Public pension costs rising again for NY state and local governments
Investment returns were adequate in FY 2025, but other factors will play a larger role in driving up employer contributions
Taxpayer-funded employer contributions to New York State’s biggest public pension plan are about to increase for a fourth consecutive year, likely adding at least $400 million dollars to an annual expense that already tops a combined total of more than $6 billion a year.
The coming uptick in employer pension costs was announced last week by state Comptroller Thomas DiNapoli, who is sole trustee of the enormous Common Retirement Fund (current assets approaching $300 billion) and administrator of the 500,000-member New York State and Local Retirement System, which consists of the Police and Fire Retirement System (PFRS), whose membership is described by its name, and the Employee Retirement System (ERS), which covers everyone else (other than professional educators) working for the state and for local governments (excluding New York City).
Calculated as a percentage of total salaries, the average employer contribution rate will rise to 17.6 percent for ERS members, up from 16.5 percent in the current billing cycle, DiNapoli said. The average PFRS rate will increase by even more—to 36.5 percent of salaries from 33.7 percent. Those rates will be reflected in pension bills payable by state and local entities during fiscal years starting in 2026.1 The increases may sound small, but look at it this way: in effect, scheduled pay hikes for state and local workers next year will be compounded by nearly 1 percent for ERS members and by nearly 3 percent for police and firefighters, whose benefits already cost employers nearly twice as much per worker.2
As illustrated by the chart below from the pension systems’ 2025 annual actuarial report, the employer contribution rate for ERS will reach its highest level in 11 years, while the PFRS rate will reach a new all-time high.
Applied to ERS and PFRS payrolls as of 2023 (the latest year for which figures are available), the projected contribution rates would translate into a net increase of $437 million. The actual cost could be closer to $500 million, after adjusting for two more years of increases in base salaries.
Calculated as an average percentage of each employer’s salary base, pension contribution rates historically have moved in the opposite direction of the pension fund’s investment performance—rising in the wake of financial market downturns, and falling when returns exceed the pension fund’s assumed target rate, now pegged at 5.9 percent.
The upcoming increase stems from different causes, however. During fiscal 2025, which ended March 31, asset returns in the state enormous Common Retirement Fund were virtually on target at 5.84 percent. If nothing else had changed, this would have resulted in no contribution rate increase at all. As detailed in the pension actuary’s annual report, employer contributions must rise to make up for other actuarial factors—a trend of bigger salary hikes in the case of ERS members, and a combination of accelerated service retirements and increased disability retirement benefits among police and firefighters.
Background basics
Defined-benefit pension plans like ERS and PFRS guarantee their members a stream of post-retirement income based on peak average salaries and career duration. Accrued benefits are pre-funded, meaning all the money necessary to cover promised pension payments has been accumulated before employees retire—a sum now approaching $300 billion. The goal of every pension plan is to be 100 percent funded, or as close to that level as possible. As of fiscal 2024, the Common Retirement Fund’s ratio of assets to liabilities stood at 92 percent, among the highest levels of any state system.
Monthly pension payments to ERS and PFRS retirees are drawn out of an investment pool replenished by annual contributions from employees and employers, both calculated as a percentage of salaries. That replenishment is essential, because the system’s cash flow is negative: in a normal year, the outflow of benefit payments exceeds investment earnings by billions of dollars. Employees contribute at a fixed rates of 3 to 6 percent, while employer contributions vary around an estimated “normal” percentage level—increasing whenever necessary to backfill a shortfall in investment returns, and decreasing when investment returns are stronger than expected.
As explained in the 2025 report of the State Actuary:
Proper funding requires that liabilities and employer contribution rates are developed using reasonable actuarial assumptions and methods. Actuarial assumptions are grouped into two broad categories: demographic assumptions (rates of employee turnover, disability, mortality, and retirement) and economic assumptions (interest rates, inflation, and salary growth). [emphasis added]
The factors driving the next pension contribution increase come from both actuarial categories. On the economic side, salaries for ERS members over the past five years have grown by an average 5.7 percent, well above the 4.4 percent actuarial assumption, and by 7.1 percent for PFRS members, compared to the expected average of 5.7 percent. As usual, increases vary by experience level within both groups, with newest hires climbing the pay scale at a faster rate. Moreover, the actuary reported:
Accelerated retirements and labor shortages now drive a strong labor market and have greatly increased employers’ reliance on overtime compensation. Add to this an increased rate of inflation, and we see all elements of the salary scale building blocks increasing.
Reflecting these changes, the system’s actuarial assumptions have been adjusted to increase the expected average annual ERS pay hike to 5.2 percent and the expected PFRS salary growth to 6.1 percent, starting with the fiscal year 2025 cohort of employees, although the actuary indicated there could be further adjustments to PFRS salary expectations in the near future.
The salary change, all by itself, will drive an increase of 1.4 percentage points in ERS, the actuarial report showed. In other words, salary hikes aside, all other actuarial factors combined would produce a slight decrease in ERS contributions starting next year.
On the PFRS side of the ledger, the drivers are demographic. Assumptions related to increased disability benefits will drive up employer contribution rates by 2.2 percent, and a higher level of accelerated retirements by police and firefighters in 20- and 25-year plans will pump up employer costs by an average of 1.3 percent of salaries. All other actuarial factors combined produce an offsetting reduction of 0.6 percent in PFRS contributions.
Operating on a more typical July 1 - June 30 fiscal calendar, the five New York City pension funds and the New York State Teachers Retirement System had much stronger investment returns during their 2025 fiscal years.3 The New York City funds collectively realized an investment gain of 10.3 percent, easily exceeding their 7 percent target rate; as a result, Comptroller Brad Lander estimated the city’s projected pension costs would be reduced by $191 million in FY 2027, $436 million in FY 2028, and $668 million in FY 2029. NYSTRS hasn’t yet announced its FY 2025 investment gain, but that figure also likely exceeded 10 percent, well above the fund’s assumed 6.95 percent rate of return. Barring any offsetting actuarial adjustments, this should further reduce what school districts must pay into that fund in 2025-26 budgets.
Meanwhile, in Albany
Oblivious to the rising pension cost trend, legislators in both parties have shown their willingness to pander to public-sector labor unions demanding a rollback of the cost-saving reforms enacted as part of two new pension benefit “tiers” enacted in 2010 and 2012.4 Expect to hear the unions’ crude slogan— “Tier 6 Sucks”— repeated early and often around the State Capitol in 2026, a statewide election year. If the union lobbying campaign succeeds, the resulting cost to taxpayers (spread across the New York City and school district pension plans as well) will make the coming ERS and PFRS increase look like peanuts.
New York City has five pension plans, including separate plans for teachers, police and firefighters. Teachers and administrators in suburban and upstate school district belong to the separate New York State Teachers Retirement System.
PFRS pensions are much more expensive than ERS benefits because police and firefighters are paid much more on average ($123,196 as of 2023, more than double the ERS figure) and they can retire on full pensions after just 20 to 25 years, a full decade or more sooner than the earliest retirement dates available to ERS members.
These funds had bigger gains largely because they were able to benefit from the strong rebound in the S&P 500 between March 31 and June 30. The state funds bore the brunt of the fall in the S&P 500 precipitated by the announcement of President Trump’s planned tariff increases earlier in the year.
For anon-pandering perspective on the issue, see my October 2023 testimony and recommendations to the state Senate Civil Service and Pension Committee.