glacier-150x150-2169748New York’s second largest public pension fund continues to move—at a glacial pace—towards a more reasonable and prudent assumption of its future investment earnings.

The state Teachers’ Retirement System (NYSTRS), which covers public educators outside New York City, recently reduced its rate of return assumption from 7.5 percent to 7.25 percent. The change is effective immediately for purposes of valuing pension fund assets and liabilities.

Under government accounting standards, public pension funds such as NYSTRS are allowed to use their assumed rate of return (RoR) as a discount rate on future pension liabilities—i.e., the constitutionally guaranteed benefits they have promised to all current and vested future retirees.

When the RoR is lower—i.e., when the pension fund expects to earn less on the money it collects from employers—pension contributions must be higher. Therefore, as a result of the latest RoR change, the NYSTRS contribution rate applied to 2017-18 payrolls will increase for the first time in four years, from 9.8 percent to between 10.5 percent and 11 percent of payroll, according to the system’s latest administrative bulletin.

What impact will the NYSTRS rate change have on taxpayers? Extrapolating from payroll data in the latest NYSTRS annual report, the increase in required pension contributions will add roughly $130 million to $195 million to school budgets. (In accounting terms, these costs are accrued in 2018-19 but won’t be payable until the fall of 2019, in the 2019-20 school budget year.)

The real story

A Gannett News Service report on the NYSTRS move was headlined “NY Schools Just Got Bad Fiscal News,”  but the real story isn’t quite so simple.

While adding to budgets, a lower assumed RoR and a higher employer contribution rate will at least slightly ameliorate the fiscal shock that will follow the (inevitable) next Wall Street downturn. That makes the rate change good news—but not good enough. By the standards applied to corporate pension funds, NYSTRS contribution rates are still too low.

At 7.25 percent, NYSTRS will still be counting on a higher rate of return than assumed by actuaries for the New York State and Local Retirement System and the New York City pension funds—which peg their RoRs and discount rates at 7 percent. In fiscal year 2017, which ended June 30, the stock market boom lifted the NYSTRS return on investment to 12.5 percent, following subpar returns the previous year.  But as the disclaimers in public investment offerings put it, past results are no guarantee of future performance. Last year’s gain could easily be wiped out—and then some—by a stock market swoon, as happened twice in the past 16 years.

Over the the long run, assuming a return of 7 percent is, as former Mayor Michael Bloomberg put it a few years ago, “indefensible” by real-world standards. (“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,” Bloomberg said.)

In fact, according to its latest actuarial analysis (pp. 8-9), NYSTRS expects a 30-year average annual return of 6.6 percent. The real “bad news” is that New York school taxpayers remain exposed to a greater than 50-50 risk that the pension fund won’t earn enough to prevent higher catch-up contribution rates in the future.

Meanwhile, in the real world…

Most private-sector actuaries agree that pension liabilities (especially when reflecting constitutionally guaranteed benefits) should be discounted using a much lower, risk-free “market rate” of interest, such as the yield on U.S. Treasury bonds. This would require significantly higher pension contributions—e.g., probably closer to 20 percent for NYSTRS employers. Of course, this would lead to greater public pressure to reform the system. It’s unsurprising that teacher unions and managers both prefer an accounting measure that reduces apparent pension funding costs. (For an in-depth explanation of public pension funding, see page 7 of this recent Manhattan Institute report.)

The property tax cap contained an important loophole: a “cap” on increases in NYSTRS contributions. The tax cap law provides that, to the extent that teacher pension contributions rise more than two percentage points in any given year, the amount necessary to pay the added contribution is not counted against the maximum allowable tax levy. In 2013-14, the second year after the tax cap took effect, the pension exclusion was a major factor in boosting allowable school tax levy limit to an average of 4.6 percent. The amount excluded from the tax cap could equal up to 2.41 percent of base TRS salaries.

The pension limit in the tax cap law didn’t work in reverse, however: when contributions dropped back below the 2013-13 level, the unneeded money was not returned to taxpayers. As of 2017, the one-time pension exclusion dating back to 2013 is allowing school districts to collect at least $390 million more in taxes to cover pension contribution billings that are $1 billion lower than would have been raised by the 2013-14 contribution rate.

Actuarial assumptions aside, the primary drivers of teacher pension costs are the salaries on which pensions are based. The chart below tracks the NYSTRS school district salary base and average salaries for full-time NYSTRS members since 2002. As shown, after flattening in the wake of the Great Recession, base salaries rose 7 percent between 2013-14 and 2016-17, from $14.8 billion to nearly $15.9 billion. The average salary of full-time NYSTRS members reached $79,813 in 2015-16, the latest year for which an estimate is available, up from $57,308 in 2001-02.

screen-shot-2017-11-28-at-11-34-28-am-1024x652-6645467

 

Tags:

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

Empire State’s new budget is a bridge to nowhere

Looking ahead to an uncertain post-pandemic recovery, New York’s newly enacted state budget for fiscal year 2022 raises spending by staggering amounts that—barring an unlikely rapid return to peak 2019 economic activity in New York City—can't possibly be sustained for more than a few years. The budget is a mid-2020s fiscal disaster in the making: an incomplete bridge over a deepening river of red ink. Read More

NYC Turns from Rewarding Failure in Schools to Punishing Success

Mayor de Blasio began his tenure by rewarding New York City’s worst-performing schools with added funding. He’s now set to end it by punishing the city’s best. Read More

Thanks to Unions, NYC’s School Reopening Deal Was Costly and Educationally Hazardous

New York City schools reopened this fall under terms dictated by the city's teacher and principal unions. Now, as city schools close -- once more at the unions' behest -- the city is left with thousands of extra teachers hi Read More

On Measuring School Quality, Education Week Misses the Mark

Education Week’s rankings do not measure what counts. New York’s substandard achievement coupled with highest-in-the-nation spending and above-average wealth means that when it comes to school quality, New York fails to pass the mark. Read More

Even After Aid Cut, New York Will Spend Most on Education

If New York was a country in 2016—the most recent year for global education spending data—it would have boasted the highest per pupil expenditure in the world, even after subtracting 20 percent of state aid. Read More

Carve-outs prevail in “wage” bill

A “prevailing wage” expansion in Governor Cuomo’s budget is riddled with carve-outs—and new discretionary power for the governor. Read More

Rochester schools: bad to worse

There's good news and bad news about Rochester schools from a new study comparing the variation in educational quality within urban educational systems. The good news: measured by standardized pupil proficiency scores, there's only an 8.6 percentage point gap between good and bad schools in Rochester. The bad news: even Rochester's good schools—those in the 75th percentile—have the lowest proficiency scores among the 68 largest urban school systems in the country. Read More

NY per-pupil spending reaches $23k

New York's spending on elementary and secondary education reached a record $23,091 per pupil in 2017, once again topping  all other states in this category, according to the latest U.S. Census data. Read More

Subscribe

Sign up to receive updates about Empire Center research, news and events in your email.

CONTACT INFORMATION

Empire Center for Public Policy
30 South Pearl St.
Suite 1210
Albany, NY 12207

Phone: 518-434-3100
Fax: 518-434-3130
E-Mail: info@empirecenter.org

About

The Empire Center is an independent, non-partisan, non-profit think tank located in Albany, New York. Our mission is to make New York a better place to live and work by promoting public policy reforms grounded in free-market principles, personal responsibility, and the ideals of effective and accountable government.

Empire Center Logo "...the Empire Center is the think tank that spent months trying to pry Covid data out of Mr. Cuomo's government, which offered a series of unbelievable excuses for its refusal to disclose...five months after it (the Empire Center) sued, Team Cuomo finally started coughing up some of the records." -Wall Street Journal, February 19, 2021

SIGN UP TO READ ABOUT THE ISSUES IMPACTING NEW YORKERS.