NEW YORK (Reuters) - For Niagara Falls, a city in New York staring at the prospect of insolvency in the face of a weak local economy and soaring employee costs, diverting money earmarked for pensions to cover short-term spending needs seemed like the only option.
"We don't like doing it, so this is sort of a last ditch strategy for us," Mayor Paul Dyster told Reuters in an interview. Postponing pension payments was the way to avoid cutting back on town services, he said.
Dyster is not alone. A poster child for the struggling upstate economy, Niagara Falls is now one of around 200 New York municipalities, counties and other public employers that delayed more than $1 billion in pension contributions last year as they struggled to plug budget shortfalls.
The delay in contributions mirrors steps taken some years ago in other states like New Jersey and Illinois, both now grappling with massive pension funding troubles.
The problem is national. Nearly half of all public plans did not make their required contributions last year and had self-declared unfunded liabilities of around $834 billion, according to Wilshire Consulting.
As economic recovery remains elusive for many quarters of New York state, the number of entities deferring required contributions to two public pension funds has quadrupled since 2011, and the amount deferred has risen by a similar magnitude to a total of more than $2 billion.
That trend may well accelerate under new rules allowing employers to divert even more pension money, and the practice is raising concerns it could undermine one of the country's best-funded public pension systems, which oversees the retirement savings of more than a million workers.
The so-called smoothing or amortization rules - first introduced by the state in 2010 - are intended to give municipal governments facing huge increases in pension costs some wiggle room. Pension contribution rates, which have been soaring after pension fund assets were depleted during the 2008-2009 financial crisis and as interest rates have fallen, are based on defined future payouts that pension funds have to make to members.
"They called it pension smoothing, but that's a lot of nonsense, they're borrowing," said former New York Lieutenant Governor Richard Ravitch, a critic of the deferrals. "They're contributing promissory notes to the pension fund and that is what's called in my world kicking the can down the road, and I consider it highly irresponsible, highly risky."
Supporters of the plan, including New York Governor Andrew Cuomo, counter that New York's funding ratio of around 90 percent, gives the state and municipalities a cushion, and the deferrals help to avoid cutting services or raising taxes. New York's deferral rules come with hard repayment schedules, helping to minimize risks to the system, they say.
"There are no easy solutions to the new fiscal reality that localities are facing," New York State Comptroller Thomas DiNapoli said in emailed comments. "The vast majority of employers have opted to pay their pension bill in full."
DiNapoli, who administers the funds, says falling state aid to municipalities and restrictions on raising local property taxes are adding to the problem that towns face. Governor Cuomo has introduced a 2 percent cap on property tax increases in the state.
Previously unpublished data provided to Reuters by the New York State Comptroller's office show public employers deferred $1.1 billion in the fiscal year ending in March 2013, up from $293.2 million in 2011, a near four-fold increase.
The number of public employers using deferrals jumped to nearly 200 in the fiscal year just ended from around 50 two years earlier. About 3,000 employers pay into the system.
Participants range from some of the state's largest, wealthiest counties to some of its smallest, hardscrabble towns.
In the fiscal year that just ended, Long Island's Nassau County, already under the control of a financial oversight board, and Suffolk County, also on Long Island, deferred nearly 30 percent of their pension obligations.
The tiny Village of Clayville, population 350 and located 60 miles east of Syracuse, deferred nearly 56 percent of its obligations to one system - the biggest of any authority in percentage terms.
This year the amounts the state's municipal employers are required to pay by actuarial formulas, which match assets to obligations, are 20.5 percent of the annual wage bills for the Employees Retirement System (ERS) and 28.9 percent for the Police and Fire Retirement System (PFRS).
In 2001, the year after the tech stock market bubble had peaked, those rates were 0.9 percent for the ERS and 1.6 percent for the PFRS.
The Comptroller's office says contribution rates are expected to start falling again in 2015 as the stock market, where much of the systems' assets are invested, continues to improve. The Standard & Poor's 500 index, the most widely followed U.S. equity market benchmark, has been clocking up a series of record highs this week and has more than doubled off its low following the financial crisis.
In fiscal year 2013-2014, employers can cut their contributions as a percentage of their wage bills to 12 percent into the ERS and 20 percent into the PFRS.
"I don't think people have a choice," George Maragos, comptroller of Nassau County, told Reuters in reference to the deferrals. "The problem is that rate increases of 20-25 percent are unconscionable and no organization can absorb those."
Officials for Clayville and Suffolk County did not return requests for comment.
New York reformed its public pensions in 2012, requiring new hires to contribute more, but those changes will not begin to impact overall pension costs until years down the road, leaving municipalities with a growing cost for current and former employees.
Reporting by Edward Krudy; Editing by Tiziana Barghini, Martin Howell and Leslie Gevirtz