In early 2000 at the height of the dot-com bubble, the former mayor agreed to major improvements in the pension benefits for city workers. At the same time, the trustees of the five city pension funds agreed to a “market restart” of the assets of the city’s five pension funds as recommended by the NYCERS & TRS actuary. This allowed the city to drastically cut its pension contributions in 2000.
But almost immediately, the devil came knocking on the door. After steadily advancing for ten years, the market perversely began to collapse and did not recover until 2003. See note below.
In the summer of 2002, it was clear to informed experts that the five city pension funds were headed in the wrong direction and that they needed to make serious changes to the systems. They, first, had to put in place a lower benefit structure for new employees. Second, they had to significantly increase employer contributions. Third, they had to put in place an investment strategy that would minimize risk, steadily grow the assets of the funds and produce an adequate and reliable income stream. For various reasons they did none of these things.
Then in 2007, the mortgage crisis hit and the devil was back with a vengeance. When the markets closed on June 30, 2009, the city pension funds had approximately $82B in assets, $19B less than they had 10 years ago. The rate of inflation over the last ten years makes this loss even worse than it first appears.
Over the same ten years, the pension funds have fallen short of their expected rate of return by $53B. The actuary’s 8% target has turned out to be beyond the reach of the trustees. Perversely, it also caused the trustees to adopt a very aggressive investment strategy.
Since the City Charter revision in 1989, the mayor has become the dominant political figure in the city. As such, his representatives on the pension boards wield tremendous power. It is unfortunate that his former choice for the NYCERS and TRS chairperson brought no expertise to this position. In FY-2009, the trustees of the five pension funds blindly spent $400M on investment fees while the funds lost $19B in assets.
It is ironic that in the midst of theses losses NYCERS earns a guaranteed 7% rate of return on loans to NYCERS members.
While the assets have been shrinking, the benefits have been exploding. In 2009, the five pension funds will pay out $9.9B. This is an 80% increase from the $5.5B pay out in 2000.
The city’s budgeted pension contribution for 2010 is $6.4B (with a phantom $200M projected savings). That is 17.5% of the total city payroll. While this amount is obscenely out of proportion to the payroll, it is significantly short of what is needed to properly fund the current pension benefits. In fact, the city’s contribution to the FDNY pension fund is $874M, well over 80% of the firefighters’ payroll. In FY-2008, however, this retirement system was only 56% funded.
In addition to the city’s contributions, the city’s 240,000 workers will be required to contribute over $755M to the pension funds in 2010.
On July 1, 2009, the governor signed the extension bill for Tier 3 &4. Because of his previous veto of the police & fire Tier 2 extension bill, all new police officers and firefighters are in Tier 3. While this 33 year old law has never been analyzed for police & fire benefits, it is reasonable to assume these benefits are less costly than the Tier 2 benefits.
This sets the stage for a rewrite of pension benefits for all new NYS employees. While employees are entitled to decent retirement benefits, employees will be at risk, if those benefits are not sustainable.
If new employees benefits are reduced, then future investment policy must be based on a conservative, highly transparent strategy with minimal management costs.
In addition, there can be no campaign contributions allowed at any time from any firm or their employees & spouses, who have contracts with the pension firms, to any person who makes decisions effecting those contracts. Without this change, the investment process will continue to rot.
Also as part of the reform, there is a need for a mandatory minimum/maximum contribution by the city and participating employers. If the employees are required to pay 3% of their pay checks, then the city should always pay at least 6% and cap its upper liability at 10% for new employees and new benefits. This would be a big incentive to keep the investment strategy conservative and not let the benefit structure get out of hand.
Funding a pension system is a simple process and if done with integrity, almost never fails. If you consistently contribute 12% of income to a fund and invest the money wisely, in 30 years with a 6% percent rate of return, you have a 50% pension at age 62. Why do some many pension funds fail? Without effective oversight, people tend to stray. It is telling that the NY State Insurance Department has not issued an audit of any of the city pension funds since 1999. On June 25, 2009 the Insurance Department finally issued the audit for NYCERS covering FY-2000 to FY-2002. Better late than never.
There is now a real danger to the pension benefits of city workers and retirees. Underfunding, bad investment decisions, and excessive benefits are the death kneel for a pension fund.
Note: From 1989 to 1999, the NYCERS assets rose from $16.5B to $41.0B. From 1999 to 2009, those same assets fell from $41.0B to $29.8B and the funded status has dropped from 136%. to 80%.
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