It's hard to be a doomsayer on public pensions, because the process of collapse moves so slowly. Even if a given pension system is definitely in a death spiral from which no exit is possible, it still may be 20, 30 or even 40 years before the final collapse when the pension checks actually start to bounce. That's just too long to maintain any kind of a sense of crisis. Meanwhile the pension systems provide the perfect slush fund for politicians to play with, making promises to the people who put them in office, completely secure in the knowledge that the bill will come due long after they themselves are gone.
And thus we have new New York City Comptroller Scott Stringer, one of the trustees of each of the City's pension plans, coming out with a big press release last week touting the great performance of the City pension plans on his short watch:
New York City Comptroller Scott M. Stringer announced today that the New York City Pension Funds achieved a 17.4 percent investment return for Fiscal Year 2014, which ended June 30th.
Stringer also noted the strong performance of the funds over the previous four years, going back to 2010. The result: more money for the City to spend on other programs!:
The pension investment returns from FY 2014 will lower the City’s pension contributions beginning in FY 2016, resulting in cumulative City savings of $17.8 billion phased in over a six-year period with each year’s incremental savings repeated for 15 years.
So I guess there's no problem here! Stringer's press release contains no mention of funding levels of the various plans (New York City has five), nor any discussion of whether the current level of pension promises is sustainable in any sense.
The New York Times, to its credit, promptly came out with a long front-page article on Monday August 4 taking a much deeper look at the City's pension situation and coming to an overall very pessimistic view. Other articles critical of the City pension situation came from Greg David of Crain's and Megan McArdle of Bloomberg on August 5.
While the Times article is not directly addressed to or critical of Stringer, it contains plenty of data to make Stringer's statements appear, frankly, ridiculous. For example, while Stringer cites data on investment returns only from the last 5 years (2010 - 2014) during which the stock market has performed strongly, the Times points out that returns from 1999 to 2009 averaged only 2% per year. That is a big, big problem for systems that at the time were calculating contribution and funding levels based on an assumed 8% rate of return. And then the Times has a big chart showing contributions and funding levels for 2003 - 12 for the biggest of the five plans, the so-called Employee Retirement System, now based on a new investment return/discount rate assumption of 7%. In summary, for that plan over that period:
- Assets have gone from about $32 billion to about $47 billion.
- Contributions have been about $20 billion. Do the subtraction and you see that contributions have exceeded the overall growth of the fund, meaning that all investment returns and then some have been consumed by payouts of pensions to beneficiaries.
- The present value of benefits accrued to date (7% discount rate) has soared from about $49 billion to about $104 billion.
- Therefore the funded ratio (7% discount rate) has gone from about 65% to about 45%.
And now here's a calculation the Times does not do, but is important. If you think a more proper discount rate would be 6%, or even 5%, what would the funded ratio be? Assuming average duration of liabilities of 15 years (which I think is short) that would mean that liabilities at 6% would be around $120 billion and the funded ratio 39%; and at 5% the liabilities would be around $138 billion and the funded ratio around 34%.
About the best you can say about this is that New York City, largely for having made very large contributions to these plans over the last decade, is in substantially better shape than, say, Chicago or Los Angeles. On the other hand, as I have said many times, when you are in a Ponzi scheme, the best thing you can hope for is that it will collapse quickly; the alternative is that you spend more and more money to keep it going, only to have a much bigger and more horrible crash in the end.
In the face of this, Stringer's strategy is to fail to mention the funding situation at all, and to declare that more money is now available to spend! And de Blasio? According to the Times:
Mr. de Blasio, notably, did not mention the word “pension” during his hourlong budget presentation in May.
While there is lots of good data in the Times article, the big picture is that its main criticism of New York City's current pension situation is that a switch of higher risk investment vehicles (largely hedge funds) to chase higher returns has not notably increased returns but has notably increased fees. The most recent number they give has fees running about 0.5% of invested assets, up from only about 0.1% earlier when the funds invested in less exotic stuff. That is indeed real money, with lots of opportunity for graft.
However, it is not the big problem. The big problem is unsustainable pension promises, including retirement ages in the 50s or even 40s following working careers as short as 20 and 25 years in most cases. Do even the simplest math and you realize that, as these promises work their way through the system, pension costs are going to exceed, and indeed far exceed, the costs of active employees. No amount of magical returns from the stock market, or from hedge funds, can fix that problem.
And that's the problem that de Blasio and Stringer will not even talk about. I'm not sure they've even figured it out. Prior Mayor Bloomberg had figured it out and did talk about it. Also in the category of those who have figured it out are members of the bureaucracy, but they badly want for the problem not to be discussed, at least until they are collecting their own pensions.
I'll close with this from the Times:
In the existing environment, important questions about cost and sustainability can be broached only with great diplomacy. In 2010, Blackstone Advisory Partners, a private equity firm, found out what can happen otherwise. On a conference call with investors, a company official answered a fiscal question by saying retirement benefits for public workers across the country were excessive. When New York City’s trustees got wind of the comment, they called for Blackstone’s chairman to apologize in person. A few months later, he did, and when that proved insufficient, Blackstone issued a statement saying it opposed “scapegoating public employees.”
Of course, the financial guys who work with the pension funds are among the very few people in the City who understand how these things work. Shut them up, and you have a really good shot of keeping the whole subject of unsustainable pension promises out of the public debate. And there are several hundred million of annual dollars in investment advisory fees for these funds to be used in the shutting-up project.
A couple of bad stock market years in a row and we could easily see the City's required pension contributions doubling to 20% or more of the budget. Meanwhile, our current leaders fiddle.