(Bloomberg View) — The New York Times has a lengthy and dismaying article on the problems with New York City’s pensions:
“Next year alone, the city will set aside for pensions more than $8 billion, or 11 percent of the budget. That is an increase of more than 12 times from the city’s outlay in 2000, when the payments accounted for less than 2 percent of the budget.
But instead of getting smaller, the city’s pension hole just keeps getting bigger, forcing progressively more significant cutbacks in municipal programs and services every year. Like pension systems everywhere, New York City’s has been strained by a growing retiree population that is living longer, global market conditions and other factors.
But a close examination of the system’s problems reveals a more glaring issue: Its investment strategy has failed to keep up with its growing costs, hampered by an antiquated and inefficient governing structure that often permits politics to intrude on decisions. The $160 billion system is spread across five separate funds, each with its own board of trustees, all making decisions with further input from consultants and even lawmakers in Albany.”
The core problem is that returns have not tracked with the city’s optimistic projections. In 2012, the city finally lowered its projected return to 7 percent from 8 percent, but after decades of excessive optimism, that left it with a giant hole; the payments had to be stretched out over more than two decades in order to minimize the fiscal hit. Yet this still may not be enough; it’s possible that 7 percent is still too rosy.
Like many state and local pension funds, the city has tried to make up the difference between its projections and what the market actually delivered by plunging into higher-risk investments. Those more complicated investments came with higher fees… and the possibility of big losses. The city seems to have taken at least one major bath, on a private equity fund that closed in 2011.