State pension system may face lower rate of return

State Comptroller Thomas P. DiNapoli is considering a lower assumed rate of return for the state pension system, possibly bringing it to as low as 7.5 percent, and a decision will likely be made within the next two weeks, officials said Friday.

Such a reduction from current expectations of an 8 percent annual return will require increased contributions for local governments and school districts in the state, experts said, as localities will have to make up the difference with additional tax revenue.

"We're fighting to close a huge budget deficit, and this is not going to help," said Nassau County Comptroller George Maragos.

He estimated that just a half-point reduction - from 8 to 7.5 - in the rate of return could mean an additional $8 million in contributions from the county to the pension system.

Any lowering in the rate of return could kick off higher contributions from taxpayers. "It means that, everything else being equal, the contributions go up," said Frank Mauro, the executive director of the liberal New York-based Fiscal Policy Institute. He said the move by the state comptroller was an effort to give the plan more realistic expectations based on the stock market and, ultimately, to keep it fully funded.

State officials said they were not certain what the rate would be, but that a reduction was certainly coming.

"There's probably going to be a reduction in that range" that could be as low as 7.5 percent, spokesman Robert Whalen said Friday.

Heading into 2011, local governments will have to pay more than 12 percent of their total payrolls toward the state pension system for the Employee Retirement System and 17 percent of payroll for the police and firefighters' pension system. Nassau and Suffolk county officials have already estimated that their contributions will increase by $90 million for 2011 - before any change to the annual growth rate was considered.

And officials have anticipated that their contributions could continue to rise in 2012 and perhaps beyond. Those increases could be larger with a change to the anticipated rate of return.

For the past 10 years, the state comptroller's office has assumed an 8 percent rate of return for the state pension fund. The fund has been lauded as one of the strongest in the country and has been consistently "fully funded," meaning that it has enough in its coffers to make the payments that are coming due.

Some economists, however, say that assuming even a 7.5 percent rate of return in current stock market conditions is too high.

"It's still an economic fantasy," said senior fellow E.J. McMahon of the conservative Manhattan Institute. He said that a 5 percent expected growth rate would be more realistic.