Rebounding from its biggest loss since the Global Financial Crisis, New York’s Common Retirement Fund realized a strong investment gain of 11.55 percent in fiscal year 2024, state Comptroller Thomas DiNapoli announced. The Fund, which now stands just below $268 billion, supports pensions paid to members of the New York State and Local Retirement System (NYSLRS).

The Common Retirement Fund earned nearly twice its 5.9 percent assumed rate of return (RoR), which in actuarial terms was enough to offset part—but only part—of its 4.1 percent loss in fiscal 2023.  On a compound basis, the fund’s assumed RoR gains since 2022 would have come to 12 percent; but even with last year’s rebound, the actual two-year return has been 7 percent.

The bottom line for taxpayers: at best, there will be no increase in required employer contributions to the pension fund starting next year.  At worst, there will be another increase, but smaller than the one DiNapoli is billing in 2024 and 2025.

Retirement fund rollercoaster

As depicted in the following chart, the asset-return bounceback in FY 2024 continues a 25-year trend of volatility in the retirement fund’s performance, which reflects broader financial market trends since the turn of the century.

The retirement fund’s FY 2024 return will come as no surprise to anyone keeping a close eye on Wall Street: domestic equities are the Common Retirement Fund’s single largest asset class (now 43 percent of the $267 billion total), and stock prices as measured by the S&P 500 rose nearly 28 percent during the state’s fiscal year, which ended March 31. Because the state retirement fund is both hedged and diversified—investing just over one-fifth of its assets in cash, bonds, and mortgages, and nearly 13 percent in real estate and other “real assets”—both its gains and losses generally are less extreme than those of the stock market indices. For example, last year’s 4.1 percent loss came during a period when the S&P fell nearly 10 percent, while the fund’s record gain of 33 percent in FY 2021 came during the 12-month post-pandemic bull market when stock prices soared 63 percent.

Since 1999, the retirement fund’s compound average rate of return has been 7 percent a year, and its compounded total return has been 451 percent—compared to a  508 percent nominal gain in corporate stocks listed in the S&P 500 (assuming dividend reinvestment; not including dividends, the S&P 500 nominal price return has been 287 percent).

It was following the retirement fund’s record return of 33.6 percent in FY 2021 that DiNapoli reduced the pension fund’s RoR assumption—which is also the discount rate for calculating future pension obligations—from 6.5 percent to 5.9 percent, which is the lowest (and therefore the most prudent) among the nation’s largest public pension systems. This brought New York’s rate much closer to the yields on low- and no-risk fixed-return assets including high-quality corporate bonds (now around 4.8 percent) and 30-year Treasury bills (most recently hovering around 4.4 percent), which are the standards against which multi-employer private pensions are measured.

“While inflation persists and global tensions pose risks to investors, the Fund, thanks to its prudent management and long-term approach, is well positioned to weather any storms and continue to provide retirement security to the public employees it serves,” DiNapoli said in announcing the FY 2024 return.

To be sure, that was the kind of self-serving boilerplate one expects from an elected official—but, giving credit where due, New York’s current comptroller is more entitled than most to tout his pension fund management, particularly the latest reduction in the RoR. A pension fund billing employer contributions based on a 5.9 percent discount rate will, in the long run, always be much better funded and more secure than one assuming a higher return, both for retirees and for taxpayers who (in New York) constitutionally guarantee retirement benefits. By comparison, New York City’s pension funds still discount their liabilities based on an assumed RoR of 7 percent, which former Mayor Michael Bloomberg once compared to an investment guarantee from Bernie Madoff.

To adjust for volatility, the level of tax-funded employer contributions to the Retirement Fund in any given year has long been derived from “smoothed” returns over the latest five years. However, when DiNapoli lowered the RoR in 2021, he also approved a “restart” of actuarial asset measures, allowing him to announce a reduction in pension bills just in time for his re-election campaign. As explained here three years ago, this was a calculated risk:

[I]f investment returns over the next few years average below the assumed RoR, as they did in the early 2000s and again in the Great Recession, employer contributions will need to be sharply increased in just a few more years.

As of last year, the risk had backfired. The Common Retirement Fund’s returns in FYs 2022 and 23 had averaged barely 5.0 percent — forcing DiNapoli to announce double-digit percentage increases in employer pensions bills for 2024-25. With the latest gains, the average return since the restart has risen to 5.4 percent, not far below the RoR assumption, but not yet even with its assumed level. While investment returns move up and down, the cost of benefits heads in only one direction—up. Payments to retirees totaled about $15.5 billion in FY 2023, up 5 percent over 2022. As a result, the total value of Retirement Fund assets at the end of FY 2024 was still nearly $10 billion below the FY 2022 peak of $272 billion. When DiNapoli issues his end-of-summer announcement of fiscal 2025-26 employer pension contribution rates, they are likely to rise yet again, but by a smaller amount than last year.

Pushing back the clock

Pension costs would now be even higher—at least $755 million a year higher for NYSERS and PFRS alone—if not for the Tier 5 and Tier 6 pension reforms enacted under Governors David Paterson and Andrew Cuomo, respectively, in 2009 and 2012. As further explained and documented in the Empire Center’s 2021 report, Tiering Up: The Unfinished Business of Pension Reform in New York, the Paterson and Cuomo reforms also produced substantial savings for New York City and for school districts throughout the state.

Unfortunately, previous pension reform laws in New York were rolled back under relentless lobbying pressure from New York’s politically powerful government unions, starting with the enactment in 1983 of Tier 4 and capped by a wave of pension sweeteners in 2000 that added billions to pension costs just in time for a market downturn and recession. This year, the Legislature and Governor Hochul indulged the unions with a partial Tier 6 rollback that will add more than $4 billion to pension costs.

As the latest Retirement Fund math should remind them, given all the ups and downs in financial markets, fat generous benefits won’t pay for themselves.