Just in time for Wall Street’s latest bout of bearish volatility, state Comptroller Thomas DiNapoli is taking an important step to fortify New York’s largest pension fund.

Too bad he also passed up a golden opportunity to go further in the right direction.

The comptroller is reducing, to 7 percent from 7.5 percent, the annual rate of return that he assumes the state Common Retirement Fund will earn on its investments. DiNapoli, the pension fund’s sole trustee, began strongly hinting at this move before the stock market’s plunge in August.

Assuming a 7 percent return puts New York’s largest public-pension fund on the leading edge of a nationwide trend also joined by New York City’s pension systems, which began moving toward assuming a 7 percent return a few years ago.

The comptroller’s action leaves the separate New York State Teachers’ Retirement System — which covers public-school educators outside New York City — in a shrinking minority of funds still optimistically assuming they’ll earn 8 percent.

The rate of return matters because it’s a key determinant of the amount taxpayers must fork over every year to ensure that pensions are adequately funded in the future.

Normally, the less the pension system assumes it will earn on investments, the more taxpayers have to pay in the form of current contributions, which are calculated as a share of current payrolls. Based on DiNapoli’s recent signals, New York’s state and local governments had reason to expect their pension costs would stay at their current high levels for years to come.

But DiNapoli coupled his rate reduction with changes in other calculations that will shrink current pension-funding costs. Most notable among them: the assumption that future pay hikes for state and local workers will remain lower than they were before the recession. That should translate into lower pensions — assuming, of course, state and local officials actually hold the line on salaries.

So, even assuming lower investment gains, DiNapoli projects that state and local government pension bills for 2016 will decrease by $800 million, reflecting New York’s biggest one-year drop since 1989 in pension contributions as a share of employee salaries.

But today’s savings will likely translate into tomorrow’s higher costs. In a world of ultra-low interest rates on the safest fixed-income investments, such as bonds, the pension fund can only hope to earn 7 percent by continuing to invest heavily in stocks and other riskier, more volatile assets.

There’s still another problem here, common to all public pension systems: unlike private pension-fund managers, DiNapoli is allowed to “discount” future pension liabilities based on what he assumes he’ll earn, rather than using the much lower “market” interest rate determined by low-risk bonds.

In fact, as noted in DiNapoli’s own actuarial study, there’s a less than 50-50 chance New York state’s pension investments will make 7 percent annually over the next 30 years. The expected long-term return on the state’s current investments is 6.6 percent, the study said.

Re-setting the return assumption to 6.6 percent would have would have moved at least a bit closer to reflecting the true cost of generous public-pension benefits, which are guaranteed by the state Constitution. And it would’ve done more to limit pension-fund shortfalls after the next prolonged market dive — which, for all we know, could be just around the corner.

The Common Retirement Fund earned an average of 5.9 percent between 2001 and the end of its 2015 fiscal year on March 31 — and since then, the S&P 500 has dropped by more than 5 percent. Assuming DiNapoli’s stock investments roughly track the S&P, they’ll have to gain at least 13 percent over the next seven months to hit the new return target. That’s not completely unprecedented — but would appear to be highly unlikely.

It’s quite possible that New York state’s pension investments will live up to their assumptions in the future. Or . . . not. With employee-pension contributions limited, the retirement fund is gambling mainly with someone else’s money — yours.

You may also like

Defuse this city pension bomb

Wednesday, Mayor de Blasio presented a fiscal 2018 Executive Budget that called for pension contributions totaling $9.6 billion — another all-time high. Yet city pension plans remain significantly underfunded even by lenient government accounting standards, posing a big risk to New York’s fiscal future. Read More

Desperate measures only add to NY’s pension perils

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. Read More

NY’s disability pension gambit

New York City’s pension costs will reach nearly $8.8 billion in the coming 2016 fiscal year — more than double the 2006 level and nearly eight times the 2001 amount. Yet now, with a week to go in the state legislative session, Albany is poised to drive those costs even higher. Read More

Lighting a fuse on N.Y.’s pension bomb

Last week, the Illinois Supreme Court struck down a desperately needed overhaul of that state’s massively underfunded pension system. The case has chilling implications for Albany as well as Springfield — and for New York City as well as Chicago. Read More

New York lawmakers’ three big blown chances

The Legislature is on the verge of following Governor Cuomo's lead by making three big moves in the wrong direction. Read More

Defusing the Pension Bomb

DESPITE the improving national and regional economy, New York City's budget remains stuck in a hole. With operating expenses momentarily in check, the city's continuing fiscal imbalance stems mainly from big projected increases in the cost of Medicaid, debt service, employee health benefits - and, seemingly out of nowhere, pension contributions. Read More

San Diego Needs Fundamental Pension Reform

San Diego's $1.1 billion pension fund deficit has been blamed on deliberate underfunding of the city employees' pension system, compounded by costly benefit enhancements for city retirees. But San Diego is hardly the only government employer with a big pension headache these days. Read More

Start The Revolution

Arnold Schwarzenegger just proposed it for California. Michigan has had it since 1997. Florida has had an optional version since 2000. It's time for New York to join the revolution and adopt the same kind of 401(k) retirement plan that is almost universal in the private sector for its future civil servants. Read More