New York City and New Jersey, like most places, have separate pension plans for teachers, police officers, and firefighter, and large plans for everyone else. This post is about updated Census Bureau data, for the years 1957 to 2012, for the New York City Employees Retirement System (NYCERS), which also covers New York City transit workers, the New York (state) Public Employees Pension and Retirement System, which also covers local government workers (including police officers and firefighters) in the rest of New York State, and the New Jersey Public Employees Retirement System.
In general the findings are the same as they were in this post last year, since one year of data isn’t going to make a big difference for something as slow moving and inexorable as pension funding.
Unless there is a big retroactive pension increase, and its cost is actually admitted to. One big thing that did happen in 2012: there was a huge increase in taxpayer contributions to the New York City Employees Retirement System, balanced by a reduction in contributions to the New York City Teachers Retirement system. And one thing I learned this year: there have been more early retirement incentives in the crippled New Jersey public retirement system than I was previously aware of. Further discussion, and a spreadsheet with a series of charts follow after the break .
The charts for the three big pension plans for general public employees in New York and Jersey are in this spreadsheet, with tabs at the bottom. I suggest downloading to have access the numerical data for reference.
The prior post on New York and New Jersey teacher pension plans, updated with 2012 data, is here and should be read before this one.
It should be noted that the three general employee pension plans include workers with very different levels of pension benefits. For New York City, most current and recently retired workers were hired under the “Tier IV” rules imposed after the soaring cost of Lindsay’s “Tier I” benefits wiped out city services in the 1970s. Most Tier IV workers were promised a half pay pension at age 62 after 30 years of work, but with a required employee contribution at 3.0% of their pay during their careers. But some workers, those in “physically demanding” titles such as sanitation workers and transit workers, were allowed to retire at age 55 after just 25 years of work, also with a 3.0% contribution.
The chart above shows the percentage change in inflation adjusted pension benefit payments by NYCERS from year to year. A big increase in one year that is not offset by a big decrease the year after shows a permanent, ongoing increase in pension costs. The chart shows the effect on benefit payments of the pension “incentives” of 1991 and 1995, which allowed workers to retire earlier than they had been promised, and the retroactive pension increase of 2000, which increased the pensions of past and future retirees for inflation. All these deals were described to an ignorant public as “costing nothing” or “saving money.”
Both NYCERS members and New York City teachers have been offered early retirement incentives over the years, but somehow those deals didn’t hit NYCERS as hard. The 1990 to 1992 increase in inflation-adjusted benefit payments for NYCERS, for example, was just 14.4%; payouts by the New York City Teachers Retirement System jumped 33.7% during the same time. The 1995 early retirement inventive and retroactive pension increase led to a 37.0% increase in inflation-adjusted benefit payments by the NYC teacher pension fund over two years from 1995 and 1997. But NYCERS payouts only increased moderately over the same period.
One reason may be buyback requirements. In exchange for eligibility for earlier retirement, NYCERS members have generally been required to contribute more to their pensions – not only going forward, but also for the years they had already worked. For the huge 1995 deal that allowed most civilian employees to retire at age 57 rather than 62 (after 30 years or work in each case), for example, the requirement was an additional 1.85% of payroll for all years worked, with a “buyback” requirement for past years.
The false claim was made, by the unions and politicians, that this “buyback” requirement was sufficient to offset all the additional pension costs, and that the deal paid for itself. That is not true – those additional five years in retirement, five fewer years of work, AND five more years or retiree health insurance before Medicare picked up most of the burden, cost far more than 1.85% of pay. And in any event no one was making up all the years of investment returns that would have occurred had the extra 1.85% had been contributed all along, rather than after the fact.
But the “buyback” may have reduced the burden of these deals on the pension system by discouraging participation in the early retirement offer. In addition, the many NYCERS members already permitted to retire at age 55 after just 25 years of work, such as sanitation workers, transit workers, and corrections officers, did not benefit from the earlier retirement deal of 1995, and may not have benefitted from the other temporary retirement incentives either. These factors may explain why the same early retirement incentives led to much greater increases in pension payouts by the NYC teacher pension fund, relative to NYCERS.
This chart above shows the inflation-adjusted contributions to NYCERS by New York City public employees and by taxpayers over the years. While the 1991 pension incentive was associated with a huge one-time taxpayer contribution to the New York City teacher’s pension fund, probably the proceeds from a “pension bond,” for NYCERS the Census Bureau data show a major extra employee contribution of about the same amount of money (about $11,400 per active worker in $2011). That may be an error, with NYCERS also receiving the proceeds from the pension bond rather than money from the employees. Or it may be a “buy-back” of service time to qualify for earlier retirement, although those are generally paid for over several years.
The data show that employee contributions increased significantly in 1992 and 1997, remaining much higher thereafter. This was certainly the result of buy-backs; existing public employees were never required to contribute more than the promised 3.0% to their pensions except to qualify for early retirement. The early retirement deal of 1995 increased those contributions to 4.85% of payroll.
Employee contributions to NYCERS fell by half from 2000 to 2002. Like NYC teachers, Tier IV NYCERS members benefited from having their 3.0% pension contributions eliminated after they reached 10 years seniority, under the portion of the 2000 pension deal pushed by then-Mayor Giuliani. Because public employee wages rise with seniority, the total reduction in their contributions to their own pensions fell by a large percent. They only had to contribute a percentage of their salary in the lower-paid early years of their careers.
Those public employees who stuck with retirement at age 62 after 30 years of work started paying nothing after the 2000 pension deal became effective. Those who were in the 30/57 plan had their contributions cut to 1.85%, from 4.85%. Later, those New York City transit workers who had already paid 3.0% for more than 10 years before the year 2000 had some of their contributions refunded by the MTA.
The other part of the 2000 retroactive pension deal was a big adjustment in pension payouts for inflation, retroactively for those already retired and indefinitely into the future. The retroactive inflation adjustment for those already retired caused pension benefit payments to soar immediately. The increase in inflation-adjusted benefit payments over four years from 1999 to 2003, after which things settled down, was 31.3% for NYCERS, a huge hit but less than the hit to the New York (state) Public Employees Pension and Retirement System, and the New Jersey Public Employees Retirement System. Of the pension deals over the years, it is this one that had the largest impact on NYCERS.
According to the Center for Retirement Research at Boston College, NYCERS had been 117.4% funded in 2001, but this is frankly not true as it assumes an 8.0% return from the peak of the 1990s stock market bubble. By 2010 NYCERS was only 64.2% funded according to this source. See the data for major individual pension plan in the Appendix.
The New York State legislature passed yet early retirement “incentive” in 2006, despite soaring pension costs and underfunding, but this time Governor Pataki vetoed it. A huge retroactive pension increase was passed and signed in 2008, but it only benefitted New York City teachers. Another huge early retirement incentive deal passed the state legislature and was signed by Governor Patterson in 2010, but much to the outrage of New York City’s unions Mayor Bloomberg declined to participate.
With smaller huge increases in payouts, relative to the NYC teacher pension fund, as a result of the pension deals of 1991, 1995 and 2000, no additional pension deals after that, a huge increase in taxpayer funding (paid for by increases in taxes and cuts and services), and a renewed stock market bubble, the Center for Retirement Research put the 2013 funding level for NYCERS at 66.0%. That is still dangerously low, and the reality is likely worse, but NYCERS is still in better shape than the New York City Teachers Pension Fund, which is only 55.6% funded according to the Center for Retirement Research.
The early retirement pension “incentives” that caused benefit payments by NYCERS to increase were nonetheless described as “saving money.” But this is a lie. What such incentives do allow is for costs to be hidden and deferred, benefitting the politicians in office at the time but crippling state and local governments in the future (that is now the present). They “save money” only because taxpayers aren’t forced to put in enough money to offset the added payouts due to the early retirements – until later. Even the pension bond New York City apparently floated in 1991 to add money to the funds to offset the cost of the additional retirees, a more honest admission than in any subsequent deals, shifted costs to the future.
In reality, temporary early retirement incentives and other pension increases keep getting passed by the New York State legislature, regardless of the fiscal and pension funding situation at the time, as part of a political deal. These incentives are nothing more than exchanges of very early retirement for union members in exchange for financial support for the perpetual incumbent politicians they keep in office.
In other places pension increases stopped after the 1990s stock market bubble deflated and the cost of those increases became clear. But in New York City there was also a 2003 deal for members of the New York state and local employees’ retirement system, the New York state teachers` retirement system, the New York City teachers` retirement system, the New York City board of education retirement system and the New York City employees retirement system. It allowed retirement for non-uniformed employees as early as age 50 with some reductions in benefits, and retirement at age 55 after 25 years of work with no such reductions. This deal was in addition to the deals cited above. There were likely more in the 1980s and 1990s. A large number of retroactive pension increases, in fact, are awaiting Governor Cuomo’s signature right now – despite years of service cuts and tax increases to pay for the pension increases already enacted.
The underfunding of the New Jersey New Jersey Public Employees Retirement System, and the near absence of taxpayer contributions for 15 years, has become a national story. While past New Jersey taxpayers and tax cuts bear most of the blame for New Jersey’s pension catastrophe, however, the public employee unions and their retirees bear some of it. As was the case in many places around the country at the time, New Jersey’s public employee unions took advantage of the 1990s stock market bubble to score a huge retroactive pension increase near the end of that period.
Pension payouts by this pension fund soared by 48.7% more than inflation from 1999 to 2003, or about $631 million per year in unadjusted dollars, on into the future. No money had been set previously aside for that higher level of payouts, so there could be and have been no investment returns to help pay for it. That, at a minimum, is the tax increase and/or service cuts that should have gone through at the time, just for this pension fund, with more for the other pension funds. But New Jersey cut taxpayer contributions to the pension fund to zero instead.
New Jersey taxpayer contributions had already been slashed in the desperate times of the deep early 1990s recession, which was concentrated in the Northeast and led to a far greater fiscal crisis in New York and New Jersey than has occurred in any recession since. In both states, however, many of the “temporary” future-selling deals that took place on an emergency basis at the time – underfunding pensions, cutting off city and state general tax revenue funding for the MTA capital plan, raiding the transportation trust funds of both states, running up debts – were simply extended into three subsequent booms by a new set of Generation Greed politicians to whom the future didn’t matter. In New Jersey, this included all the state legislators, former Governor Christie Whitman, and all the Governors after Christie Whitman.
For the New Jersey Public Employees Retirement System, unlike the New Jersey Teachers Retirement System, significant taxpayer funding resumed in 2007. Moreover as is the case for New Jersey teachers, and unlike public employees in New York, other New Jersey public employees also contribute quite a bit to their own pensions – about as much as taxpayers in those years when the taxpayers in fact make their contributions. The damage had been done, however. The Center for Retirement Research put the funding level for the New Jersey Public Employees Retirement System at just 62.1% of the level required in 2013. The reality is almost certainly worse.
This pension fund, moreover, also had its payouts jump due to a series of early retirement incentives. From 1991 to 1992 there was an increase in payouts of 16.7% more than inflation, presumably the result of one such incentive. There was an increase of 18.3% more than inflation from 1995 to 1997, presumably for the same reason. Taking the dollar value of these two increases and the increase around the year 2000 together, the New Jersey Public Employees Retirement System is currently paying an extra $954.7 million per year in extra retirement benefits. Every year. No money had been set aside in advance to pay for those extra payouts, and thus no investment returns are available to help cover them.
And the pension incentives did not stop there, as I learned when I stumbled upon a tabulation of early retirement deals by the National Association of State Retirement Administrators.
This source shows New Jersey passed early retirement incentive deals in both 2003 and 2008, even as the state’s pension funds headed into a death spiral. From 2008 to 2009, payouts by New Jersey’s pension funds increased by 19.0% more than inflation.
As for the New York (state) Public Employees Pension and Retirement System (NYSTRS), which also covers local government workers (including police and fire) in the portion of New York State outside New York City, the 2000 pension deal led to a huge, 57.5% increase in inflation-adjusted payouts from 1999 to 2003. The fund started paying out an extra $2.1 billion every year, on into the future, for which no money had been set aside while the beneficiaries were working, and thus no investment returns were available to offset.
Let’s imagine that instead payouts by NYSTRS had increased by 2.0% more than inflation each year after 1999, which still would have hurt taxpayers because the wages of most private sector workers have been falling behind inflation. In $2012, the fund would have paid out $23.6 billion less over the year from 1999 to 2012. There would be that much more money in the NYSTRS pension fund. Plus the additional investment returns on that $23.6 billion. That gives you an idea of the devastation retroactive pension increases wreck on taxpayers and public service recipients.
NYSTRS, moreover, was also affected by all the other pension deals and “incentives” over the years. The 1990 to 1992 increase for the New York (state) Public Employees Pension and Retirement System, in the wake of the 1991 pension early retirement incentive, was 15.8% more than inflation. From 1995 to 1997, after the 1995 pension increase/early retirement incentive, NYCERS payouts increased by 20.3%. The payout increases associated with the deals in the 2000s appear to be smaller, perhaps because a large number of older retirees were dying off at the same time. But there was also a jump in pension payouts in the late 1980s, likely the result of yet another early retirement deal.
As is the case for New Jersey (and for that matter New York City), there was a huge drop in taxpayer contributions to NYSTRS in the early 1990s. In the case of NYSTRS, that drop in taxpayer contribution did not start to be reversed until 2004. Taxpayer pension contributions have soared since, although some questionable accounting practices may exaggerate the increase. New York State Comptroller Thomas (Mr. Smooth) DiNapoli pushed through a series of deals allowing the state and local governments to borrow money from the state pension fund at 3.0% interest, and use the money to make their pension contribution to that same fund, even though the pension fund assumes an 8.0% future return. Net, therefore, some of those additional pension contributions may not really exist as anything other than IOUs. Moreover, as is the case for New York City and unlike in New Jersey, public employees covered by the NYSTRS contribute virtually nothing to their own pensions.
Despite this series of retroactive pension increases, cuts in taxpayer funding, and a near absence of public employee funding, the Center for Retirement Research accepted assertions by the New York State Comptroller and the plan administrator that in 2013 NYSTRS was 88.5% funded for most employees and 89.5% funded for police and fire employees, among the best ratios among major public employee pension plans in the U.S.
The New York (state) Public Employees Retirement System may still be benefitting from the responsible fiscal policies of Governors Carey and Cuomo (no, not him, his dad Mario). The above chart shows the ratio of taxpayer pension contributions to benefit payments for the New York City Employees Retirement System (NYCERS), the New York Public Employees Retirement System NYSTRS), and the New Jersey Public Employee Retirement System.
The data show that relative to benefit payments, New York City taxpayer pension contributions to NYCERS had been lower than taxpayer contributions to NYSTRS, since the 1960s. At first this was understandable. With the suburbs in the rest of the state booming, the ratio of workers earning benefits to retirees collecting benefits was high. Local governments in the rest of the state had to put more in, relative to the amount the pension plan that covered them was paying out, to fund those higher future benefits associated with the high level of current employment. And the chart shows that up until the early 1990s, taxpayer contributions to NYSTRS generally exceeded pension payouts, building up more and more money to cover future benefits.
That period of responsibility ended with the early 1990s recession, when taxpayer contributions to NYSTRS were slashed, and irresponsibility continued through the all years New York State was led by Governor George Pataki, Assembly Speaker Sheldon Silver, and Senate Majority Leader Joe Bruno. In recent years taxpayers have since resumed paying in contributions equal to at least 50 percent of what NYSTRS is paying out in benefits. Assuming the contributions are real, and not just IOUs.
There is no excuse for the plunge in NYC taxpayer contributions to NYCERS after 1990. And in particular for the near elimination of taxpayer contributions during the Giuliani and early Bloomberg years. In the year 2000, at the peak of the stock market bubble, the City of New York put $265 million (in 2011 dollars) into the New York City teachers’ retirement system, down 56.8% from 1999. But it only put $89.6 million into NYCERS, down 68.6% from the year before.
Since then taxpayer contributions to NYCERS have soared. With the huge increase in FY 2012, New York City taxpayer contributions equaled 84.7% of benefit payments that year. To further understand the situation of the city’s pension fund, lets put these figures in dollars. NYCERS paid out $3.8 billion (in benefit payments and other payments) in FY 2012, while taxpayers put in $3 billion and employees put in $404 million. That left a deficiency of $379 million to be covered by investment returns.
NYCERS earned $1.2 billion in real cash money in FY 2012 – dividends, interest and other investment payments. Not including the paper gains and losses due to fluctuations in asset prices. Thus, real cash investment returns were only sufficient to cover less than one-third of the $3.8 billion in pension plan payouts. That’s the hole NYCERS is in, and why taxpayers will have to put in so much into the indefinite future. As it is, about $811 million was re-invested in the fund in FY 2012. In prior years, the city pension fund had been selling off assets just to pay benefits. The future rate of return on nothing is nothing.
In New Jersey, meanwhile, FY 2012 taxpayer contributions into the New Jersey Public Employee Retirement System equaled 34.8% of benefit payments out by that fund – up from around zero during the late 1990s through the mid-2000s. But that pension fund is still in a death spiral. In FY 2012, according to the long-term database I compiled, taxpayer contributions equaled just under $1 billion, and public employee contributions equaled $738 million. But total payouts were just over $3 billion, leaving a deficiency of $1.27 billion. And actual cash returns, money that actually came in from investments to pay benefits, totaled just $694 million.
Meaning that $574 million in pension assets had to be sold off to pay benefits for existing retirees. That had been going on for years, and is presumably still going on today. Not only is no money being set aside for the pension benefits current workers are earning, the inadequate amount of assets to provide benefits for existing retirees is disappearing.
If the paper value of the remaining investments temporarily rises by more than $574 million, due to yet another stock market bubble, it may temporarily appear that the dollar value of the remaining assets in the New Jersey Public Employee Retirement System has gone up. But if anything, given low interest rates, the actual cash earnings by that fund, and all pension funds, is going down, as higher interest bonds purchased in the past are retired, and now low yield investments must be purchased to take their place. The same Federal Reserve zero interest rate policy that has inflated asset values has also decreased real cash returns. Despite simply accepting New Jersey’s excessive estimate of future investment returns, the Center for Retirement Research found that the New Jersey Public Employee Retirement System was only 62.1% funded in 2013.
The reality is worse. Retirement advisors have generally recommended that those relying on their own 401Ks withdraw only 4.0% of their retirement savings in their first year of retirement, to ensure they won’t run out of money. But with today’s lower interest rates and dividend yield, some are suggesting that is too much.
But NYCERS paid out 8.1% of its assets in benefits in 2012, compared with 5.9% for the New York Public Employees Retirement System. New Jersey was even worse off, with 12.0% of assets paid out.
There ought to be enough pension assets in these funds to pay for all of the future pension benefits of workers who are already retired, most of the future pension benefits of those soon to retire, and some of the future benefit payments of younger workers. All without any additional contributions from current or future taxpayers. After all it is past taxpayers, some of whom are dead or gone elsewhere, who benefitted from whatever work was associated with already accrued pension benefits were associated with. (And past politicians got the political support associated with the retroactive increases that were not associated with any work, not future politicians).
At the benefit payment and asset value levels of 2012, the New Jersey Public Employee Retirement System fund would be emptied in just 8.4 years. The New York City Employees Retirement System would be gone in 12.3 years, were not current taxpayer suffering higher taxes and service cuts to avoid this. When unions and other apologists claim there is “no pension problem” in New York City, they mean that they have no problem with city residents having among the highest tax burdens in the country, with inferior schools, reduced help for the needy, declining services generally, and a diminished future. Because the unionized public employees can live in the suburbs, retire to Florida, and are exempted from New York’s state and local income tax when they retire. Even the New York (state) Public Employees Retirement System, presumably well funded, would be gone in 16.9 years at the current rate of benefit payouts. Which is why required taxpayer contributions are soaring, even though NYSTRS is allegedly well funded.
Even without past retroactive pension increases, past taxpayer underfunding, and inadequate assets, public employee pensions would be very expensive simply because public employees are required to work so few years in exchange for so many years on permanent vacation in retirement. That ratio perhaps ought not to be called retirement at all. “Slavery light,” living off the work of your indentured servants, is more like it. While police officers, firefighters and teachers tend to have the richest benefits, public employees have promised each other (in political deals with other beneficiaries) richer retirements after shorter careers than private sector workers receive.
The chart above shows the ratio of active pension plan participants to those receiving periodic payments. Rapidly growing areas, such as developing suburbs and expanding Sunbelt cities, have a high ratio of working public employees to retired public employees, because years earlier – perhaps when an area had been rural – there had been fewer public employees working who are retired later. Later still, years after an area is built out and its population and public employment levels off, the ratio of workers to retirees levels off as well, at a point that reflects the service requirements and retirement ages of the pension plan.
New York City has essentially been in that situation for decades, but when it and other older cities reached that point in the early 1970s the result was a massive fiscal crisis, soaring taxes, and collapsing services. Much of suburban and Sunbelt America, having become built out by the early 1990s, is now facing a growing wave of retirees relative to a stagnant number of taxpayers. New Jersey, from example, is a mostly suburban state that boomed during the suburbanization era and has subsequently stagnated for more than 15 years. That wouldn’t be a problem if enough money had been contributed to the pension funds while today’s retirees had been working, but of course that didn’t happen.
NYCERS averaged 1.8 active workers per retiree in 1987, when most of those retiring were in Tier I, and 1.4 workers per retiree in 2011, when just about everyone retiring was in Tier IV. That seems to be the ratio going forward – an average of 1.4 years worked for each year in retirement. Of course for those eligible for 25/55, including transit workers and sanitation workers, and who work exactly 25 years and retire right at 55, that is probably closer to one year worked for each year in retirement.
For NYSTRS, which includes workers and retirees from older cities such as Buffalo and Yonkers as well as once growing but now-aging suburbs such as those on Long Island, the ratio of active workers to retired beneficiaries has fallen from 2.2 in 1987 to just 1.3 in 2012. The massive expansion of local government employment in the portion of the state outside New York City during the Pataki years, despite stagnant private sector employment at the time, is leading to a huge wave of current and future retirees. The cost of their pensions will be a big burden, even though NYSTRS is relatively well funded. The cost of their retiree health insurance will be devastating, since no money had been saved for that purpose in the past.
As for primarily suburban New Jersey, the ratio of active to retire public employees was 4.4 in 1987, after three decades of rapid growth in population left the number of active public employees at the time very high relative to the smaller number of retired public employees from the mostly rural past. That ratio was down to just 2.2 in 2011 (the 2012 data seems to contain an error – I’ll check next year).
Put another way, there were 250,700 active members of the New Jersey Public Employee Retirement System pension plan in 1987, and just 297,600 in 2011, a modest increase. In 1967, however, total membership in the pension plan (including those not yet collecting benefits but no longer employed) had been just 88,150. As a result the number of beneficiaries receiving benefits in 1987, 20 years later, was just 57,000. But as a result of the 250,700 public employees in 1987, by 2012 the number of beneficiaries receiving payments had jumped to 150,000, or nearly three times as many as in 1987.
In one last analysis, the chart above uses Census Bureau data to compare the rate of return, including paper gains in asset values, for the three funds over the years. Before 2002 the Census Bureau tabulated pension plan assets by book value, but starting in 2002 market value has been the measure, leading to more volatility. What role, if any, did bad investing play in the current pension disaster for New York City and New Jersey?
Before 2000, New York City and New York State pension plans assumed a future 7.0% return on investments. This was increased to 8.0% as part of the 2000 retroactive pension increase, and subsequently reduced back to 7.0% for New York City in 2012. I’m not sure what the assumptions are for New Jersey, but my guess is the assumed future rate of return was at least as high or higher. So what was the actual return?
Based on Census Bureau data, for the period from 1976 (the first year the Bureau has this data available) to 2012 the average for pension fund earnings for each year divided by pension funds assets as the start of the year was 7.7% for the New York City Employees Retirement System (NYCERS), 9.3% for the New York State Employees Retirement System (NYSTRS), and 8.8% for the New Jersey Public Employee Retirement System. Limiting the analysis to the retroactive pension increase/taxpayer underfunding era from 1991 to 2012, the average annual investment return was 7.1% for NYCERS, 9.1% for NYSTRS, and 9.0% for New Jersey.
There are two takeaways from this.
First, despite stock prices re-bubbling to record highs, there are those in the political/union class who like to blame all the pension-related sacrifices for ordinary people on inadequate investment returns. “Wall Street stole our money.” You saw this argument from union pension shill, liar, hypocrite, value-free careerist, past City Comptroller and current state legislature candidate John Liu. He released two pension reports while Comptroller. The new Comptroller has taken them down
(Page Not Found on comptroller.nyc.gov The page you are looking for might have been removed, been renamed, or may be temporarily unavailable. – See more at: http://comptroller.nyc.gov/legacy-url/?q=rsnyc/#sthash.MoCT4DvR.dpuf)
But I wrote about them here.
In one report, seeking to make the claim that his union backers were not responsible for disaster, he claimed that more than half of the pension funding deficiencies were due to low investment returns, not retroactive pension increases. But in the other report, seeking to assert that the city’s high estimate for future investment returns was reasonable, he showed that over the long term actual returns had been higher than those anticipated. So how can inadequate returns lead to pension underfunding if in the long term returns exceed expectations?
In reality, the long-term investment returns for NYCERS, NYSTRS, and New Jersey should have been sufficient to cover pension obligations – even for NYCERS — if the expected rate of return had not been inflated to justify the 2000 pension deal.
During brief periods between1976 to 2012 average pension returns had been higher, if one includes paper gains due to asset price bubbles, but those bubbles subsequently reverted to the mean. From 2001 to 2012, for example, the average annual return was just 3.6% for NYCERS, 6.9% for NYSTRS, and 6.6% New Jersey. But that was starting from one of the two largest asset bubbles in history. If pensions had been funded with a long-term perspective, rather than raided by those cashing in and moving out and using the bubble as a justification, there would be no problem. Meanwhile, we are currently in the third biggest asset price bubble in U.S. history right now, according to one analysis.
The second takeaway is this. Although it is unfair to blame investment returns for the pension crisis, I’m still stunned that average returns for NYCERS are so much lower than for NYSTRS or New Jersey – over just about every time period. The gaps are enormous, and make no sense. Normally, investors who want less risk accept lower investment returns in return. If that was what happened, then New York City’s pension fund would have done better than New York State or New Jersey during the mostly negative period from 2001 to 2012, after having trailed during the bubble years. Instead New York City’s pension fund seems to have accepted a lower long-term return in exchange for more risk. Why? Are Wall Street’s fees higher for New York City? Is the home of Wall Street snorting its own supply?
While below average investment returns don’t get the blame for the past, they could be devastating for New York City in the future. The high returns for all three plans from 1976 to 2012 reflect an investment era that was more bubble than bust, and higher inflation than is present today. Future investment returns are likely to be much lower, as explained in this post.
In this new era of lower returns, that 1.5% per year gap could be the difference between a 4.5% average return and a 3.0% average return, with one-third less coming into the New York City pension funds. And unlike in other states, where the unions are trying to blame “right wing politicians back by Wall Street for lower than average returns, there is no such fig leaf in New York. The unions dominate the New York City pension boards, and have essentially owned all the NYC Comptrollers over the years. Including current Comptroller Stringer, put into office with 100 percent backing from both the unions and Wall Street.
I plan to conclude this series with a post on the police and fire pension funds for New York City, New Jersey, based on the latest data, when I can. It’s a big job. Anybody still reading? You want a tweet? The executive/financial class and the political/union class have robbed our future. Don’t let them escape blame, or take even more, without even being called on it.