The NYCERS actuary, Bob North, has finally started using 7% as the assumed interest rate in the financial statements for the city pension funds. The new rate still requires authorization legislation from Albany. That by itself is a whole other story.
With the new rate the funding status of all five pension funds has dropped significantly in FY-2012 from the levels in FY-2011.
- NYCERS 64.2% from 78.6%
- TRS..... 58.9% from 64.1%
- Police... 60.1% from 71.3%
- Fire..... 48.2% from 56.8%
- BERS.... 57.8% from 68.7%
While 7% is more realistic than 8%, the city funds have only earned 4.82% over the last 13 years since FY-2000. That is a great argument for a 5% assumed interest rate. The end result of this miscalculation on the interest rate has been a long term short fall on the necessary annual contributions to the pension funds.
The historical rate of return on stocks is 6.8% and for bonds it's 3.5%. Actuaries should not be playing with these rates. A standard prudent pension plan should operate within a 50/50 range of stocks and bonds depending on the level of annual benefit payments that the plan is required to make. A 5.15% interest rate should be almost a mandatory upper limit for interest rate assumptions.
It is always painful to see pension plans being damaged by bad behavior when it is so easy to to run a successful plan.