Sunday, February 14, 2010

Bob North and the 8% Dilemma

This spring Bob North, the NYCERS and NYCTRS actuary, must make a very important decision. He must recommend a new assumed actuarial rate of return for the city pension systems. This recommendation has to be enacted into law and is usually effective for the next 5 years. Last year the old 8% rate expired (2004-2009). Bob chose to kick the can down the road and recommended that the old rate be renewed for one more year (C.211/L.2009, see:NYS Laws).

This sounds like a very obscure issue but it is not. This rate of return has a huge impact on the city pension costs over the next 5 years. Any reduction in the rate will greatly increase the city’s cost. Over the last ten years the pension systems have only had a 2.17% rate of return, significantly short of their 8% target. This is a big part of the pension crisis in the city.

It is bad enough that the 8% assumption leads to underfunding of the pension systems but it is creates a rationale for risky investment decisions hoping for high returns to compensate for the underfunding. You can see what a vicious cycle this is.

Because of the budget crisis there will be intense pressure on Bob North not to reduce the actuarial rate. He most likely will buckle under the pressure. This is not responsible but at least, it is understandable. The trustees, however, must abandon their current risky policies and adopt a prudent investment strategy that recognizes a lower, more realistic rate of return. The trustees must not make the situation worse.

City workers have skin in this game. Over the last ten years NYCERS members have contributed $3.3B to NYCERS from their own paychecks. In that same time period the city and the other participating employers have contributed $8B. Most of that amount was paid in the last 4 years ($6.5B: 2006 – 2009).

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Background

In 1990, NYCERS and NYCTRS appointed Bob North as the actuary for the two pension funds. BY statute, this also made him the actuary for the police, fire, and Board of Ed. pension funds. At the same time the city created a new stand alone agency for the actuary. Previously the actuary’s operations were part of NYCERS. There was no legal basis for creating this agency but the Law Department can be counted on to be creative when asked.

This was done partly to make Bob feel good about running his own agency. This really didn’t matter much until 1996. In that year however, Albany granted NYCERS and NYCTRS their own independent budgets. The law was changed for several reasons, one of which was that the city was slowly strangling the budgets of both retirement systems.

Prudently, both retirement systems should have pulled the actuary’s operations back into their agencies in order to exercise proper control of their appointed actuary. The trustees did not do this and left the actuary under the budgetary control of the mayor. Since 1990 the mayor has controlled the actuary’s salary and he still does.

Of course, the NYC Law Department never advised the retirement system trustees that as of July, 1996 they should, as fiduciaries, place the actuary within the boards’ budgetary control. The Law Department has never given the trustees comprehensive advice about their fiduciary responsibilities. That potential advice would have had to include a clear warning about the on-going conflicts of interest that exists whenever the mayor’s lawyer is giving advice to the NYCERS Board of Trustees.

On January 28, 2010 the mayor proposed cutting the actuary’s budget for FY-2011 by $222K ($4.9M down from $5.1M) and his headcount by 5 (32 down from 37). In addition, if the state goes forward with the governor’s budget recommendations, the mayor has proposed cutting another 5 positions from the actuary’s headcount and an additional $406k from the actuary’s budget.

This is a clear reason why the actuary’s operations should be directly funded by the retirement systems. In addition, the actuary should be totally transparent with respect to any work that he does for any outside agencies. He should be more active with investment issues. He should also be more responsive to 1) the operational needs of the pension systems and 2) requests for fiscal notes of proposed legislation from all responsible parties, not just the city.


FYI: This is the most current estimates of the city’s ongoing pension costs. The chart below does not include the Transit Authority, the Housing Authority, HHC, and other participating employers. These figures are based on the 8% assumption. Even with 8%, you can see that the situation is deteriorating. If the rate of return is reduced, the amounts will increase even further.

YearAs of June 2009As of Jan. 2010
FY-2010$6.7B$6.8B
FY-2011$7.0B$7.3B
FY-2012$7.4B$7.7B
FY-2013$7.6B$7.8B
FY-2014 NR$7.9B

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