Pension Peril
Disgusted with the subway? Well, chew on this: Since 2014, the city has forked over more to its pension funds than it has for building and repairing schools, parks, bridges and, yes, subways — combined.
That’s not because the city pays so little for infrastructure but because it pays so much for pensions — a whopping $9.6 billion for the fiscal year that starts July 1, over 11 percent of the budget.
And more than half of that is to pay down its pension-fund debt. Lower that debt, and you free up funds for other pressing needs, like subways.
That’s just one of the stunning takeaways from last week’s Manhattan Institute report by E.J. McMahon and Josh McGee. Here’s another: The city is misleading everyone about how much more it will need to pay off its bills down the road.
Gotham’s official estimate of its pension-fund shortfall now stands at a whopping $65 billion. That will be hard enough to cut down over the next 15 years, as the city plans.
But the report puts the actual red ink at more than twice that sum — $142 billion. Ouch.
Why the difference? It’s because the city uses an overly rosy estimate of how fast its pension assets, now valued at about $175 billion, will grow. To be safe, independent actuaries and economists suggest using an annual “market” growth rate of less than 4 percent; the city uses 7 percent.
The more optimistic figure lets officials claim the funds are “only” short 34 percent — instead of the more realistic 53 percent.
More bad news: The city will only reach full fund- ing in 10 to 20 years if its investments grow at least by that 7 percent rate and pension benefits don’t get sweeter.
Yet “based on historical experience,” McMahon and McGee note, “this optimistic scenario almost certainly will not happen.”
In fact, the city’s current predicament is the result of benefit increases that state lawmakers have showered on retired city workers. The pension sweeteners added just in 2000 alone cost the city $13 billion over the next 10 years.
These two factors (over-optimistic assumptions and ever-greater benefits) are why the city’s yearly contribution to the funds has had to mushroom nearly sevenfold, from $1.4 billion in the 2002 fiscal year to that $9.6 billion for fiscal 2018.
What to do? The city’s not going to switch abruptly to the more realistic 4 percent expected return; the politicians just wouldn’t accept that shock to the budget. But it can take the advice of independent actuarial consultants and shave a quarter-point off its assumed 7 percent return.
That would still oblige the city to pay $655 million more a year into the funds. But McMahon and McGee note that the money can come from a pot of cash Mayor de Blasio has set aside for future worker raises. That makes sense. Workers have benefited from all those pension sweeteners; they should help plug the gap.
Clearly, something has to give, or the city’s growing pension hole will wind up eating the rest of the budget — leaving nothing extra for the needs of schools, parks and, yes, the subway.