The U.S. Census Bureau released state and local government public employee pension data for 2006 last month. I’ll discuss this information next May, when more detailed information is released along with all public finance data for the year. Nonetheless, the data provides a few interesting tidbits. Benefit payments equaled 6.6% of the assets of New York City’s public employee pension systems in 2006, more than for the New York State pension systems, which include New York State government and local governments outside the city, at 4.5%, or the national average for state and local pension systems, at 5.2%. Employees accounted for just 7.3% of all contributions to New York City’s pension systems, even though in most titles new NYC employees are required to kick in 5.85% of their pay, because those hired in prior generations (and those in certain titles such as police and fire) are not paying in at all. The national average is 20.6% and the figure for the New York State pension systems is 4.5%. And New York City’s pension fund earnings equaled just 7.5% of its investment holdings in 2006, compared with a national average of 10.3% and 12.0% for the New York State systems. Despite last year’s return, however, New York City’s investment choices, if they didn’t change and if the city isn’t taxed to make up for losses by the rest of the state, may leave us better off in 2007.
You may have heard about the sub-prime mortgage collapse in 2007. Mortgages accounted for 2.1% of total assets for the New York State pension systems, compared with nothing for the New York City pension systems. Real Estate Investment Trusts, after a strong run through 2006, have lost value this year. The state system had 3.3% of its assets in real estate, compared with none for New York City. Then there is the 7.7% of New York State pension assets invested in “Miscellaneous Investments,” compared with none for New York City. You may have heard about Collateralized Debt Obligations (CDOs) plunging in value and hedge funds closing shop this year, particularly in August. You may recall I wasn’t pleased with the suggestion that New York City pension funds improve their returns by investing in these exotics. Hopefully they didn’t get around to it. Worst case – Wall Street firms dumped these investments off their books and onto ours, just in time for us to absorb some of the losses those firms are announcing this quarter. Prudential is already suing State Street over losses in pension funds the former placed with the latter, perhaps hoping to get out ahead of lawsuits by the pension funds against Prudential.
The New York State pension funds were also more heavily invested in stocks than are the city’s pension funds; stocks have done well so far this year. According to Bloomberg, however, “Skittishness over the U.S. stock market’s record-setting rally is reaching a crescendo among options traders who are preparing for a crash…Investors are paying the most ever to protect against a drop in the Standard & Poor’s 500 Index, data compiled by Morgan Stanley show. The gap between the price of so-called put options on the benchmark for U.S. equity and the cost to wager on further gains has averaged about 8 percentage points since August. That’s more than the previous high in July 2001, before the index dropped 34 percent and fell to the lowest this decade.”
If the state pension system does get socked by losses the state could always raise state taxes, which city residents pay, and use the money to increase aid the rest of the state, since the city would be “better off.” Better off relative to the higher taxes and more modest services we are used to, that is. That’s the “peasants are used to suffering” method of allocating sacrifice in a fiscal crisis that I fear here in New York, the “passive-aggressive” state. Certainly, I would expect state legislators from the rest of the state will demand that custom be followed and state education funding be slashed for New York City and increased for the Rest of the State. Particularly since the Court of Appeals has held that the only penalty for such unequal treatment is a statement that it wasn’t very nice that will arrive a decade later.
At least, however, it would be difficult for New Jersey to drain New York City the same way. Because New Jersey’s state and local public employee pension benefit payments equaled a stunning 10.4% of the state’s pension assets last year, and four times the amount contributed to the funds. New Jersey’s state and local governments made almost no contributions to those funds. But perhaps New Jersey’s situation is fairer than New York’s. It appears that the generation making the decisions will get their pensions in New York, leaving those who come after with lower public employee wages and benefits, higher taxes, and diminished services. In New Jersey, the reckoning will apparently come while those who caused the problem are on hand to experience the results.