Public pension funds in New York and across the country are continuing to rely on overly optimistic assumptions about their future investment gains, as detailed in a major New York Times story yesterday.

The Times report came days after Comptroller Thomas DiNapoli announced that the state’s largest pension fund had realized a gain of 5.96 percent — short of its 7.5 percent target.  (More analysis of that announcement here.)

But the problem is not just that the funds make less than they hope when financial markets are especially volatile.

As the Times put it:

Worse … is that states and cities have special accounting rules that have been criticized for greatly understating pension costs. Governments do not just use their investment assumptions to project future asset growth. They also use them to measure what they will owe retirees in the future in today’s dollars, something companies have not been permitted to do since 1993.

Private pension funds discount their liabilities at an average rate of 4.8 percent, according to theTimes. If the DiNapoli-run Common Retirement Fund used that discount rate instead of 7.5 percent, it would have to raise taxpayer-funded contributions even higher.

The New York State Teachers’ Retirement System is stuck on an even more optimistic 8 percent — which means, in effect, that is is more severely underfunded.  Meanwhile, New York City’s chief actuary has recommended that municipal pension systems drop their discount rate to 7 percent, which will require a further long-term increase in taxpayer contributions.

Mayor Michael Bloomberg admits that even 7 percent is too high to literally bank on.  As the mayor put it during a lobbying trip to Albany a few months ago:

“If I can give you one piece of financial advice: 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.”

At a time when treasury bonds are delivering sub-zero real returns, pension funds must assume greater risks to hit their return targets.  When the funds lose money, taxpayers must bail them out — which is what is now happening.

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

DiNapoli bolsters pension fund stability—and cuts tax-funded costs

DiNapoli announced today that he's approved a recommendation by the State Retirement System Actuary to reduce, from 6.8 percent to 5.9 percent, the assumed rate of return (RoR) on investments by the $268 billion Common Retirement Fund, which underwrites the New York State and Local Employee Retirement System (NYSLERS) and Police and Fire Retirement System (PFRS), of which the comptroller is the sole trustee. Read More

The Gov’s pension

There are several (dozens? hundreds?) of unanswered questions as the fallout from Andrew Cuomo's resignation earlier today continues. Among those are questions related to his pension, some of which can be answered, sort of. Read More

NYSTRS bill to drop again

The New York State Teachers' Retirement System (NYSTRS) will reduce its pension contribution rates for a third consecutive year in 2017-18, even though the pension fund's investment returns came in well below its target rate in fiscal 2016. Read More

The new (old) normal of NY pensions

The Empire State's largest public pension plan still has not fully recovered from the financial crisis and Great Recession of 2008-09, a new report from the state comptroller's office confirms. Read More

DiNapoli’s “slight gains” in context

New York's largest public pension fund earned 2 percent in its first fiscal quarter—which isn't necessarily good or bad news for taxpayers. Read More

NYC pension costs shooting up

Taxpayer-funded pension contributions in New York City will need to increase by a total of $732 million between fiscal years 2018 and 2020 due to the pension funds' paltry investment earnings in the recently concluded 2016 fiscal year, City Comptroller Scott Stringer has just disclosed. Read More

Skelos pension could exceed $95k

Following his conviction on federal corruption charges, former Senator Dean Skelos apparently will qualify for a public pension of up to $95,590 a year. Read More

A losing quarter for NYS pensions

Still betting far too heavily on the stock market, New York State's main state and local government pension fund lost money in the first half of its current fiscal year. Read More