As we await final, detailed data from the 2007 Census of Governments, the U.S. Census Bureau has released pension system finance data for FY 2008. There is no need for me to keep endlessly repeating myself, so if you want a detailed look at New York’s pensions over time read this post, and compared with other parts of the country read this post, downloading the attached spreadsheet. I’ll go into even more detail when the 2007 finance data comes out.
I did do a couple of couple of calculations with the 2008 data, which are shown in the spreadsheet attached to this post. In addition to the points I made in the two posts above, which one ought to read if one hasn’t already, what jumps out at me about 2008? New York City pension plan payments drained 9.1% of their total assets that year, compared with a national average of 6.1%. These payments are for work done in the past, which was supposed to be paid for in the past, when taxpayers benefitted from the work. There is supposed to be enough money in the pension plans that if the City of New York disappeared, all vested benefits could be paid. New York’s public employees, however, spend 25 to 40 years in retirement on average, after working for just 20 to 25 years. And yet at the FY 2008 rate of drain, before the big financial hits in the fall of that year, its public employee pension plans were sinking so fast the money would be gone in just eleven years. Only Rhode Island, West Virginia and Connecticut were worse off. California and New Jersey, which have been and will be very much in the news on the pension issue, were better off.
Recall that in New York state government employees, and local government employees in the portion of the state outside New York City, are covered by the state pension systems, while employees of the City of New York (and, for historical reasons, New York City Transit) are covered by separate local government pension systems. So the “state” pension system in the table for New York includes local governments outside New York City, while the “local” system is pretty much New York City.
Most analyses of public employee pensions produced by think tanks in recent years, such as those by the Pew Center on the States and Truth in Accounting, only include state systems. Because there are only 50 of them, and to go through hundreds of small local systems would be too much work. In general state systems cover local government workers, as in the portion of New York State outside New York City. But the New York City pension system is larger than that of most states. Ignoring the city system, these think tanks usually report that New York’s pensions are relatively well funded, ignoring the disaster that is the city’s pensions.
The think tanks have recently reported that state pension systems are drastically more underfunded than they admit, because in order to cut political deals to increase pension benefits and cut taxes, politicians have set an unrealistic future rate of return far in excess of past experience – generally based on the big stock market run-up from 1982 to 2000. The resulting recalculations, based on a more achievable or historically accurate rate of return, have generated headlines about states being $trillions in the hole.
In 2000, the New York State legislature passed a law that said the future rate of return on pension investments – from that inflated point – would be 8.0% per year (and in some cases more). An ongoing flood of retroactive, unearned pension enhancements followed, all described as costing little or nothing. We are almost exactly a decade since the perpetual incumbents started handing out those gifts to members of their own generation, to be paid for by those coming later in a diminished future. According to mutual fund firm Vanguard, their Total Bond Index fund has an average return of 5.98% while their Total Stock Market Index fund had a rate of return of zero. Which means a mixed pension fund of 70% stocks and 30% bonds, which is what New York City had in 2000, would have had an average return of just 1.8%.
The next decade will be better? Most people believe interest rates will have to rise from their current lows, which means the value of existing bonds held by New York City pension funds will fall. And most people believe stocks are overpriced, relative to earnings that are being inflated by government debt, and will also eventually fall. We are in a Japanese economic situation, and choosing the Japanese route of stretching out the problem to avoid steeper losses in the short term. The result will be another “lost decade” for investors.
Recently, the Manhattan Institute compiled data on the 59 largest teacher pension funds – including both the New York State system, covering teachers outside the city, and the New York City system, covering teachers inside the city.
Stamford recently generated headlines in California re-estimating that state’s pension problems using a 4.11% investment rate return, which may be fairly called too low since it is based the current interest rate on 30 year U.S. Treasury bonds. Using a more reasonable discount rate (ie. assumed investment return) of 6.06%, which is more like what the government requires private company pensions to use, the Manhattan Institute found that while the New York State teacher pension system had 77.0% of the money it should have to pay for pensions, the city system had just 46.0%, one of the worst in the country. The city is $36 trillion in the hole, and that’s how much will have to be cut from education or raised in taxes over the next few years to get out of it. We already have just about the highest tax burden in the U.S.
I have one quibble with the authors of this report, based on their quotes in Crain’s. ““New York state has been more conscientious than most about making required contributions into the fund,” said Josh Barro, one of the report's authors. “New York City has shirked its responsibilities to a significant extent,” Mr. Barro said. “By making promises of benefits without depositing money needed to cover them, it is effectively borrowing.”
Actually, New York State charged local governments outside New York City nothing for several years when Carl McCall was running for Governor as Comptroller and pushing through pension enhancements, including those that hit New York City, in exchange for union support. Aside from a couple of years when Rudy Giuliani wanted to run for Senator, in contrast, New York City has paid massive amounts in the pension funds (while its employees have not).
So why are we so much deeper in the hole? Are we still paying for Lindsay? One thing for sure, Mayor Bloomberg’s deal – when he wanted to run for President – to restore the Lindsay pensions for New York City’s teachers didn’t help. Once this begins to be paid for, the Mayor will also restore the 1970s New York City schools.
When Comptroller Liu was asked about the MI report, he should have said “I just got here; I’ll look into it. The City Council has no say on pensions, only the state legislature is responsible.” What he did say is that the city has been making all the pension contributions required by its actuary. Which is the same as Enron saying it was only booking the profits agreed by its accountant. Not the kind of honesty I had hoped from the new Comptroller. I guess when more pension incentives pass for employees about to retire, and more benefit and wage cuts come down for future hires, the unions can count on him going along with it, just like everyone else. And when the schools are devastated, they can count on him not saying why, just like all the pols who were in on the deals. After all, he wouldn't want to be accused of being "anti-worker" for saying things that just happen to be true in defense of the vast majority of workers.