ATTORNEY GENERAL CUOMO EXPANDS PENSION INVESTIGATION TO ADDRESS "PENSION PADDING"
Investigation Aimed at Artificial Inflation of Compensation to Boost Pension Payout
BROOKVILLE, N.Y. -- Yesterday, Attorney General Andrew M. Cuomo announced an expansion of his ongoing efforts to root out fraud and abuse in the New York State pension system. For the past three years, the Attorney General has led efforts to investigate and reform the New York State pension system and the New York State Comptroller's Office.
The investigation announced today deals with the manipulation of salary and overtime payments that leads to inflated pensions at the expense of taxpayers. As an initial step in the investigation into the practices of "pension padding" or "pension spiking," Cuomo is sending letters to 28 state agencies, authorities, and local government employers that have some of the highest salary or pension payments in the State (list of recipients available at:
http://www.ag.ny.gov/media_center/2010/mar/FirstWaveRecipients.pdf ). The letters seek payroll and related data for pension recipients.
"My office believes in the pension system and supports the right of public employees to receive their hard-earned compensation after dedicated service," said Attorney General Cuomo. "But we also believe that the pension system should be effective, efficient, and free from abuse. Public employers, like private employers, need to follow best practices in order to ensure that taxpayer dollars are safeguarded."
RISING PENSION COSTS AND ITS EFFECT ON PROPERTY TAXES
According to recent census data, New York State had an overall pension cost of $486 per resident in 2007, which was the highest in the nation. The New York State Common Retirement Fund ("CRF"), which funds the Employees' Retirement System ("ERS") and the Police & Fire Retirement System ("PFRS"), has assets of more than $129 billion and covers more than 1 million members and retirees from more than 3,000 government employers. The CRF is primarily funded by taxpayers who pay an estimated $2.5 billion to the fund each year.
Pension payments to retirees in ERS and PFRS have increased from $3.5 billion in 1999 to more than $7.3 billion in 2009. New Yorkers end up bearing the burden caused by excesses in pensions through increases in their property taxes. New Yorkers already face some of the highest property taxes in the nation. In a ranking of the counties with the highest property taxes in the United States, Nassau County ranks fourth, Westchester County ranks fifth, Rockland County ranks seventh, and Suffolk County ranks eleventh. Although pension costs typically make up only about 2 percent of expenditures in cities, towns, counties, and villages, in certain localities pension costs represent over 7 percent of expenditures.
In light of these rising pension costs, state and local employers will be required to make significantly higher contributions to fund the state pension system starting in 2011. For public employers participating in ERS, their mandated contributions will increase from 7.4 percent of payroll to 11.9 percent of payroll; for those participating in PFRS the costs will go from 15.1 percent to 18.2 percent.
VAST DIFFERENCES IN PENSION BENEFITS
There is currently a striking variance in levels of retirement benefits paid across the State. The average annual public pension payment in New York State is approximately $25,000, but pensions paid to some individual retirees top $300,000 per year and some retirees end up receiving more in pension than they received in salary.
Some examples of inflated salaries that can lead to inflated pensions include:
- A water department worker took in more than $30,000 in overtime and extra pay in addition to his $40,000 salary for a total salary of almost $74,000.
- A county animal control officer took in more than $19,000 in overtime in addition to his $38,000 salary for a total salary of more than $57,000.
- A police officer earning a base salary of $74,000 took in $125,277 in overtime in his final year, bringing his total income to almost $200,000. Based on this inflated final year's salary, he then received a $101,333 annual pension.
- A sanitary district official saw his annual salary increase from approximately $150,000 to over $200,000 through raises, bonuses, and special payments.
Boosting a final salary has compounding effects on a pension because it increases the ultimate, repeated payouts over the pension's term. For example, if a public employee with 20 years of service and an expected 20-year payout period gets an average salary inflation of $50,000 in overtime in the final years of employment, that adjusted pension could cost taxpayers as much as an additional $500,000.
Furthermore, if merely 1 percent of the pension costs in 2009 were improperly inflated by pension padding, elimination of those practices could potentially save taxpayers close to $500 million over twenty years.
Cuomo continued, "Some public employees may boost their income toward the end of their careers by monopolizing overtime shifts and other pension padding practices, which in turn raises their pension benefits. This type of manipulation causes a one-two punch to the taxpayer - first through unnecessarily high payroll costs for the public employer and again through artificially inflated pension payouts. We are investigating these practices so that we can take steps to rein in our ever-increasing pension costs and safeguard taxpayer dollars."
New York State Association of Counties Executive Director Stephen Acquario said, "Property taxes in New York State are among the highest in the nation. These taxes place a heavy burden on New Yorkers. The amount of tax dollars that state and local governments must contribute towards public pensions has more than doubled since 2009. As such, we need to do all that we can to rebuild the public's trust in our government operations and I applaud Attorney General Cuomo for his leadership in addressing this important issue."
New York State Conference of Mayors Executive Director Peter Baynes said, "New York has one of the highest overall pension costs in the nation and over the past few years we have only seen these costs grow. Added expenses that may be a result of unfair inflation become an added burden on taxpayers, who are already strained during these difficult economic times. I applaud the Attorney General for leading this investigation to ensure that our taxpayer dollars are accounted for."
OTHER INVESTIGATIONS INTO THE NEW YORK STATE PENSION SYSTEM
Curbing all types of pension abuse and manipulation is a top priority for Attorney General Cuomo. One ongoing investigation conducted over the past three years with respect to the CRF has led to a number of criminal charges to date, including charges against political advisor Henry "Hank" Morris, former CRF Chief Investment Officer David Loglisci, former Liberal Party Chair Raymond B. Harding, and investment advisor Saul Meyer. Loglisci, Meyer, Harding, hedge fund manager Barrett Wissman, and unlicensed placement agent Julio Ramirez, Jr. have pled guilty to Martin Act securities fraud charges for conduct related to the pension fund. Elliott Broidy, a venture capital fund manager, pled guilty to charges of rewarding official misconduct arising from his role in the pension fund investigation. Morris is presumed innocent until he is proven guilty in court.
To date, eleven investment firms have agreed to sign the Attorney General's Public Pension Fund Reform Code of Conduct to resolve their roles in the Attorney General's investigation into pay-to-play practices involving the CRF. Those firms are: The Carlyle Group; Riverstone Holdings LLC; Pacific Corporate Group Holdings, LLC; HM Capital Partners I; Levine Leichtman Capital Partners; Access Capital Partners; Falconhead Capital; Markstone Capital Group LLC; Wetherly Capital Group; Freeman Spogli & Co.; and Ares Management, LLC. The firms have agreed to return over $90 million to the CRF. Payments from individuals bring that total to over $120 million for the CRF and New York State. Cuomo also issued subpoenas in May 2009 to investment firms and their agents after his investigation found that 40 to 50 percent of agents obtaining investments from New York pension funds were unregistered.
In a separate ongoing investigation, Attorney General Cuomo uncovered abuses by independent contractors throughout the state who defrauded the pension system by holding themselves out as public employees entitled to pension benefits, resulting in the return of over $1.9 million to taxpayers through actions involving the conduct of more than 70 attorneys and other professionals. As a permanent fix, the Attorney General spearheaded legislative reform to curb pension fraud and rein in double-dipping. Another investigation explored abuses of federal disability benefits by Long Island Rail Road retirees.
The Attorney General's pension padding investigation is being conducted by Assistant Attorneys General Lauren Ellis, Renée Jarusinsky, Jessica Silver, and Director of Economics Kitty Kay Chan, under the supervision of Deputy Bureau Chief Monica Stamm of the Public Integrity Bureau and Special Deputy Attorney General for Public Integrity Ellen Nachtigall Biben.
The Attorney General's office urges individuals with knowledge of any questionable pension padding practices to contact the Attorney General's Public Integrity Bureau by telephone at 212-416-8090 or by e-mail at public.integrity@ag.ny.gov .
A copy of the letter can be found online at www.ag.ny.gov/media_center/2010/mar/OAG Letter Request.FINAL.pdf .