stock_ticker-150x150-7461692Yesterday marked the end of a second straight  sub-par fiscal year for most of the nation’s state and local public pension funds, including all five New York City funds and the New York State Teachers’ Retirement System (NYSTRS).

The bellwether  S&P 500 and the Dow Jones Industrial Average were essentially flat, and major foreign indexes were all down (some sharply) during the same period, after a volatile year marked by weak global economic growth, slumping U.S. corporate profits and uncertainty about the outlook for the China and the European union.

Because public pension funds typically invest roughly 70 percent of their assets in equities, and more than half in corporate stocks, their annual returns are strongly correlated with the stock markets—as shown, for example, in the following chart tracking the S&P 500 and NYSTRS returns since 2007.

screen-shot-2016-07-01-at-9-52-39-am-1024x629-4679076

The S&P 500 average change for the period shown above was 5.9 percent, while the NYSTRS average was 6.6 percent — considerably below its assumed return of 8 percent.  NYSTRS has since lowered its assumed return to 7.5 percent, while the city pension funds are in the process of “amortizing” their annual expectations down to 7 percent.  Their actual FY 2015 experience was well below those levels: 5.2 percent net of fees for NYSTRS, and 3.4 percent collectively for the city funds.

Based on the stock indexes, it seems likely NYSTRS and the city funds, as well as other public pension systems with July 1-June 30 fiscal years, will have much smaller gains (if any) for fiscal 2016, once again undershooting their targets.

So what does this mean for taxpayer costs? A lot depends on how the financial markets fare in the next two years.  NYSTRS, for example, values assets based on a “five-year phased in deferred recognition of each year’s actual gain or loss, above (or below) an assumed inflationary gain of 3.0%.”  As a result, there’s upward pressure on contributions when the formula includes big losing years such as 2009—when, for example, NYSTRS’ asset values dropped 21 percent. The city funds use a slightly different method of “smoothing” asset values over a three- to five-year period, but the underlying forces are similar.

Looking ahead, however, the smoothing formula used to figure employer contributions in 2017 will no longer be boosted by the big gains all funds realized in fiscal 2011.  The net change in assets over the five years ending 2016 has roughly kept even with investment targets. So, if returns fail to meet or exceed the target over the next couple of years, taxpayer contributions will have to rise again to make up the difference.  A repeat of the 2007-09 bear market—or even something just half as bad—would cause pension costs to rise again.

Much the same can be said of the Common Retirement Fund, which feeds the New York State and Local Retirement System (NYSLRS), which ended its 2016 fiscal year on March 31 with essentially no gain at all.  The fund, run by state Comptroller Thomas DiNapoli, is also heavily weighted to stocks—and, like all public pension funds, is allowed to calculate its funding needs based on accounting assumptions that would not pass muster in the private sector.

About the Author

E.J. McMahon

Edmund J. McMahon is Empire Center's founder and a senior fellow.

Read more by E.J. McMahon

You may also like

Next Time Get It In Writing: The NY Redistricting Bait-and-Switch

New Yorkers got a thorough lesson on the difference between a constitutional amendment and a law. Read More

How a Medicaid Program To Improve Nursing Home Care Ended Up Paying for Union Benefits

New York State's budget-making process sometimes works like a closed loop, as interest groups on the receiving end of state spending reinvest a portion of their proceeds to lobby Albany for still more money. Read More

Turning NY’s Yellow Buses Green Could Cost $8B+

New York in 2022 imposed the largest unfunded mandate on schools in a generation, requiring them to replace their buses with electric models. New price data indicate the cost is still rising. Read More

The Election Day After Tomorrow

New York’s “cap and invest” program (NYCI), a central part of the state’s efforts to reduce greenhouse gas emissions, appears designed to hold back much of the program’s sticker-shock until January 2027—after the 2026 election. Read More

How Eliminating the Medicaid ‘Gap’ Would Perpetuate Inequity in Hospital Funding

A change in Medicaid reimbursement currently being pushed by New York's hospital industry appears likely to benefit high-end hospitals proportionally more than safety-net institutions, a review of hospitals' financial repor Read More

Union Membership Dropping in NY Too

The decline in union membership observed nationally appears to be occurring in New York as well. Read More

Hochul’s ‘Straight Talk’ on Medicaid Isn’t Straight Enough

Arguably the biggest Medicaid news in Governor Hochul's budget presentation was about the current fiscal year, not the next one: The state-run health plan is running substantially over budget. Read More

NY private employment was flat at end of 2023

New York's post-pandemic employment recovery stalled in the final quarter of 2023, with the state ending the year still 76,400 private jobs below its February 2020 level. Read More