Long Term Pension Data for New York And New Jersey to 2016: The Large Plans for Most Public Employees (With Commentary on Hedge Funds)

New York City and New Jersey, like most places, have separate pension plans for teachers, police officers, and firefighters, and large general pension plans for all other public employees combined. This post is about updated Census Bureau data, for the years 1957 to 2016, for the general pension plans: 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, which covers most public employees in New Jersey. In general the findings are the same as they were the last time I analyzed this data.


It has been a few years, however, so I have decided to repeat the analysis and update the charts below, and add a further discussion on hedge funds and the rate of return at the end. The data shows a pension disaster not only for New Jersey, where taxpayers have contributed very little over the years, but also for New York City, where taxes are high and taxpayers have contributed massively. The New York State system is in somewhat better shape – but in much worse shape than a decade ago.

The charts for the three big pension plans for general public employees in New York and Jersey are, once again, in this spreadsheet, with tabs at the bottom. I suggest downloading to have access the numerical data for reference.

Long Term General Pension Charts NYC NY NJ

Awareness of the pension disaster is spreading. For NYC, some of the trends discussed below were reviewed in this recent New York Times article.


The three general public employee pension plans include different types of workers with 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.

One can see the difference by looking at pension contributions as a percent of wages and salaries reported and projected by the City of New York in its budget documents.


In FY 2018, the City of New York predicts that its pension contributions will equal 33.9% of the wages and salaries of workers in the Department of Education, most of whom are in the separate New York City Teachers’ Retirement System, 52.5% of wages and salaries for those in the NYC Police Department, most of whom are in the New York City Police Pension Plan Article II, and 71.8% of wages and salaries for the New York City Fire Department, most of whom are in the New York City Fire Pension Plan Article 1B.

Employees of other city agencies are in the general New York City Employees Retirement System (NYCERS), the subject of this post. But pension contributions as a percent of wages and salaries by agency are projected to range from 33.3% for the Department of Sanitation and 32.6% for the Department of Corrections, to between 13.6% to 17.0% for all the other agencies. For its part the Metropolitan Transportation Authority predicts that pension contributions for employees of New York City Transit, who are also part of NYCERS since NYCT used to be part of the City of New York, will equal 22.0% of wages and salaries in FY 2018. Sanitation and Transit workers get to retire at age 55 after just 25 years of work.

All these diverse workers with diverse benefit levels are included in the data for NYCERS. And the New York (state) Public Employees Pension and Retirement System also includes the police officers and firefighters in the rest of New York State. But let’s start with NYCERS, a massive pension plan with 237,700 active workers and 149,940 retired members receiving pension benefits.


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 benefit payments 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 worked.

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 of 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 NYCERS by discouraging participation in the early retirement offer. Workers would have had to come up with a whole lotta money. 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.

Although there have been no additional large scale retroactive pension increases for this pension fund since 2000, total NYCERS benefit payouts have continued to rise by more than the overall inflation rate. The increase in benefit payouts from 2006 to 2016 was 19.2% after adjustment for inflation.


Adjusted for inflation, NYCERS pension benefit payments were around $1.5 billion per year in the 1970s, nearly tripling from 1967 as a result of the retroactive pension increases under the Lindsay Administration. For this and other reasons New York City public services collapsed. But pension benefit payments kept climbing, to more than $2.5 billion in 1996 to more than $3.5 billion in 2002, after the retroactive pension increase of 2000. In 2015 pension benefit payments exceeded $4 billion.


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 $12,160 per active worker in $2016). That is probably an error, with NYCERS also receiving the proceeds from the pension bond rather than money from the employees.

The data show that employee contributions increased significantly in 1992 and 1997, remaining much higher thereafter. This was certainly the result of buy-backs; public employees as a part of Tier VI 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 for those who chose to participate, with those seeking earlier retirement forced to pay for past years as well.

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, after the 2005 strike. But those hired after April 1, 2012 are in Tier VI and have had their pension benefits reduced. They are required to contribute to their own pensions on a sliding scale between 3.0% of pay and 6.0% of pay. With no reduction in contributions after ten years.


Despite Tier VI there had been no significant increase in inflation-adjusted employee contributions to NYCERS from 2012 to 2016. While new employees with higher required employee contributions continue to be hired, other workers continue to reach the 10+year cutoff for their contributions to be reduced or eliminated. That will continue until some time in 2022.

Taxpayer contributions to NYCERS, meanwhile, have soared from next to nothing in 2000 and 2001 to nearly $3.4 billion in 2016. As part of a pension deal with the New York City unions, then-Mayor Giuliani agreed that employee contributions to the pension fund would be reduced permanently in exchange for taxpayers contributions being cut temporarily – so Giuliani would have some extra money to throw around while running for Senator against Hilary Clinton. But taxpayer funding for NYCERS, adjusted for inflation, was well below $500 million each year from 1996 to 2005, during the 1990s stock market bubble and the years thereafter. At the same time that pension benefits were being retroactively increased.

The other part of New York’s 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.


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. That is an even larger increase as a result of the 2000 deal than that of NYCERS.

Moreover, Census Bureau data shows another 23.2% jump in payouts by NYSTRS in 2008, far more than any annual increase in pension payouts by NYCERS in the years since 2000. And in 2010 Governor Paterson signed yet another “early retirement incentive” for state government workers and local government workers whose employers agreed to participate. Similar to other deals over the years, it allowed workers to retire five years earlier without a reduction in pension payments. For once, New York City did not allow this big increase in retirement costs.


And yet despite all this, NYSTRS is, according to most analyses, far better funded than NYCERS, a pattern that repeats for all public employee pension funds for New York City compared with the rest of NY State. The Center for Retirement Research asserted that in 2015 NYSTRS was 93.8 funded for most employees and 93.2% funded for police and fire employees, among the best ratios among major public employee pension plans in the U.S.


Meanwhile NYCERS was reported to be just 76.2% funded, and even that was probably generous. The funding ratios of the other New York City pension plans, the ones for teachers, police and firefighters, are far worse.


NYSTRS isn’t better funded because public employees in the rest of New York State have contributed more to their pension plans than those in NYCERS. And taxpayers in the rest of New York State drastically decreased their pension contributions from 1991 to 2003.   While taxpayers in the rest of the state contributed more during these years than NYC taxpayers contributed to NYCERS, NYSTERS is much bigger. It has 494,400 active members, compared with 237,712 for NYCERS, and 407,112 beneficiaries receiving payments, compared with fewer than 150,000.

When I used the general state and local government finance data to estimate total taxpayer pension contributions as a percent of wages and salaries for all New York City, New York State, and New Jersey pension funds over the years from 1980 to 2012, I got 16.7% for New York City, just 8.6% for New York State, and just 7.2% for New Jersey. The respective contributions by the public employees themselves were 3.6%, 1.2% and 4.8% of payroll. New York City’s taxpayer pension contributions were higher as a percent of payroll than the total state and local pension contributions of any state save Nevada, were the public employees don’t get Social Security (saving taxpayers 6.2% of payroll). And yet the NYCERS is less well funded than NYCERS, where both taxpayer and public employees put in less over the years.


Taxpayer pension contributions to the New York State plan have soared since 2003, peaking (for the moment) at $4.8 billion in 2012. That year Tier VI was enacted, with lower pension benefits and higher employee contributions for newly hired employees. And starting about that time the State of New York and local governments outside New York City were allowed to “borrow” the pension contributions they were supposed to make to the pension fund, promising to make it up with interest later.


The impact will show up in a later chart.


According to the Center for Retirement Research, the New Jersey Public Employees Retirement System was only 59.5% funded in 2015, worse than NYCERS. Pension payouts by this pension fund soared by 48.7% more than inflation from 1999 to 2003, or about $685 million per year in $2015, on into the future. The big factor here is a retroactive pension increase signed into law by acting Governor Donald Difrancesco, which reportedly increased benefits by 9.0%.


New Jersey also passed an early retirement incentive in 2002, and another one in 2008, allowing public employees to retire years earlier than promised and inflating pension benefit payouts.


And as a result pension benefit payments jumped by 19.0% more than inflation from 2008 to 2009. Benefit payouts for the Jersey Public Employees Retirement System increased by 47.2%, adjusted for inflation, from 2006 to 2016.


New Jersey taxpayer pension 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” 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 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 has been done, however.   The New Jersey Public Employees Retirement System has about the same numbers of active workers and about the same number of retirees as the New York City Employees Retirement System, and it is worse-funded. And yet New Jersey taxpayers contributed just $1.2 billion to the pension fund in 2016, compared with a $3.4 billion contribution by New York City taxpayers to NYCERS.


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 those 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 about 50.0% 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 $202 million into the New York City teachers’ retirement system, down 55.3% from 1999. But it only put $68.6 million into NYCERS, down 67.5% 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. And New York City taxpayer contributions to NYCERS remained close to 80.0% of benefit payments through 2016, compared with taxpayer contributions of 48.9% of benefit payments for NYSTRS and just 35.8% of benefit payments for the New Jersey Public Employee Retirement System.


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 then retired. 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. You then have a “mature” 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 1.85 active workers per retiree in 1987, when most of those retiring were in Tier I, and 1.36 workers per retiree in 2011, when just about everyone retiring was in Tier IV. There has been some variation since, with 1.59 active workers per beneficiary in 2016. 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 1.2 in 2012, a lower ratio than for New York City. This may be due to inclusion of police officers and firefighters, who tend to retire very early, in this pension fund.

As for primarily suburban New Jersey, the ratio of active to retired public employees was 4.4 in 1987, after three decades of rapid growth in population and public that left the number of active public employees at the time very high relative to the smaller number of retired public employees from the pre-suburban past. That ratio was down to just 1.5 in 2016, about the same as for NYCERS. This shows that huge amounts of money should have been contributed to New Jersey Public Employee Retirement System during the 1990s and 2000s, to provide for the large number of suburban government workers heading toward retirement. But the contributions were not made.

Put another way, there were 250,700 active members of the New Jersey Public Employee Retirement System pension plan in 1987, and just 260,900 in 2016, a modest increase that matches up with New Jersey’s now modest overall population growth. The number of members receiving benefits, however, soared from 57,100 in 1987 to 169,020 in 2016, nearly tripling.


The changes in the number of active workers and beneficiaries for NYCERS have been much smaller over the decades, since New York City’s population leveled off after 1950. The plan had 197,500 active workers in 1987 and 208,650 in 2015, but there was a huge jump to 237,700 in 2016, as reported to the U.S Census Bureau. Similarly NYCERS had 106,800 beneficiaries receiving payments in 1987 and 149,940 in 2016, an increase but not as large as the increase for New Jersey.

I get the feeling that after the enactment of Tier VI and its higher employee pension contributions and lower future benefits (assuming they aren’t retroactively increased yet again), there has been a push to get more and more young workers into the pension system.   Particularly in the DeBlasio Administration. Workers who, if they leave before qualifying for full pension benefits, will end up subsidizing those who benefited from the retroactive pension increases and early retirement incentives of the past.

One unexplained change is the huge increase in the number of “inactive” NYCERS members from 2007 to 2008. These are people who are no longer working for NYC, have earned retirement credits, but are not yet eligible to begin receiving benefits. The increase in inactive members could be the result of layoffs, except that those laid off tend to have too few years worked to qualify for a pension. And a recession year is a strange time to leave city service voluntarily.


My view is that a well funded mature pension is one that has enough assets that benefit payments are no more than 4.0% of total assets in an average year. And 2016 was a near peak asset price year, not an average year, so that ratio should have been even lower.

The chart shows, however, that NYCERS benefit payments have been at least 6.0% of NYCERS assets every year since 1972, and have often been at or above 8.0% of assets in years when stock prices turned down. In 2016 NYCERS had nearly $4.2 billion in benefit payments, but just under $56 billion in assets – benefit payments were about 7.5% of assets. By this measure NYCERS was a little over half-funded.

Worse, NYCERS had just $1.5 billion in actual cash interest and dividend earnings. The rest of its earnings were merely paper gains as stock and bond prices inflated. That means it would have had to sell off $2.7 billion in assets to pay benefits, if taxpayer pension contributions had been limited to just what was required to pay the future benefits of current workers. (Which is all that today’s taxpayers really deserve to have to pay).

With such a low level of actual cash earnings and assets relative to benefits paid, New York City taxpayer pension contributions will have to remain sky high – with diminished services despite high tax levels – into the indefinite future.

In FY 2016 the New Jersey Public Employee Retirement System’s benefit payments equaled 13.0% of its assets. At that pace the fund would be wiped out in 7.7 years, and unlike New York City taxpayers New Jersey taxpayers weren’t kicking in enough to make up the difference. This pension fund had $3.6 billion in benefit payments, and just under $26 billion in assets, in 2016. Its actual cash earnings were only about $552 million, enough to pay for just 15.0% of the benefit payments.

The big change is in New York Public Employees Pension and Retirement System (NYSTRS). Over the decades until 2008, that fund’s benefit payments had generally run between 4.0% and 5.0% of its assets. Not as well funded as it ought to have been, but not terrible. In 2009, however, NYSTRS pension benefit payments jumped to 6.7% of assets, as asset prices plunged. Asset prices have since soared to a new bubble, as a result of the Federal Reserve’s zero interest rate policy. But NYSTRS benefit payments were still 6.0% of assets in 2016 – severely underfunded, no matter what the Center for Retirement Research says. That year it had $9.4 billion in benefit payments, and $156.7 billion in assets, but just $2.6 billion in actual cash interest and dividend earnings, enough to pay for just 27.6% of benefit payments.

Remember, 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). If a pension play has to sell off assets to pay the benefits of current retirees, what will be left to throw off income to pay the benefits of future retirees?


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 2016 the average for pension fund earnings for each year divided by pension funds assets as the start of the year was 7.8% for the New York City Employees Retirement System (NYCERS), 9.1% for the New York State Employees Retirement System (NYSTRS), and 8.3% 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 7.3% for NYCERS, 8.8% for NYSTRS, and 8.1% 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.”  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 pensions had never been retroactively increased and enough money had been put in.

The problem is that there have been periods when stock market bubbles temporarily inflated returns. Politicians and public employee unions took advantage of temporarily high pension funding levels to increase benefits and cut pension contributions. The result has been massive costs for future taxpayers decades in the future.


From 1977 to 1995, according to Census Bureau data, annual pension fund investment returns averaged 8.5% for NYCERS, 9.7% for NYSTRS, and 8.8% for the New Jersey Public Employees Retirement System. Much of that gain, however, was not “real,” it was just inflation. The inflation rate averaged 5.4% over those years according to Consumer Price Index data, something that also reduced the “real” cost of pension benefit payments relative to taxpayer incomes. Net of inflation, the “real” return for NYCERS was just 3.2%.

While there have been two stock market bubbles inflated by the low interest policy of the Federal Reserve since, the big bubble was from 1996 to 2000. Stock prices soared so much that the dividend yield on the S&P 500 – the cash return on the purported value of stocks – fell to just 1.0%, less than a quarter of its historic average. With inflation falling interest rates fell as well, causing the value of pre-existing high-interest bonds to soar too. The average return for these five years was 14.2% for NYCERS, 13.4% for NYSTRS, and 14.4% for the New Jersey Public Employees Retirement System. Most retroactive pension increases and underfunding occurred during, or soon after, this era, though in New York pension increases and in New Jersey underfunding continue right to the present.

Even though the stock market bubble has been inflated twice more, the average annual pension fund return from 2001 to 2016 was just 4.8% for NYCERS, 7.0% for NYSTRS, and 5.7% for the New Jersey Public Employees Retirement System. Inflation averaged just 2.1% over those years – the Federal Reserve’s inflation target was at first announced at 0.0% to 2.0% and more recently described as 2.0%. That means that the “real” return for NYCERS has averaged just 2.7%, only slightly less than from 1977 to 1995 despite the deflation of a bubble.

The second takeaway is this. Returns have still not yet fallen to their long-term average. Which means that future returns are going to be lower than past returns. With the dividend yield on stocks at half its historic average, bond interest rates close to record lows, everyone who is being honest acknowledges this.


“We are going to go through almost certainly a period over the next three or four years—unless we see some radical changes in fiscal spending and inflationary expectations—we’re going to see subpar levels of return because of the extraordinarily low inflation rates and commensurate interest rates,” Deputy Comptroller Scott Evans told a crowd of investment managers at the Bureau of Asset Management’s annual conference. “So I would expect some subpar years ahead.”

Evans said that while the fund’s technical expectation was that of a 7% annual return, “you have to look very, very long-term, like 30 years, to believe that it’s possible to get a 7% return.”

U.S. Treasury buyers have a choice of straight 10-year Treasury Bonds or 10-year TIPS, which pay an amount in excess of whatever inflation turns out to be. Based on the spread between the two rates, that means that the expected average inflation rate over the next 10 years is just 1.7%.

An expected 7.0% (or higher) return from today’s inflated asset prices and low interest rates and given low expected inflation is nothing but a fraud. It is a way to shift some of the cost of today’s pensions to future taxpayers and service recipients. Which is why the state and local government pension disaster is going to get worse and worse, with tax increase after tax increase, and service cut after service cut. To the benefit of those who grabbed more for themselves in the past.

Which brings us to hedge funds.


A new report poses an interesting question: “Would public pension funds have fared better if they had never invested in hedge funds at all?”   This is a subject we have investigated numerous times. The conclusion of the report confirms our earlier commentary: a small number of elite funds generate alpha (market-beating returns) after fees for their clients while the vast majority underperform yet still manage to overcharge for their services.   One wouldn’t imagine that a market pitch built around “Come for the poor performance; stay for the excessive fees” would work. And yet the industry continues to attract assets. This year, gross hedge fund assets under management crossed the $3 trillion mark.

In reality, however, politicians – and in places where politicians are controlled by the public employee unions those unions – got exactly what they paid for from the hedge funds. What mattered wasn’t that hedge funds would actually deliver higher returns. It was that they promised higher returns. And politicians and unions used those promises of higher returns as an excuse to cut pension fund contributions and increase benefits – in effect shifting a massive cost to the future and those who will live in it. Hedge funds got paid massive fees to help politicians and public unions keep lying for 15 years after the 1996 to 2000 stock market bubble started deflating.

“Nobody seems to care about performance”, as pension consultant Christopher B. Tobe told Gretchen Morgenson of the New York Times.

That’s not precisely true. People do care about performance, as well as fees. It is just that in the hierarchy of public-pension fund needs, both take a back seat to expected returns. This is because the higher the expected return, the lower the capital contributions required of some obligated public entity.

Here is the punchline: Those expected returns are a myth. They don’t exist, except for the most elite funds, which are a tiny percentage of the industry. A few can generate alpha; most of the rest are mere wealth-transfer machines. As the chart below shows, none of the major classes of hedge funds beats the market.

In other words, hedge funds aren’t used to generate higher returns; they simply make it possible for some public entity to reduce contributions to the underlying pension. This is the primary driving force in the rise of hedge funds for public pensions.

Lying, to benefit yourself at the expense of poorer later-born generations has been the MO of Generation Greed all along. On Wall Street, and in the state legislatures and city halls, everywhere.

A discussion of police and fire pensions will follow, when I have time to write it.