ALBANY – The state’s pension fund for 1 million current public workers and retirees may lower its estimated rate of return, a move that could increase the cost on local governments.
Comptroller Thomas DiNapoli said the $176.8 billion pension fund, the third largest in the nation, is considering lowering its 7.5 percent average return assumption amid uncertain times on Wall Street.
The Comptroller’s Office last lowered the rate from 8 percent to 7.5 percent in 2010. An official announcement on the fund’s rate of return and the contribution rates for local governments won’t be announced until at least late August.
“I think moving forward the investment climate continues to be very volatile and problematic. So certainly we have always been, on the scale of public funds, conservative,” DiNapoli said in an interview this week with Gannett’s Albany Bureau.
“If we do lower that assumed rate, that would certainly be a conservative approach. And one that I think would be reasonable,” he continued.
Still, a lowered rate of return would likely mean higher contribution rates in the short term for municipalities, who were burdened by growing retirement costs after the recession in 2008 and 2009. This year is the first time in the last five years the state lowered rates for municipalities.
DiNapoli said his office would need to consider a variety of factors in determining whether to lower its expected rate of return. In New York, the comptroller is the sole trustee of the pension system.
“Whether or not we’ll lower it and by how much is what we are pondering right now,” DiNapoli said. “The stock market can’t stay up as high as it has forever. I think being a little more conservative would be prudent.”
E.J. McMahon, president of the Empire Center, a conservative think tank in Albany, said DiNapoli should drop the rates, saying “the lower the better” to limit fluctuations in the fund’s performance.
“While it would lead to higher contribution requirements in the short term, in the long term it will shield taxpayers from very real risks,” McMahon said.
Nationally, public pensions have an average estimated rate of return of 7.68 percent, according to the National Association of State Retirement Administrators.
Keith Brainard, the group’s research director, said pension managers have to consider numerous factors when deciding whether to lower its estimated rate of return, such as the number of retirees in the system, inflation assumptions, the real rates of return and wage growth.
A lower rate means higher contributions from employers to make the fund whole.
“Every plan is unique, and they have to develop a return assumption that is based on the demographic profile and the risk tolerance and the projected asset allocation of their fund,” Brainard said. “Some plans are more comfortable taking a risk.”
The state’s Teachers Retirement System, which has 270,000 active members and nearly 156,000 retirees and beneficiaries, has retained an estimated rate of return of 8 percent.
John Cardillo, a spokesman for the $108 billion fund, said its projections are reviewed each year, but he added that the actual rate of return has exceeded 8 percent over the long term.
“NYSTRS’ current 8.0 percent expected rate of return assumes a real rate of return of 5.0 percent and a 3.0 percent rate of inflation,” Cardillo said. “The system’s 25-year rate of return is 9.2%, exceeding this assumed rate by more than 100 basis points.”
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