New York City’s Last GASB?

Confirming its prior analysis, and the analysis of independent actuary John Bury, the Center for Retirement Research at Boston College has once again found New York City’s pension plans to be among the most dangerously underfunded in the United States, this time in light of the new rules proposed by the Government Accounting Standards Board (GASB). The New York State pension plans, which also cover local government workers in the portion of the state outside New York City, are once again found to be among the best funded.

Noted actuary Girard Miller who writes for Governing Magazine, for those plans scheduled to run out of money in less than 25 years “without causing a panic, it's clear that the time has come for stakeholders, trustees and plan sponsors in these systems to ask penetrating questions and get to work on solutions — pronto. That includes the unions whose members must contribute to the solutions and stop playing the ‘not me’ entitlement game.” He lists 28 plans among those in desperate shape, including the New York City Teachers and New York City Employees, but the Boston College report only included larger plans. Other analyses have shown the NYC Police and Fire pension plans to be worse off than the NYC Employees retirement plan, though not as bad off as the Teachers. “This abyss,” said Miller, “is the result of a decade or more of benign neglect by all parties at the table.” Actually in New York, there have been additional retroactive pension enhancements in the past decade, and deals to borrow money from the pension plans to pay pension contributions, which is much worse than benign neglect.

The data presented in the table in the rear of the BC report is stark. According to the analysis, the New York City Employee Retirement System, which also includes workers in New York City Transit, claims to be 76.2% funded. But based on money it actually has, not money it pretends it has on the assumption that past market declines didn’t happen, it is only 64.4% funded. And if one uses the blended rate of return recommended by GASB it is only 38.8% funded, and will run out of money in 2034. That is, none left, and with all those tax-free pensions still owed, and guaranteed by the state constitution. The situation for the New York City Teacher’s retirement fund is drastically worse – a claim of 64.9% funded, but only 54.1% funded based on money that actually exists, and schedule to run out of money in 2023 if future returns as are GASB expects.

The most controversial aspect of the GASB proposal concerns the expected future rate of return. GASB has proposed a “blended rate” in which “each plan will project the number of future years in which assets on hand, investment returns, and certain future employer and employee contributions will be sufficient to pay annual benefit payments. The payments made in those years are discounted by the expected return on assets. Meanwhile, benefit payments that occur in years after assets have run out will be discounted by the high-grade municipal bond yield.”

Accordingly, since the New York City Teacher’s retirement plan is expected to drain all its assets to pay benefits in the short run, leaving nothing after 2023, it can no longer assume that risky investments will be held for the long term, so its expected return is just 4.7%. Meanwhile, since the New York State Teacher’s retirement plan is closer to fully funded, it can hold assets longer and can assume a rate of 7.4%.

In reality, the expected rate of return has no effect on how much must be contributed in the long run. That is determined by the money paid out. But it does determine the extent to which politicians and unions can lie about what the situation is in the short run, and defer costs to a future they don’t care about, for “another decade of benign neglect” in the words of actuary Miller, until nothing is left.

Given that all assets continue to be overpriced, and the income on those assets remains limited relative to those prices, the expected rate of return is likely to be low. Until asset values fall, meaning there is theoretically less money in the pension funds. I don’t find the 4.7% assumption for the NYC Teacher’s plan to be low for the period through 2023, though higher returns might resume thereafter. The 7.4% is unlikely given current interest rates and dividend yields. The assumed 8.0% return could only occur if the Fed succeeds in inflating away our debts and gets the inflation rate up to more than 4.0% per year. That is not the way things look today.

The one certainty about the rate of return, moreover, is that when you have nothing you have no earnings. Consider the funded status right now – just 54.1% for the New York City Teacher’s retirement plan based on assets that actually exist. That is, past taxpayers funded half of the retroactively enriched pensions NYC teachers are now entitled to receive, while those teachers were working. And future NYC taxpayers will have to pay the other half, PLUS the cost of the pensions of teachers working from now on, and the retiree health benefits of both groups. Perhaps by eliminating education. Game over, the UFT wins, as in the 1970s. Now will someone make them fess up?

It is clear that the value of the NYC Teachers’ pension plans cannot be allowed to go any lower. NYC should be paying in more than the ever-escalating amount the retired are taking out for the next decade or two. That means assume huge cuts to the classroom, despite sky high school spending overall and high taxes, for decades. Perhaps an end to pre-K. Perhaps an end to K. Perhaps the elimination of the senior year of high school. Perhaps on-line high school taught by computers. Certainly after school activities and sports have to go, along with any attempt to educate the poor. The alternative is even more sweeping things under the rug, followed by even more massive cuts in school spending, despite even higher taxes, in a decade or two.

And how about New York City Transit, included in the New York City Employees retirement system? In 2000, then-Mayor Giuliani cut a deal to slash New York City’s contributions to the pension plans for two years (giving him extra money to throw around while running for Mayor), in exchange for the employees getting to slash there own contributions (by 75% over their careers) permanently. Now MTA head Joe Lhota was Giuliani’s budget director at the time. Was he involved with that deal? How did he justify it then, and what does he think of it now? Is a huge increase in pension spending, and a huge cut in transportation, in the MTA’s plans?

With multiple actuaries finding that New York City’s public services are doomed thanks to Generation Greed, what does the official New York City actuary have to say? He was supposed to issue a report on the status of the pension funds last June. But didn’t. Where is it?

We have two former New York City Comptrollers running for Mayor. One is Bill Thompson, who oversaw the diversification of the New York City pension funds into “alternative assets” such as hedge funds and private equity, on the grounds that riskier investments were required to achieve the rate of return needed to pay for all the pension enhancements around 2000. My response was this post: Hedge Funds, Kiss Our Assets Goodbye. Now the Financial Times is reporting that U.S. pension plans have $billions trapped in “zombie funds” with no prospect of a positive outcome. Thompson, meanwhile, was silent when Mayor Bloomberg and UFT head Randi Weingarten said cutting the retirement age for teachers would “save money.”

Then there is John Liu, the pension deceiver himself, who issues a press release saying that NYC pensions cost almost nothing and are not a problem, based on a report that has pension costs in small print tables in the rear that are many, many times those in bold print in the front. Despite the numbers in the back being based on vastly more optimistic assumptions than GASB is prepared to accept. What does he have to say about this?

What about the recent deal to change the way the pension funds are managed? Is the plan to claim that future returns will be higher under the new system, so not as much money has to be contributed to the pension plans? That is baloney, unless the city has been lying when it claimed that over the long term its returns have been good.

And what about the press? The top priority, according to the Daily News, is for current and retired workers to get everything they and the state legislators they control have promised themselves. The entire hole they created it to be filled by drastic service cuts, since the rich don’t require public services, and lower pay and benefits for future public employees, since younger generations don’t matter either. The News presumably also likes the Ryan plan at the federal level – even more Medicare benefits and no change in Social Security for those 55 and over, paid for by borrowing to keep taxes low, and offset by drastic reductions leading to poverty and ill health for those 54 and younger. And then in other publications, Mort Zuckerman tut tuts about the future younger generations are being left with.

It’s past time to be honest about what the future will be like for those living in New York City, New York State, and the U.S. Generation Greed doesn’t want to talk about it. And no wonder.