The New York State Teachers’ Retirement System (NYSTRS) has officially confirmed pretty much what it predicted last fall: the taxpayer-financed pension contribution rate payable in the fall of 2015 will rise to 17.53 percent of teacher payrolls, or 1.28 percent above the contribution payable this coming September.

Based on payroll data in the latest NYSTRS annual report, this will equate to an added cost of about $187 million* for school districts statewide (outside New York City, which has a separate teacher pension fund).

In its new administrative bulletin, NYSTRS says this will be the last year to reflect the impact of major investment losses the pension fund suffered in the wake of the Great Recession and financial crisis, which suggests the pension contribution rate will go down at least a little for 2014-15 school year (payable in fall of 2016). Unfortunately, this will lead many politicians and school board members to jump to the conclusion that the worst is behind them.

In fact, the contribution rate continues to understate the true costs of teacher pensions–because NYSTRS, like many similar funds across the country, continues to assume that it will earn a healthy average return of 8 percent a year for decades to come. Because it does not adjust for the level of risk inherent in an asset allocation heavily weighted to stocks, it produces overly optimistic future projections, according to the growing consensus of economistsactuaries and independent analysts of every stripe.

Even state Comptroller Thomas DiNapoli, generally a guardian of the pension status quo, has dropped his pension fund return assumption to 7.5 percent. New York City assumes a return of 7 percent — which former Mayor Bloomberg suggested was still the sort of promise you’d expect to hear from Bernie Madoff. The closest thing to a risk-free rate, reflecting the fact that the pension is constitutionally guaranteed and thus risk-free from the recipients’ perspective, would be closer to 3.4 percent. The next best thing, a AAA-rate corporate bond, would be about 4.7 percent. But note: even a slight reduction from 8 percent would drive a big increase in taxpayer-funded teacher pension contributions.

NYSTRS artificially suppresses costs–and effectively pushes big risks into the future— by sticking with an 8 percent rate. The pension system’s case for maintaining that assumption boils down to the argument that … well, they’ve earned more in the past, if you look back several decades. The standard investor warning, “past results are no guarantee of future performance,” simply is ignored.

Meanwhile, a recent dip in the stock market has led some Wall Street watchers to suggest that the market could be in for another big “correction” — i.e., a dip in stock prices, which would lead to another round of sub-par returns and catch-up contribution increases for pension funds like NYSTRS.  Even after the bounce-back of the past two days, the S&P 500 is down by more than 4 percent since the end of 2013.

The bottom line remains the same: taxpayers are on the hook. And the only way to get off — to ensure flat and predictable retirement costs in the future — is to shift to a defined-contribution system, which many teachers might prefer in any event.

* And that’s actually a pretty conservative projection, since payrolls will probably have increased sufficiently by 2015 to boost this figure to over $200 million.

About the Author

E.J. McMahon

Edmund J. McMahon is Empire Center's founder and a senior fellow.

Read more by E.J. McMahon

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