age or other employment. Retiree health insurance is an increasingly rare benefit in the private sector, and most municipal governments offering the benefit require retirees to share the premium costs, typically at rates greater than employees. Other state and local governments prorate the subsidy according to length of service.
Second, reform of union welfare funds is needed. Based on negotiations with each union, the City makes per employee and per retiree contributions to the funds, which are administered by union officials who decide upon the benefits the funds will offer, typically prescription drugs, vision, and dental benefits.4 The funds are inefficient, poorly managed, and unaccountable; consolidating supplementary health care benefits under the city’s health plan would be more efficient.
Finally, Medicare Part B premium reimbursements should be eliminated. This benefit is unheard of in the private sector and uncommon even among public employers.
CBC estimates that these three changes could provide savings totaling up to $1.6 billion by fiscal year 2020 – keeping total legacy costs under $20 billion and reducing the growth to a more reasonable 11 percent.5
- Expenditures are adjusted for prepayments as well as a $500 million deposit to the Retiree Health Benefits Trust Fund in fiscal year 2016. Off-budget debt service payments for the Sales Tax Asset Receivable Corporation (STARC) and the Tobacco Settlement Asset Securitization Corporation (TSASC), totaling $244 million annually, are included. Reserves of $20 million in fiscal year 2016, $1.5 billion in fiscal year 2017, and $1 billion in the following fiscal years are excluded.
- Includes STARC and TSASC debt service.
- Indeed the stated purpose of the NYC-MLC endeavor is to “bend the cost curve.”
- Note some unions have separate funds for employees and retirees, while others provide the benefits through one fund.
- Assumes 50 percent retiree contribution for retiree health insurance, elimination of Medicare Part B reimbursement, and 20 percent savings on the costs of retiree union welfare funds (but does not include savings that would be generated in parallel to funds for active employees).