Mineola, NY. An analysis of the New York State Pension Fund (NYSPF) found that it underperformed compared to the Dow Jones and S&P 500 general market indices costing municipalities an estimated $19.7 billion, or approximately 46.2%, in higher pension premiums over the past 10 years. The cost to Nassau County is estimated to have been over $672 million over the last 10 years (2008-2017), or about $67 million annually, on average, in higher than necessary pension premiums for its employees. This analysis has been sent to the New York State Comptroller in a letter dated December 5, 2017 with copies to local officials and Governor Cuomo.
“The underperformance of the NYSPF’s investments have placed a big burden on local municipalities’ budgets,” said Comptroller George Maragos. “It is imperative that the fund adopt new strategies that can match or exceed the performance of general market indices. Nassau County and other municipalities cannot afford to pay any more than what is absolutely necessary to ensure the pension benefits of its employees.”
Nassau County is required to make annual pension contributions into the NYSPF for its employees at rates established by the State Comptroller. These rates are determined to maintain the pension fund fully funded on an actuarial basis under appropriate investment return assumptions. Over the last 10 years (2008 to 2017), Nassau County was invoiced approximately $1.45 billion in pension contributions on behalf of its employees. The County’s 2017 invoice alone was $168.3 million, which represented an overall increase of 58.6% compared to 2008.
According to the State Comptroller’s Local Retirement System Comprehensive Annual Financial Reports (CAFR) for the fiscal years 2008 to 2017, member municipalities throughout New York contributed $42.5 billion into the NYSPF while, the NYSPF paid out $89.3 billion in benefits and earned about $84.3 billion in investment returns, after expenses. As the benefit payments are now more than double the contributions, the investment returns are critical to maintain the fund’s health and to meet the benefit payments. For the fiscal year ending March 31, 2017, the NYSPF is estimated to end at a record high of $192 billion.
At first glance, the $84.3 billion investment earnings, or 54.5% gain, over 10 years may appear impressive. However, in reality this investment rate of return actually under-performed the markets by $19.7 billion. During the same 10 year period the Dow Jones Industrial Average (DJIA) and the S&P 500 Indices rose
by about 67.3%. The higher performance of the DJIA, compared to the 54.5% performance of the NYSPF, translates into a lost opportunity worth $19.7 billion in higher returns. A comparative analysis is provided below in Table 1.
The impact of the lower investment gains by the NYSPF to the individual local municipalities, including Nassau County, is significant. In the case of Nassau County, it meant that our $1.45 billion invoiced pension contributions over 10 years would have been lowered by 46.2%, for a savings of $672.2 million, while the NYSPF would have still ended fiscal year 2017 at the same level of $192 billion (Table 2).
Given the history of investment under performance by the NYSPF, it would be advisable that the fund review its investment strategies and possibly achieve higher gains by simply investing in the general major indices to lessen the expense pressures on local municipalities.
Additionally, the financial profile of the NYSPF highlights the heavy reliance on robust investment gains to pay retiree benefits. In the 10-year period, benefit payments totaled $89.3 billion while contributions totaled significantly less at $42.5 billion. Consequently, any prolonged market downturn may cause a significant premium increase to municipalities and their taxpayers on top of already very high rates. As the markets are reaching historic highs it may be prudent to also invest in hedging strategies to protect the fund from possible heavy losses in the event of significant and prolonged market declines.
Comptroller George Maragos added, “I urged the NYS Comptroller to undertake an independent review of the current pension investment strategies in order to improve performance and reduce the future taxpayer burden, while also ensuring that taxpayers are protected from even higher contribution costs from any prolonged market downturn.”
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