New York State Pension $71 Billion Underfunded, Empire Center Report Says

New York state’s $132.8 billion pension plan is underfunded by $71 billion and annual taxpayer payments to keep it sound may more than double to almost $4 billion during the next five years, a report says.

Increased payments are needed by the third-largest U.S. public pension to recover from a 26 percent decline in assets in the year ended March 31, 2009, and to cover benefits lawmakers increased over the past decade, the Empire Center for New York State Policy said.

“The traditional pension system exposes taxpayers to intolerable levels of financial risk and volatility,” said the Albany-based center, a project of the Manhattan Institute, which opposes taxes and promotes outsourcing to private companies and reduced spending.

New York Comptroller Thomas DiNapoli described the fund as strong during his election campaign.

The pension is fully funded, even though the market value of investments is less than needed to pay all benefits because assets “include the current value of all future contributions employers and employees will make,” its annual report says.

The center recommended that risk be passed to employees with a new pension system that consists wholly or partly of accounts like 401(k) retirement plans used in businesses, with government contributions set at a fixed rate rather than rising or falling with investment results.

Rich Retirement

Most taxpayers “will never receive anything approaching the costly, guaranteed benefits available to public employees,” the Empire Center’s report said. An annuity to provide the same benefit as the median $47,000 pension of a New York teacher would cost $860,000, it said.

New York state, New York City and other local governments have more than $200 billion of unfunded liabilities for retired- worker health coverage in addition to pension benefits owed, the report said. Health benefits in retirement are promised in existing labor contracts. The state constitution bars reductions in pension benefits from what a worker was promised when hired.

DiNapoli announced in September a 37 percent increase in government contributions due to the plan in February 2012 to 16.3 percent of payroll from 11.9 percent. The Division of Budget estimated that contribution rates may rise to 24 percent of payroll by the fiscal year ending in 2014.

The Empire Center report said the 7.5 percent assumed rate of return on pension investments is too high and that the practice of measuring pension liabilities and investments with a moving five-year average was a “gimmick.”

Reasonable Rate

The actuary for the state plan said the 7.5 percent assumed rate of return is reasonable in light of the plan’s 30-year investment horizon and because the state government is a longer- term enterprise than a private enterprises.

Over the past 30 years, the fund’s investments gained an average of 10.1 percent annually, though that fell to 3.7 percent the past 10 years, the actuary report says.

Using five-year averages instead of market values is intended “to reduce volatility on contribution rates,” the report says.

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

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net

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