The bursting of the stock market bubble in 2000 triggered an explosion in taxpayer-funded contributions to New York City’s pension funds. But a new report from Comptroller John Liu shows that roughly half of the pension cost run-up in the last decade was self-inflicted, resulting from benefit sweeteners, increased salaries and overtime, and higher investment fees.
The comptroller’s analysis finds that the city’s total pension contributions since fiscal 2000 have been a whopping $31.6 billion higher than would have been expected, using pre-2000 benefit levels and actuarial assumptions as a baseline. Of the added amount:
- $15.2 billion, or 48 percent, can be attributed to “net investment losses,” reflecting the extent to which the average rate of return of 2.5 percent fell short of the assumed target rate of 8 percent;
- $13.7 billion, or 43 percent, can be attributed to pension benefit enhancements, the bulk of which were enacted just before the stock market bubble burst in 2000;
- $1.7 billion, or 5 percent, can be attributed to “actuarial losses and revisions in actuarial assumptions and methods, due to a variety of factors including increased longevity, salaries, overtimes, disability, early retirement, and buy-backs of service”; and
- $982 million, or 3 percent, can be attributed to “higher-than-expected investment and administrative fees.”
We knew the city’s pension investment losses and benefit sweeteners were enormous, but this is the first time their respective shares of total pension costs have been detailed so clearly. Those rising investment fees and administrative expenses, in particular, have not previously received much attention from anyone other than John Murphy, former director of the New York City Employees’ Retirement System.
Liu’s report suggests that the pension system’s fee-and-expense costs have tripled, from about $150 million in 2000 to $450 million in 2010. Moreover, it says New York City’s expenditures in this category are nearly 13 percent higher than norm for other large pension funds. That would translate into an added taxpayer bill of $56 million.
Oddly, while Liu is the pension funds’ asset manager, he doesn’t suggest what he might do about this — or whether he plans to do anything at all. Instead, after laying out an array of numbers dramatizing the system’s inherent flaws, he closes his report with this fairy-tale ending:
For more than a century, New York City has found that reasonable pension benefits are an effective tool to attract and retain qualified employees to municipal service. The City’s immediate aim should be to increase investment income while reducing volatility, thereby containing pension expenses without pushing costs to future taxpayers. New Yorkers should be proud that in spite of tough economic times the City has appropriately funded its pension liabilities and, with normal investment returns, the pension funds should become stronger in the years to come.
In other words, “we’ll all live happily ever after.”