During the first few years after Wall Street prices bottomed out in 2009, public-pension funds across the country reaped double-digit returns. They were riding a bull market pumped up by ultra-low interest rates, and it wouldn’t last.
Now pension managers have been struggling to break even — the predictable outcome of a funding strategy that continues to expose taxpayers to unreasonable long-term risks.
Case in point: New York state, where Comptroller Thomas DiNapoli announced last week that the $178 billion state and local pension fund ended its fiscal year March 31 with a minuscule return on assets of 0.19 percent, well short of its 7 percent long-term target.
Similar results can be expected from New York City’s five municipal-worker pension funds, which also bank on 7 percent returns. Based on market trends, the city funds will be lucky not to lose money in the fiscal year ending June 30.
Generally more than half the money in New York’s public-pension funds is invested in stocks. A chunk of what remains is steered to high-risk, high-reward categories such as private equity and hedge funds, as well as real estate. Less than one-third of pension-fund assets typically are parked in safer, lower-yielding government bonds and other fixed-income investments.
Like just about everyone else, the state retirement fund lost money in the stock market. DiNapoli could’ve achieved a better performance if he’d simply invested all the fund’s assets in the ultra-safe category of Treasury Inflation-Protected Securities — or even in cash.
To be sure, no one would seriously suggest the functional equivalent of stuffing New York’s pensions into a mattress. But the current strategy is almost at the opposite extreme, tolerating excessive levels of risk and volatility in a desperate effort to prevent current costs from spiking again.
Both politics and finance are to blame for this.
New York’s state and city pension funds collectively have well over a million active and retired members. Government employees can earn pension benefits that are exceptionally generous by private-sector standards—and guaranteed by the state Constitution.
But high returns aren’t.
As former Mayor Michael Bloomberg put it, “If somebody offers you a guaranteed 7 percent on your money for the rest of your life, you take it and just make sure the guy’s name is not Madoff.”
Tax-funded public-pension costs for every level of state government rose from absolutely minimal levels in 2000 to a grand total of more than $16 billion last year, half of it in New York City alone. But taxpayer costs would have to be much higher if pension contributions were based on the much more conservative rules applied to private funds.
As the State University’s Rockefeller Institute pointed out in 2014, pension-fund managers and trustees have been embracing “potentially destructive myths and misunderstanding” about the true costs and risks associated with their promises.
Among those myths is the notion — oft-repeated by DiNapoli — that public-pension funds are “long-term investors” that can stick with their assumptions through thick and thin, riding out the kind of market volatility that saw the state funds’ return on assets veer from a 26 percent loss in 2009 to a 26 percent gain in 2010.
In fact, if they really want to minimize costs for taxpayers in the long run, the state comptroller and other pension-fund managers need to be less tolerant of risk and more leery of volatility in financial markets than individual investors — who, after all, are routinely confronted with a federally required disclaimer to the effect that “past results are no guarantee of future performance.”
New York should lead all states toward more thorough and truthful public-pension accounting — linked to a more prudent funding method, as recommended by, among others, the Blue Ribbon Panel of the Society of Actuaries.
Could that result in even higher costs for taxpayers? Potentially, in the short run. But honestly confronting those costs now — and approving the fundamental reforms needed to rein them in — is the only sure way to prevent them from mushrooming in the future.
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