dinapoli-copy-1337709It’s no surprise that tax-funded employer contribution rates to the New York State and Local Retirement System (NYSLRS) are about to drop again, as announced today by state Comptroller Thomas DiNapoli. The rate calculation for 2015-16 is based on a “smoothed” value of assets over a rolling five-year period that has now moved beyond the worst year in the system’s history—a 26 percent loss in fiscal 2009.

If experience is any guide, we can expect New York politicians and labor leaders, encouraged by necessarily simplistic media summaries of a complex subject, to treat the decline in contributions as just the latest signal that happy days are here again (for good) for public pensions. It isn’t true, however. To be sure, thanks to a hyper-protective state Court of Appeals, the New York fund is in better shape than most other sizable public pension funds. But like its counterparts, the state pension system remains a ticking bomb that can and will go off again, sooner or later, at the worst possible time for taxpayers.

By historical standards, even with the latest announced decreases, contribution rates remain near historical highs, as shown in the comptroller-supplied chart below. In fact, applying private sector accounting standards, these contribution rates are still too low. Public pension funds like NYSLRS can get away with charging less than they should because they are backed up by what amounts to a constitutional guarantee of a taxpayer bailout whenever they fall into a hole.

screen-shot-2014-09-02-at-12-55-52-pm-7497832

Keep in mind that, while NYSLRS (like all of its counterparts) has enjoyed double-digit returns in recent years, its average annual return since 2000 is still just 5.8 percent. Since DiNapoli became comptroller at the end of fiscal 2007, including the recent boom years, the return averages just 5.4 percent.  The markets for the past 14 years have been exceptionally volatile – with returns most recently boosted by historically microscopic interest rates, which has artificially boosted equity values while depressing the yield of all fixed-income assets such as bonds.

Most economists, financial analysts and actuaries in the private sector agree that public pension funds should “discount” their future liabilities at a lower rate, something between a virtual zero-risk Treasury bill rate (now around 3 percent) and the AAA-rated corporate bond (more like 4 percent).  Adopting this requirement, which already applies to all private-sector defined-benefit pension funds, would better represent the true financial risks for taxpayers — and, by the way, show that NYSLRS is not even close to “fully funded” status, even if it is better funded than most states.

New York City’s pension system has lowered its assumed rate of return to 7 percent, a level former Mayor Michael Bloomberg said was still comparable to a promise from Bernie Madoff.  But the city’s actuary also presents alternative measures of funding status – i.e., including an estimate of liabilities based on risk-free discount rates. DiNapoli and other fund managers and trustees should do the same thing before the Government Accounting Standards Board gets around to forcing them to do so.

Doubling down on Wall Street

As of 2013, the latest year for which these figures are available, NYSLRS  had 73.4 percent of its assets invested in a volatile mix of stocks and “alternatives” including real estate, private equity funds and hedge funds. By comparison, in fiscal 2007, just before the financial meltdown (and just after DiNapoli’s appointment), the pension fund had 72.2 percent of assets in stocks and alternatives. At that point, compared to 2013, a larger share of assets was in traditional stocks and a smaller share (14 percent), compared to 2013’s 18 percent)  was in alternatives.

In other words, the pension fund is taking more risks than ever to chase the high returns it needs to hit its assumed target. When the cycle inevitably turns down again, taxpayers will again be holding the bag. 

Meanwhile, the Legislature just passed a bill that would expand the “basket” of riskier, costlier alternative investments to 30 percent from 25 percent. Lawmakers also sent the governor several bills sweetening pensions. Insert requisite Santayana quote here.

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

Remembering the scandal that brought down Health Commissioner Howard Zucker

The resignation of Dr. Howard Zucker as state health commissioner marks the end of a term marred by scandal over his role in managing the coronavirus pandemic. The much-debated compelling nursing homes to admit COVID-positive patients, though it origi Read More

As leaves turn, NY’s post-pandemic recovery still has very far to go

Entering the second autumn since the COVID-19 outbreak of March 2020, the pace of New York State's pandemic economic recovery has been abysmal by almost any standard. New York was the national epicenter of the pandemic, and Governor Cuomo's "" business Read More

More NY job gains in August—but employment needs to rise a lot further

New York's jobs report for August looked relatively strong—but only by comparison, that is, with . On a seasonally adjusted basis, New York gained 28,000 private-sector jobs last month—a growth rate of 0.4 percent, according to . This was double th Read More

Projected PIT Haul Brightens State Budget Office’s Fiscal Forecast 

Stronger than expected tax payments this spring led the Governor’s Division of the Budget (DOB) to increase its personal income tax (PIT) revenue projections for the next four years by $8.5 billion above its April pr Read More

After 10 weeks, all but five of the Empire Center’s 63 requests for pandemic data remain unfulfilled

Over the 10 days that Hochul has been in office, there has been no further progress on the Empire Center's record requests. Read More

New York’s health benefits remain the second-costliest in the U.S.

New York's health benefit costs increased faster than the national average in 2020, leaving it with the second-least affordable coverage in the U.S. The state's average total cost f Read More

Cuomo’s “FOIL at a Glance”

The document, titled “Foil at a Glance,” lays out the Cuomo administration’s procedures for handling FOIL requests Read More

Manhattan Office Suites Emptier Than Other Major Metros

Fewer than one in four New York City office workers are back in the office, according to a pair of datasets issued this week.    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

General Inquiries: Info@EmpireCenter.org

Press Inquiries: Press@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 Enjoying our work? Sign up for email alerts on our latest news and research.
Together, we can make New York a better place to live and work!