Monday, July 19, 2010

NYC Pension Costs for FY-2011

Based on the NYC adopted budget figures the pension costs for NYC for FY-2011 are as follows:


It is not clear how the $603M adjustment figure will be divided up among the five pension funds.

The numbers in the table come from the the extensive schedules provided on the NYC OMB web site. There is so much info on the web site, that the data almost hides itself. But it is there, nicely broken down. The cost for NYCERS does not include expenses paid by public authorities which ususally run about 45% of the city cost.

It is clear that based on membership the police, fire, and teachers pension funds are the major source of pension costs and unfortunately, they all have underfunding issues. It is also clear that these costs are not sustainable and that all parties will have to make major changes.

As I have said in the past, there are three keys to pension success or failure. They are funding, investing, and benefits. The most immediate and crucial key right now is investing. While the city should be putting more money into the funds and Albany needs to scale back benefits, more importantly, the pension funds should be uncompromisingly prudent with their investment decisions.

When it was reported last week that the NYCERS trustees were planning to invest in hedge funds, my opinion was that the trustees were again being lead astray. Just remember that the assets belong to the members and retirees of NYCERS, and not to the city or the trustees.

The NYCERS trustees should adopt a certain level of humility with regards to their ability to invest money. Their annual rate of return for the 10 year period from 1999 to 2009 is 2.14%, not 8%. In addition to their total lack of accountability for investment returns, the trustees have managed to increase annual investment expenses from $30M to $150M during the same 10 years.

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.