NYC Actuary Said to Seek Lower Pension-Fund Rate of Return of 7% From 8%

New York’s chief actuary is recommending that the city’s $115.2 billion pension plans lower their assumed annual rate of return on assets to 7 percent from 8 percent, which would open a funding gap of at least $2 billion next year, according to two people familiar with the proposal.

Robert North, the actuary, is presenting his plan to overseers of funds for police, firefighters, teachers, civilian employees and school administrators, the people said. They spoke on the condition of anonymity because the proposal hasn’t been made public. The New York Post reported on the plan yesterday.

The city has already set aside $1 billion for the fiscal year beginning July 1 to cover an increase in its annual pension contribution.

“To pay it all at once would be a big hit,” said Domenic Recchia, chairman of the City Council’s Finance Committee, adding that a 7 percent assumed rate of return on investments seemed “sensible.”

“We’ll make it up, but over time,” he said.

In the 10 years through June 2010, America’s biggest state pension systems -- battered by the Internet stock bubble, the financial crisis of 2008 and the longest recession since the Great Depression -- earned an annualized return of less than 4 percent, according to data compiled by Bloomberg.

Reduced Assumptions

As a result, public pensions have been forced to reevaluate the projected returns that determine how much money taxpayers and retirees need to pour into retirement funds.

Some systems, including in New York, Rhode Island and the California State Teachers’ Retirement System, have reduced their assumptions. Lowering projected gains can widen funding gaps, forcing lawmakers to put even more money into the programs.

New York City’s pension costs have increased to $8.5 billion this year -- including the reserve -- from $1.5 billion in 2002, when Mayor Michael Bloomberg first took office, representing almost 13 percent of the $66 billion budget for fiscal 2012.

If the city’s pension-fund boards and the state Legislature approve the actuary’s new assumptions, 11 of 126 public-employee pension plans surveyed by the National Association of Retirement Administrators would have a 7 percent investment return assumption, said Keith Brainard, research director for the association.

Higher Cost

Spreading the increased pension costs spurred by lower return assumptions over time, rather than making the full payment all at once, will cost taxpayers more, Brainard said.

“It’s like shorting your mortgage payment,” he said.

“If you take a holiday on your mortgage you’ll have to catch up later on,” Brainard said. “At the same time these plan sponsors and policy makers are weighing competing objectives, which include maintaining some predictability and stability in the budget process.”

Actuaries look at a number of factors in coming up with an assumed return including inflation, historical and projected returns of various asset classes, the pension fund’s historical returns and employee demographics, Brainard said.

Matthew Sweeney, a spokesman for New York City Comptroller John Liu, declined to comment citing the draft nature of the recommendation.

The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.

To contact the reporters on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net; Cristina Alesci in New York at Calesci2@bloomberg.net;

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

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