New York City Is Not Alone
The Office of the New York City Actuary is expected to recommend changes to the assumptions used to calculate the City’s annual pension costs. These changed assumptions will have an impact on the amount the City is required to contribute to its employee pension funds. One important change expected is a reduction to the Actuarial Interest Rate (AIR), which is the annual rate of return assumed for the investment of pension fund assets. If reports are correct, the AIR can be expected to drop from 8 percent to 7.5 percent or 7.0 percent, which would increase the City’s annual pension costs by at least $750 million and as much as $1.4 billion. While extremely costly, the adjustment would be prudent in order to keep the City’s pension funds fully funded, and it would be consistent with changes that have been adopted by other large public pension systems throughout the country.
The City Actuary periodically reviews investment performance, mortality and other assumptions upon which pension contributions are based and recommends changes to improve the accuracy of calculations behind the City’s pension costs. The last change made to the AIR was in 2000, when it was reduced from 8.75 percent to 8.0 percent. Since that time, sharp stock market declines in 2001-2002 and 2008-2009 have greatly affected investment performance, and other public pension funds have already revised their AIRs.
The Public Pension Funds Database provides data from 2001 to 2009 on 126 public pension funds that represent over 85 percent of all U.S. state and local government pension assets and membership. According to the Database, the majority of public pension funds in 2009 still had an AIR at 8 or higher; however 34 funds had lowered their AIR, with seven funds lowering it more than once since 2001. As a result, the share of funds with an AIR below 8 percent doubled from 15 percent to 30 percent.
Because this dataset ends in 2009, it does not capture changes made by pension systems in 2010 and 2011. For example, New York State pension funds lowered their AIR from 8.0 percent to 7.5 percent in 2010. To provide a more current snapshot, the CBC staff examined the investment assumptions for the 25 largest public pension funds.
Of these funds, 13 revised their AIR downward between 2001 and 2011. While nine funds have an 8 percent assumption, the majority (13) now use a rate below 8 percent. Only three funds from New Jersey and Illinois, two states with poor pension management practices, maintain assumptions above 8 percent.
Thus, New York City will not be alone in decreasing its AIR: other large public pension funds have already taken this responsible step.
- The Public Pension Database is collected by the Center for Retirement Research at Boston College. It includes 107 state funds and 19 local plans that represent 90 percent and 20 percent of all assets and members of each type of plan, respectively. The data were accessed by CBC in July 2011 at http://pubplans.bc.edu/pls/htmldb/f?p=198:3:1248902026141293::NO:::
- Excludes funds that both increased and decreased their assumptions in this time period.
- As of 2009, according to the Public Pension Database.