New York’s public pension funds have a pronounced taste for risk, typically plunging 70 percent of their assets into equities ranging from traditional corporate stocks to more exotic “alternatives.”  Fund managers say it’s the best way to hold down costs and to meet their ambitious return targets over the long haul, but the strategy has led to a wild roller-coaster ride for taxpayers.  New research suggests the funds would have been much better off if they had adopted a more conservative investment strategy during the five-year period ending in 2010.

John Murphy, former executive director of the New York City Employee Retirement System (NYCERS), has simulated a pension fund portfolio using a 50-50 mix of equities and fixed-income investments, which was the norm two decades ago, instead of the current 70-30 ratio of stocks to bonds.

If, in 2005, NYCERS had returned to its traditional 50% stock/50% bond allocation and used only indexed stock funds and core bond classes, the simulation showed that NYCERS would have had a closing balance of $43B in FY-2010 instead of $35B.

Fees paid to private investment advisors under the more conservative approach would have totaled only $15 million, compared to $175 million paid by NYCERS in fiscal 2010 alone, says Murphy, who thinks the NYCERS investment strategy (which is similar to those of other New York State and New York City pension funds) is “overly risky and expensive.”

**UPDATE — In response to the original post, Michael Kolesar points out in the comments section that the results of the simulation will differ based on the five-year period chosen.  This, of course, is true.  In fact, it seems to safe to assume that a 50-50 allocation would have significantly under-performed the 70-30 mix between, say, 1985 and 2000.   But remember: constitutionally guaranteed pensions are risk-free for the beneficiaries.  All the risk is borne by taxpayers.   This is quite apart from the issue of the discount rate used to calculate liabilities, which is what ultimately drives pension funds into riskier territory to begin with.

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

Next Time Get It In Writing: The NY Redistricting Bait-and-Switch

New Yorkers got a thorough lesson on the difference between a constitutional amendment and a law. Read More

How a Medicaid Program To Improve Nursing Home Care Ended Up Paying for Union Benefits

New York State's budget-making process sometimes works like a closed loop, as interest groups on the receiving end of state spending reinvest a portion of their proceeds to lobby Albany for still more money. Read More

Turning NY’s Yellow Buses Green Could Cost $8B+

New York in 2022 imposed the largest unfunded mandate on schools in a generation, requiring them to replace their buses with electric models. New price data indicate the cost is still rising. Read More

The Election Day After Tomorrow

New York’s “cap and invest” program (NYCI), a central part of the state’s efforts to reduce greenhouse gas emissions, appears designed to hold back much of the program’s sticker-shock until January 2027—after the 2026 election. Read More

How Eliminating the Medicaid ‘Gap’ Would Perpetuate Inequity in Hospital Funding

A change in Medicaid reimbursement currently being pushed by New York's hospital industry appears likely to benefit high-end hospitals proportionally more than safety-net institutions, a review of hospitals' financial repor Read More

Union Membership Dropping in NY Too

The decline in union membership observed nationally appears to be occurring in New York as well. Read More

Hochul’s ‘Straight Talk’ on Medicaid Isn’t Straight Enough

Arguably the biggest Medicaid news in Governor Hochul's budget presentation was about the current fiscal year, not the next one: The state-run health plan is running substantially over budget. Read More

NY private employment was flat at end of 2023

New York's post-pandemic employment recovery stalled in the final quarter of 2023, with the state ending the year still 76,400 private jobs below its February 2020 level. Read More