New York Mayor Michael Bloomberg may have expected an easier time balancing next year’s $70 billion budget after trimming a $4.6 billion deficit to $2 billion in November. Now a new pension formula may widen that gap.
New York owes its five pensions about $2 billion more than previously budgeted because officials have been too optimistic in assuming an 8 percent return on fund investments, Chief Actuary Robert North has determined. A more realistic expectation would be 7 percent, North said.
New York officials and union leaders who sit on the pension boards now must figure out how North’s calculation might be accommodated in a budget the mayor has described as already cut “close to the bone.” Bloomberg will discuss the impact of using a lower rate tomorrow when he presents his fiscal 2013 budget to the City Council, said a person with direct knowledge of his plan who wasn’t authorized to speak publicly about it.
“The problem is to balance responsible funding of the pensions while remaining sensitive to the city’s capacity to pay,” North said today in an interview.
He and the mayor have agreed to a plan that he compared to a mortgage, which would spread payments that increase 3 percent annually over 22 years. The formula will take into account variables such as market performance, worker attrition, life expectancy and retirement age, North said.
The city already has put $1 billion in reserve to cover an expected increase in pension contributions next year, which the mayor anticipated in May while drafting his budget for the current fiscal year.
State law enacted during the 1970s fiscal crisis that brought the city to the brink of bankruptcy requires New York to balance its budget. Tomorrow, the mayor intends to present a balanced spending plan with no increased taxes “because we budgeted with foresight,” said Marc LaVorgna, a mayoral spokesman, in an e-mailed statement.
“The actuary is doing the right thing, but the issue remains how to pay for such a huge hit,” said Brooklyn Democrat Domenic Recchia, who chairs the council’s Finance Committee. “We can’t cut police, fire or sanitation. They keep the city going.”
Public pensions have been forced to re-evaluate projected returns that determine how much money taxpayers need to pour into retirement funds. In the 10 years through June 2010, the biggest state pension systems -- battered by the Internet stock bubble, the 2008 financial crisis and the recession -- earned an annualized return of less than 4 percent, according to data compiled by Bloomberg.
The actuary of the California State Teachers’ Retirement System, the second-largest U.S. public pension, on Jan. 30 recommended lowering the assumed rate to 7.5 percent from 7.75 percent. The board of the $144.8 billion fund is scheduled to vote on the rate tomorrow. New York state, which manages the third-biggest U.S. fund, lowered its rate to 7.5 percent from 8 percent in 2010.
New York City’s pension costs have increased to $8.4 billion this year from $1.5 billion in 2002, when Bloomberg took office, representing almost 13 percent of the $67 billion budget for fiscal 2012, which ends June 30.
The $115.2 billion held in five separate city pension funds benefits police, firefighters, teachers, civil service workers and school administrators.
Bloomberg signaled some of his budget plans in November, when he trimmed the projected deficit with cuts and $1 billion in added revenue through new taxi-medallion sales. He called for personnel reductions through attrition in several agencies, and about 75 dismissals. The November recommendation had no provision to fire thousands of employees, as the mayor had proposed and later rescinded in the current budget.
Bloomberg’s budget balancing became easier in December when Governor Andrew Cuomo agreed to sign a bill that allowed the city to sell 2,000 additional medallions for wheelchair-accessible taxis. The move was part of a deal that would expand private car services to allow them to pick up passengers on streets outside Manhattan.
The proposal met with criticism from the Citizens Budget Commission, a non-partisan business-funded policy research group, which questioned the wisdom of a budget proposal that raised revenue for just one year. The group also objected to Bloomberg’s use of money set aside for future retiree health-care obligations to pay current operating expenses.
“We are not in favor of such one-shot deals that favor short-run gain instead of long-term solutions,” said Charles Brecher, the group’s research director. “The use of such one-time resources to pay for current expenses falls in the ‘muddle-through’ category.”
The mayor’s budget plans, and the city’s fiscal health, depend to some degree on economic forces beyond his control, the city Office of Management and the Budget said in a January report.
New York fared better in the recession than the U.S. generally, yet it has 41,000 fewer private jobs than in August 2008, when it enjoyed peak employment. That’s about 1.8 percent off the peak, compared with a 5.1 percent shortfall for the nation, according to the budget office.
One risk to city revenue comes from Wall Street, where New York Stock Exchange-member firms lost almost $3 billion from July 1 through Sept. 30 last year, according to the budget office. It was the industry’s first quarterly loss since 2008.
The city assessment is consistent with concerns raised by state Comptroller Thomas DiNapoli, who said the industry may lose as many as 10,000 jobs in 2012. High-salaried financial employees accounted for 7 percent of city revenue in 2011, he has said.
The city’s tourism industry, which boomed with a record 50.5 million visitors in 2011, also “may be vulnerable to a slowdown if the European debt crisis drags on or worsens,” and combines with a weakening of the euro’s purchasing power against the dollar, the budget office said.
The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.