New York's DiNapoli Cuts Pension Investment Outlook, Raises Contributions

New York’s $124.8 billion pension fund, the nation’s third-largest, reduced the assumed rate of return on its investments to 7.5 percent from 8 percent as it recovers from market losses, Comptroller Thomas DiNapoli said.

DiNapoli, the sole trustee of the pension fund, said state and local government employers’ payments to the fund will increase to about 16.3 percent of payroll in February 2012, from 11.9 percent due in February 2011. The fund covers 1 million current and retired government workers.

“The markets have become much more challenging over the past decade, which justifies a sensible reduction in the assumed investment rate of return,” DiNapoli said in prepared remarks for a press briefing today in Albany, the state capital.

The assumed rate of return on investments is used to calculate the size of pension contributions from employers needed to pay retirees. The recommendation to lower the rate came from the pension fund’s actuary, Michael Dutcher.

Robert Whalen, a spokesman for DiNapoli, told Bloomberg News on Aug. 20 that a reduction to 7.5 percent or 7.75 percent was likely.

The new assumed return “is more fiscally conservative” than the national average for public pension funds and more conservative than the 8.1 percent average for the top 100 private U.S. pension funds, DiNapoli said, citing a study from actuarial firm Milliman Inc.

Danger Point

DiNapoli, a Democrat, said it will take time for the pension fund to recover from its 26 percent decline in the year ended March 2009 and that the pension plan may report assets equal to 94 percent of liabilities by March 2011. The funded ratio, based on a five-year average for asset values and actuarial projections of liabilities, was 107 percent last year, DiNapoli said. It will remain above the 80 percent level that marks a danger point for pension plans, he said.

The fund’s value for the quarter ending June 30 declined to $124.8 billion after investments posted a loss of 4.4 percent, DiNapoli said. The fund was valued at $132.6 billion as of March 31.

Harry Wilson, a Republican and former investment manager who is running against DiNapoli in November’s election, said the changes announced today are too little, too late.

“Honest accounting of pension assets and liabilities would reveal a substantial underfunding” of $30 billion to $80 billion in New York’s plan, he said in a paper published today.

True Cost

The New York pension plan’s investments haven’t performed as well as those of peers, and by overestimating future performance, it is easier for DiNapoli and other New York politicians to conceal the plan’s true cost to taxpayers, Wilson said on a conference call with reporters.

Assumed returns of 4 percent to 6 percent are more realistic, Wilson said. He recommended an adjustment to less- risky investments and a study of ways pension liabilities can be adjusted to slow the growth of contributions by the state and local governments.

Employer contributions to the plan are expected to rise to 20.3 percent of salary in the year ended March 2013 and 23.5 percent in the following year, according to the state budget. Those estimates were compiled before the reduction in the assumed rate of return announced today.

Increases in cash contributions could be limited to 9.5 percent this year, rising by 1 percentage point annually, with the remainder paid as interest-earning IOUs under a plan approved this year by lawmakers and Governor David Paterson. That plan would save the state $242 million this year, increasing to $1.2 billion in the year through March 2015, according to budget documents.

To contact the reporter on this story: Michael Quint in Albany, New York, at mquint@bloomberg.net.

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