By ADAM SICHKO
asichko@bizjournals.com | 518-640-6818

Business owners will soon face more tax hikes as larger pension payments continue to inflate the deficits burdening local governments across the state.

And more and more tax money will be mailed to out-of-state residents - checks that now total $2.5 billion a year.

Almost $575 million of benefits go to former New York government workers and their beneficiaries living in Florida alone, not counting retired teachers.

The growth, critics said, is one example of a system on the verge of becoming unsustainable and cementing its role as a chief contributor to New York's notorious reputation of having sky-high taxes.

This month, state Comptroller Thomas DiNapoli said local governments will owe almost 40 percent more in average pension payments for most employees - a jump of $1.3 billion in one year.

The rates are now the highest in 30 years, driven up by weak returns on stock market investments.


The pension pain hits as localities reel from disappearing federal stimulus funds, shrinking state aid and one of the steepest drops in sales tax on record.

"They're mayors; they're not magicians," said Peter Baynes, executive director of the New York State Conference of Mayors. "The retirement system that we've had for a century was created at a time when New Yorkers, when they retired, stayed in New York.

"That's definitely not the case now," he said. "You hate to export the pension benefits you're paying to retirees. New York property-tax payers are funding a system where benefits are enjoyed outside of our state."

The burden seems destined to increase, with the oldest baby boomers now reaching retirement age.

To help close a budget deficit, New York state has cleared at least 4,500 workers to retire this fall and start tapping their pensions.

"The taxpayer-funded share of pensions will basically double in the next few years. There is no financially prudent, responsible way to avoid those very steep increases," said E.J. McMahon, director of the conservative Empire Center for New York State Policy, Albany. "The final irony is that a lot of this money is flowing outside our borders."


In New York, pension benefits are guaranteed by the state constitution. They were created as vital tools to lure people to government jobs, but they're now overwhelming costs, he said.

"The mentality is, if the rate of return doesn't pan out, it's OK because the taxpayers are the safety net," he said. "Now the safety net is absorbing the fall."

Most states face similar problems, said Alicia Munnell, head of the Center for Retirement Research at Boston College.

"It's now become clear that pensions are just a hugely expensive commitment," Munnell said. "There is no fast answer."

On Sept. 2, DiNapoli said the pension fund will lower its projected rate of return from 8 percent to 7.5 percent.

McMahon and Munnell said many economists endorse a rate as low as 5 percent - which would force taxpayers to pay even more to keep the system going.

"Despite what others may assert, our fund is adopting a more conservative assumption than most public, and many private-sector, funds," DiNapoli said.

The fund had a negative return rate in its latest quarter, dropping the value of its assets to $124.8 billion. It's still the third-largest public pension in the nation.

Union officials said they're tired of others blaming "lucrative" pensions for the financial problems facing municipalities.

"It's there for a purpose. That's part of the attraction of being a public servant - a guaranteed pension," said John Black, legal counsel for the New York State Professional Firefighters Association.

"Take a 90-degree day like we had last week, put on a set of that gear and tell me that's not a hard job," he said. "Now we have a new fiscal crisis, so they want to change the rules?"

His group's members earn every part of their pensions, Black said.

"Other people, I think, are jealous," he said. "Our group is willing to sit down and talk reasonably, but that never appears to happen."


There are few immediate solutions.

Last year, legislators created a new tier of reduced pension benefits, promising billions of savings over three decades.

But the tier only applies to new workers, and for now, the state has curtailed hiring. As a result, 1 percent of the state's 200,000-plus work force is in the tier.

This year, legislators enacted a plan allowing municipalities to stretch out some pension payments - in effect, taking a loan.

Supporters said the plan provides essential breathing room while also helping localities offset future rate hikes.

Baynes, of the mayors' lobby, said it could be a salve for many localities.

But for now, he warned, "there is little place else to turn but the property tax."

This article originally appeared in The Business Review (Albany).