Prudence on NY pension fund well-advised

This is a tricky time for pension fund management.

Especially so when those pension funds include the New York State Common Retirement Fund, upon which more than half a million retired state workers and their families depend.

Uncertainty abounds in the markets, in the economy, and certainly on the state’s own fiscal landscape. On one hand, it seems inflation is abating; on the other, it’s still too high. Some experts say we’ll avoid a recession; others doubt that. Economic data remains mixed. And state Comptroller Thomas P. DiNapoli, who serves as the state retirement fund’s sole trustee, released an assessment last week that the fiscal outlook is “deteriorating.” He says “significant economic and fiscal risks could further upend the state’s finances.”

While navigating such shaky terrain, DiNapoli is right to take a more conservative, careful approach to the pension-management part of his job, to ensure the pension fund remains as close to fully funded as possible.

Why should any of that matter to New Yorkers, especially if they’re not part of the state pension system?

Because employers — meaning state and local governments, including school districts — pay into the system every year. And the contribution they make is likely about to rise, especially as investment returns have fallen. Those contributions filter through every budgetary decision local and school officials make, affecting tax increases, spending choices and more. They have an impact on the health of the retirement system itself, on which so many Long Islanders depend.

MARKET PERFORMANCE

DiNapoli’s determination of the contribution rate, due in September, will ripple through the region. Government and school officials would be wise to start preparing now for the pain to come.

The market’s performance provides the context. In the fiscal year ending March 31, the state pension fund’s investment return fell by 4.14% — the largest decline since 2009. The dip comes after the fund gained a stunning 33.55% in 2021 and another 9.51% in 2022.

Two years ago, DiNapoli lowered the state pension plan’s assumed rate of return from 6.8% to 5.9%, making New York one of two public pension systems in the country to fall below the 6% mark. That choice set more realistic expectations and should narrow any swings in the contribution rate — either way. The Teachers’ Retirement System, which does not fall under DiNapoli’s oversight, took a smaller step, reducing its assumed return from 7.1% to 6.95%.

Lower assumptions help. But in a year when the market has been volatile and investment returns were down, employer contributions still are likely to increase.

Just how much those employer costs will rise remains to be seen. Everything from investment returns to mortality rates to payrolls and overtime costs is taken into account. The determination will influence 2024-2025 budgets.

But that doesn’t mean school districts must overload their reserve funds. School districts across the region have cash reserves totaling $3.1 billion. Several already surpass the state limit that requires them to keep no more than 4% of their annual budgets in such rainy-day accounts. Some are even more over-the-top. No school district on the Island should need 15% or 25% or 30% of their budgets in unrestricted fund balances; those excess funds should go toward meeting a district’s current needs or toward tax relief.

RESTRICTED RESERVES

Instead, they should set up a separate, restricted pot of reserves specifically earmarked for pension contributions. Such restricted money isn’t subject to the 4% rule and would allow school districts to prepare for contribution increases without being able to spend the funds in unlimited ways.

Establishing a restricted pot in advance of new contribution rate increases would be a responsible move. So is limiting surpluses. But as Albany’s fiscal picture is likely to darken considerably, and as the 2% property tax cap must remain sacrosanct, the legislature should consider a slight increase to the 4% limit, to allow school districts a bigger cushion. Conditions should include stricter penalties for districts that surpass the new limit, along with tougher oversight and enforcement.

The state, too, has some complex decision making ahead. Gov. Kathy Hochul has appropriately increased the state’s own rainy-day funds, which could cushion any economic hit. But, as DiNapoli said in his fiscal outlook, that doesn’t eliminate the need for “prudent fiscal discipline.” Much has changed in the last year, and DiNapoli’s analysis showed $36.4 billion in looming budget gaps through the 2026-2027 fiscal year.

The rain is on its way. Responsible budgeting and careful preparation is the only way to avoid getting wet.