New York State Comptroller Tom DiNapoli says he wants to...

New York State Comptroller Tom DiNapoli says he wants to sue BP because a stock that a state pension fund holds has lost value since the explosion of the Deepwater Horizon drilling rig, the deaths of 11 workers and the uncontrolled oil spill in the Gulf of Mexico. (February 9, 2010) Credit: Steve Jacobs

An obscure state pension fund committee will gather privately with Comptroller Thomas DiNapoli and his staff in a Manhattan conference room, next Monday. The decision they help DiNapoli make that day will either cost state and local governments tens of millions of dollars next year - or push those costs onto future taxpayers, experts said.

The group will be grappling with a difficult question: How much New York's $132-billion pension fund can reasonably be expected to make following the worst recession since the Great Depression.

For nearly 25 years, the comptroller has assumed an annual growth rate of 8 percent. When times were good, healthy returns on investments in stocks, real estate and bonds saved state and local governments hundreds of millions of dollars by keeping payroll contributions low - artificially so, according to many economists.

The rate is important because some $7.6 billion in annual pension payments are made with a mixture of investment income, taxpayer funds and employee payments. If pension-fund investments fail to meet projections, it does not affect retirees' pension checks, which are protected by the state constitution. But municipalities and state government must make up the difference in future budgets.

As part of their taxpayer-funded budgets, local governments pay 12 percent of their total payroll as a contribution to the state pension system for most public employees and more than 17 percent for police and firefighters.

For the first time in decades, the comptroller and his actuarial advisers on July 26 will consider lowering the rate to less than 8 percent, said Dennis Tompkins, a spokesman for DiNapoli.

"Will they recommend a lower rate this year?" Tompkins said. "I wouldn't be surprised if they did."

Economists say New York should have lowered the rate long ago.

Taxpayers pick up slack

Without the huge stock gains of the 1990s technology boom, the taxpayer costs of public employee pensions are bound to keep spiraling upward because the state constitution guarantees the benefits will never decrease and the employees' cost will never increase, experts said.

"Something has got to give," said economist Jeremy Gold, a consultant to several public pensions. "If you can't afford to make the contributions, you can't afford to make the benefit promises. But you've already made the benefits promises."

New York isn't the only state with the problem. At least 33 other states' pension systems assume investment profits of 8 percent or more a year.

DiNapoli spokesman Robert Whalen said 8 percent is a historically accurate estimate. Over the last 20 years, he said, average returns have beaten 8 percent, he said. But in the past five years, average returns have dwindled to a little more than 4 percent, Whalen said.

Recently, other states have been dampening their projections.

Utah and Pennsylvania have lowered their rates to 7.75 percent and 8 percent, respectively. The moves followed a 2008 speech by Donald Kohn, vice chairman of the Federal Reserve, who warned against 8 percent assumptions that "push the burden of financing today's pension benefits onto future taxpayers, who will be called upon to fund the true cost of existing pension promises."

The California pension system is considering lowering its rate from 7.75 percent, though no decision has been made, said spokesman Clark McKinley.

"Public pension plans across the country are saying, 'We don't think we can earn 8 percent a year,' " said Andrew Biggs, a former deputy commissioner of the U.S. Social Security Administration and a fellow at the American Enterprise Institute, a conservative think tank in Washington, D.C.

Biggs and other conservative economists say states should lower their projections dramatically - to about 4 percent or 5 percent, roughly the rate of a federal Treasury bond, one of the safest investments. But that would force municipalities statewide to kick in tens of millions of dollars more each year to fund retiree benefits.

In 1938, during the Great Depression, the state constitution was amended to guarantee pension benefits for all public employees. For years, New York made modest assumptions of 4 percent to 5 percent returns on investments. But after state law was changed to allow the pension fund to invest in high-risk stocks, Comptroller Ned Regan in 1981 began raising the rate. By 1986, it had reached 8 percent.

Income soared in 1990s

By the late 1990s, during the tech bubble, investment income was covering nearly all pension costs - with the state and counties on the hook for none of it.

"It put off the day of reckoning, and that day is coming," said E.J. McMahon of the conservative Manhattan Institute.

Others say it's too early to say the sky is falling. James Parrot, deputy director and chief economist at the liberal Fiscal Policy Institute, said most states have far worse pension problems than New York.

"People like to disparage the state for fiscal problems, but in at least one area, you can say it has done something right," Parrot said, referring to the pension system's management.

If the return rate were lowered, New York's pension fund wouldn't have nearly enough money to pay its future costs, experts said. That would leave it far from "fully-funded," as DiNapoli often describes it, and potentially wreak havoc with county budgets.

Nassau Comptroller George Maragos called it "a complicated question."

The pension fund should have a "reasonable rate of return to be realistic and honest with ourselves," Maragos said. "But it will translate into even higher county contributions which cannot be paid."

DiNapoli's office said relief could come from a plan to allow counties to defer unexpectedly high pension payments - some call it borrowing from the system - for up to 10 years. The plan has passed the Assembly and is waiting action by the Senate.

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