Wednesday, July 14, 2010

Slow Motion - Another Year at 8%

Bob North, the NYCERS actuary, is kicking the can down the road for another year. For the second year in a row, North has failed to recommended a new 5 year expected rate of return for the five city pension funds. That means another one year extension of the irresponsible 8% interest rate.

In plain English, this means the city & the other participating employers can continue to uderfund the pension plans for another year. Of course, things could be worse. New Jersey use 8.25% but then again, New Jersey doesn't make any pension contributions at all.

See the write up on this pending bill.

North has known for years that he needed to recommend a new interest rate in FY-2009, the last year of the last five year period. I know Bob moves slowly but this is glacial. No one wants to amputate a leg but if you don't, the gangrene will kill you.

A prudent rate would be 6%. But the city is between a rock and hard place. Because the city uses fairly accurate accounting, it has budgeted $7.49B in payments to the five pension funds for FY-2011. This is a huge number in spite of the inflated 8% assumption. A 6% rate could easily add $3B more to the cost for FY-2011.

The biggest threat to any pension plan is underfunding, followed by lousy investment decisions. What ever the benefits are, rich or poor, the driving force is funding. The city delayed paying its full pension costs and now time is running out.

One positive note. Compared to other public pension systems, the city is a saint.

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