The stock market’s recent performance suggests that the New York State Teachers’ Retirement System (NYSTRS) had trouble meeting its ambitious 8 percent return target during its most recent fiscal year, which ended a week ago.

The S&P 500 index gained about 5.3 percent between July 1, 2014, and its close on June 30—well short of NYSTRS’ expected long-term rate of return on domestic equities, which most recently was pegged at 9.6 percent in nominal terms.* NYSTRS counts on even more robust growth of 10.8 percent in its foreign stock portfolio, but as of last week, the 52-week change in the Dow Jones Global Index, excluding the U.S., was a decline of 7.1 percent.

While pension fund returns don’t exactly line up with the stock indexes, the two generally march in the same directions. Last year, for example, the overall return of 18.2 percent on NYSTRS investments was driven by gains of more than 20 percent on stocks, closely paralleling the overall indexes. Subpar performance in foreign and domestic stock markets do not auger well for total pension fund returns in fiscal 2015.

NYSTRS seeks to hold 72 percent of its assets (2014 value: $108 billion) invested in equities, including stocks, real estate and “alternatives” such as private equity funds. That makes for a relatively risky allocation profile—among the riskiest of all large state pension funds, according to the latest Wilshire Consulting survey, which said the average equities allocation was 66 percent.

With a similarly equity-heavy allocation, the state’s larger Common Retirement Fund (CRF) completed its 2015 fiscal year on March 31 with a gain of 7.16 percent—this, during a 12-month period when the S&P 500 grew by 10 percent. The fund probably gained little if anything during the first quarter of its 2016 fiscal year, given a slight market drop during that period.

Under its sole trustee, Comptroller Thomas DiNapoli, the CRF assumes a rate of return of 7.5 percent, and its actuary is widely expected to recommend a further reduction to 7 percent or less within the next few months. A lower assumed rate of return translates into higher required contributions, but also leaves taxpayers with less of a hole to fill when investment returns come in below target.

By sticking with its less realistic 8 percent rate—higher than the consensus recommendation of independent financial analysts, economists and actuaries—the NYSTRS board of trustees is exposing New York school districts to an increased likelihood of pension funding shortfalls in the future. Pension contributions are “smoothed” over five years, so the fund missing its target by a bit in one year won’t dramatically affect the contribution in the next year. But the fluctuations in a market inflated by the lack of returns on bonds are a reminder that pension expenses, backed by a taxpayer guarantee, remain unpredictable.

The lesson for local school officials: don’t feel too reassured that happy days are here again when it comes to your pension contributions. Notwithstanding a big projected drop (from 17.53 to 13.26 percent of payroll) in school district pension bills that will be payable in the fall of 2016, defined-benefit pension funds remain a fiscal time bomb, especially when they rely on excessively optimistic assumptions. What is about to go down could easily shoot back up—inevitably at a time when taxpayers can least afford it.

This problem could be minimized if the state gave teachers the ability to opt into a defined-contribution retirement plan such as the one offered to State University of New York faculty. Under Governor Andrew Cuomo’s Tier 6 pension reforms of 2012, this optional plan also has been opened to newly hired non-union employees earning $75,000 or more. Most teachers think they should have the same choice, according to a 2012 Empire Center poll.

Tuesday also marked the close of the year for New York City’s pension funds. Because those funds are transitioning to a 7 percent rate of return assumption, their likely return on investment shortfall will be smaller than that of the NYSTRS.

* See p. 46 of the NYSTRS annual report for details.