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NYC Pensions Adjusting to the New Normal?
Bloomberg reports, New York City May Cut Assumed Rate of Return on Pension Assets, Liu Says:
New
York City may reduce the assumed return on its $100.5 billion of
pension investments from the current 8 percent rate, Comptroller John
Liu said today.
The move would
increase the amount of money the city must contribute to its five public
retirement plans even as it faces a $2.4 billion budget deficit next
year, Liu said after a speech at the Union League Club in Manhattan. The
city’s pension costs are expected to rise more than 15 percent next
year, to $8.3 billion, budget director Mark Page said today. That’s
about 20 percent of municipal tax revenue, he said.
“The city
has maintained an 8 percent assumed rate for a long time,” Liu said.
“It’s fair to say that the assumption will be lowered at some point.”
Public-pension
funds from New York state to Illinois are cutting their expected
returns amid market losses and in the face of a sluggish economy. New
York state’s $132.8 billion retirement fund lowered its target to 7.5
percent from 8 percent, while the Illinois State Employees’ Retirement
System cut its rate to 7.75 percent from 8.5 percent, Tim Blair, the
system’s executive secretary, said in a telephone interview.
In
the 10 years from July 1999 to June 2009, New York’s pensions returned
2.09 percent, according to the city’s comprehensive annual financial
report for the fiscal year ended June 30, 2009.
Trustees’ Approval
Liu
didn’t say when the change might occur or what the new assumed rate
might be. The decrease must be approved by the trustees of the five
funds for civil employees, police officers, firefighters, teachers and
school administrators as well as the state Legislature. The plans cover
334,000 city employees and 237,000 retirees and beneficiaries.
Liu’s
prediction of a more conservative investment outlook follows remarks by
Mayor Michael Bloomberg last month calling the pensions’ assumed rate
of return unrealistically high.
New York City is seeking more power to set pension benefits for workers as retirement costs grow.
Mayor
Bloomberg is absolutely right, the assumed rate of return is
unrealistically high. Many US pension plans still grasp onto this
ridiculous 8% assumed rate of return, which is why they've reached their breaking point.
With 10-year bond yields hovering around 2.9%, an 8% assumed rate of
return is a pipe dream. Sooner or later, trustees will have to adjust
their expectations accordingly.
Even 7.5% is not realistic. I
don't care if pensions shove all their assets into alternatives (hedge
funds, private equity, real estate, infrastructure, etc.), they'll still
come up short. Tyler Durden at Zero Hedge discussed GMO's 7-year asset class return forecast (click on chart above):
Jeremy
Grantham, who has been rather vocal in his condemnation of the Fed
recently, and has been rather lukewarm in his endorsement of equities
as an asset class, has released an updated (as of Oct 31) estimate for 7
Year returns by asset class. And it has bad news for pension funds
which have a rather high bogey of about 8% per year.If
Grantham is correct the 'new normal' (which is really the normal
normal but with the cheap credit spigot taken away due to a new
deleveraging regime) also means that pension fund actuarial models have
to be scrapped as they will likely not be able to attain the kinds of
returns needed to keep them solvent based on capital appreciation
expectations.Where Grantham sees the best return
potential is in international and emerging equities, presumably on the
assumption that decoupling will take place. On the other hand, many are
increasingly seeing the possibility of a China topping as
a major risk factor. While Grantham is bearish on small cap US
equities and sees just a modest outperformance of large caps, what he
hates the most are all bonds, where in four out of five categories he
see a negative 7 year return. Perhaps it is time for a Rosie-Grantham
round table.
I'm inclined to side with Grantham
on bonds, but I'm also acutely aware that JGBs outperformed the S&P
500 over the last ten years and was the number one performing asset
class during Japan's lost decades. All that quantitative easing by the
BoJ and the so-called Japanese bond bubble still hasn't popped. Lots of
smart hedge fund managers shorting JGBs got their heads handed to them
in the last 15 years. Could the same thing happen in the US over the
next decade? Who knows? All I know is that more pension plans will have
to adjust to the new normal or they risk seeing their pension deficits
spiral out of control.
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My neighbor is a retired New York detective. He collects about $105,000/year in pension benefits plus medical for himself and his wife. His single daughter and her illegitimate daughter live with him. His 34 year old daughter collects about $500/month in welfare payments. She does not work. His granddaughter qualifies and receives free/reduced lunch at school. His mother-in-law died 3 years ago and left his daughter about $30,000. His daughter went out and bought a brand new VW for $24,000. About one year after the detective retired, he somehow qualified for disability. Now, all three of them drive around with handicap placards hanging from their rear view mirrors and park in the handicapped spaces at school (despite greatly inconveniencing the parents who are picking up kids who are in wheel chairs). Oh yea, the detective mows his lawn with a push mower every week and plays golf twice a week...without a golf cart, he prefers to walk.
They're getting honest all of the sudden.
Higher taxes not far behind, NY.
Will the last one to leave please turn out the CFL?
New York, and especially Wall & Broad, is full of the most important people in America and the world, and we must all pitch in to ensure they never suffer any reduced standard in living, risk of loss, or any other such potential hazards the rest of us dispensable people must deal with on a daily basis.
.20 cents on the dollar and GRANDFATHER NO ONE .....its the only way or the pension ponzi scam will collapse
...please sir, can we do that with social security? ...and medicare...and....
Reducing the benefits is the only sure fire way to bring a pension plan onside on their promises.