NYCERS, Is This Really a Ponzi Scheme?

In the NYCERS FY-2015 CAFR on page 189 you will find the updated Solvency Test issued by the NYCERS actuary.

The last year listed on the chart is 2013. The actuary has always been slow in doing his/her work. On the last line there are several amounts:

1. $7.6B = the total contributions made by active workers plus the 5% interest they have earned on their money.
2. $36.2B = the pension liability for all current retirees (7% assumed interest rate)
3. $30.6B = the employer financed pension liability for all active workers (7% assumed interest rate)
4. $47.3B = the actuarial value of NYCERS assets

What the City/Employers Actually Pay for Active Workers

Workers are currently contributing approximately 3.6% of payroll into NYCERS. In FY-2015, workers contributed $457.1M to NYCERS and the covered payroll was $12.7B.

For argument sake let us assume the city and the other employers are contributing $3 for each $1 that the workers are contibuting. That would be 10.8% of payroll. Lets assume that the $3 earn the same conservative 5% that worker's $1 earns. That would mean that there should be at least $22.8B along with the $7.6B set aside for the active workers. That would be $22.8B to cover a $30.6B liability. Wrong!

Faking It

If you go back to the last line in the chart, you will see that the actuary is claiming that both the liability for all current retirees, $36.2B, and the workers contributions, $7.6B, are 100% funded. She is also valuing NYCERS's assets at $47.3B.

So when you start with $47.3B and you subtract $36.2B and $7.6B, you are left with only $3.5B. That is $3.5B to cover a $30.6B liability for active workers. This is a truly frightening conclusion.

The Other City Pension Funds

The story only gets worse. The Police Pension Fund is in the same shape as NYCERS with only $2.3B to cover a $17.9B liability for working police officers (page 151 of the FY-2015 NYPPF CAFR).

Teachers and the Fire Funds are in totally worse shape. The Fire Pension Fund has NO money to cover a $5.2B liability for working firefighters and only $8.0B to cover a $10.5B liability for current retired firefighters (page 151 of the FDNYPF FY-2015 CAFR).

Teachers with over a 100,000 working teachers has NO assets to cover their $18.6B pension liability and only $31.9B to cover the $37.5B pension liability for retired teachers (page 120 of the NYC-TRS FY-2015 CADR).

This grim picture is based on the unrealistic 7% assumed interest rate assumption. You don't want to do the arithmetic for a lower interest rate assumption. Just going from 7% to 6% at NYCERS increases the unfunded liability from $20.2B to $28.0B (page 114 of NYCERS FY-2016 CAFR)

What is Really Going On

Of course, there is one major flaw. The current retirees benefits are not fully funded. Most of the pension contributions the city and the other employers are making each year are catch up payments covering pensions being paid to current retirees.

The city and other employers paid $3.4B to NYCERS in FY-2016. The workers paid $485.5M. Three times what the workers paid is $1.5B. Under our 3 for 1 scenario it is reasonable to conclude that $1.9B went to cover retirees benefits not current workers. This is actually a Ponzi scheme and not an actuarially funded pension plan. It is a lot like the Social Security benefit system.

What is actually going on is that the city and other employers are trying to pay two different pension bills each year. One for active workers and the other for former workers who are now collecting pensions from NYCERS. You can just imagine the political nightmare this is. Part of the ongoing pension funding issue is not just about pensions for current workers. It is the huge mass of current retirees whose benefits the city did not properly secure when the workers retired.

How did this happen?

When a worker retires, the actuary can very accurately compute the cost of the benefit. She, however, can be very prudent or a total screw up. You know where this going. A 62 year old retiree is going to get a pension of $40,000 a year for the rest of his/her life. The actuary can say that $400,000 will cover this benefit or she can say that $520,000 will cover the cost.

Now if the fund hasn't even put aside the $400,000, you can imagine how they feel about the $520,000 cost figure. In either case there is going to be catch up, even if the fund is hitting its interest targets. Needless to say pension funds are not known for hitting their interest targets

One thing that NYCERS active workers should immediately demand is that their annual statement be expanded to include how much the city or their employer have contributed on their behalf during the year for their future pension benefit. The statement should also include an opening balance of employer contributions and how those assets performed during the year. And don't let anyone tell you it can't be done.