Oct. 6 (Bloomberg) -- New York’s 8 percent assumed rate of return on its pension investments is so unrealistic that the city may have to spend even more than the $1 billion it has in reserve for its retirement plans, Mayor Michael Bloomberg said.
Officials are waiting for chief actuary Robert North to recommend how much the city can expect to reap on its pension assets, which were valued at $120 billion as of June 30. North hasn’t issued a recommendation in more than a year. A lower assumed rate would mean the city would have to contribute more to shore up its five pension plans.
“We keep talking to the actuary; I would have thought by now he would have made a decision,” Bloomberg told reporters during a news conference in Manhattan today. “The more you see returns in the stock market or in the debt market being negative or zero, the more unrealistic an 8 percent assumption is.”
Pension costs have increased to $8.5 billion this year -- including the reserve -- from $1.5 billion in 2002, when Bloomberg first took office, representing almost 13 percent of the $66 billion budget for fiscal 2012. Each quarter-point drop in the assumed rate of return would cost New York at least $350 million to be set aside to pay benefits, said Marc LaVorgna, a mayoral spokesman.
The stress on New York City’s budget has been shared by cities and states around the nation as investment returns plummet, life expectancies lengthen and governments remain obligated to pay benefits for public employees.
U.S. public pension funds have 76.1 percent of the assets required to pay retirement benefits, according to a survey of 215 plans by the Washington-based National Conference on Public Employee Retirement Systems released in June. The plans surveyed held about $900 billion and covered 7.6 million workers.
The New York State Retirement System last year reduced its assumed rate to 7.5 percent from 8 percent, upon the recommendation of its actuary.
The California Public Employees’ Retirement System, the nation’s largest pension fund, retained its assumed 7.75 percent return rate in March even after the fund’s actuaries recommended lowering it to 7.5 percent. Calpers then lost $20 billion from June 30 to Sept. 26, as its value fell to $218.6 billion.
Calpers Chief Investment Officer Joe Dear predicted it would “be tough this year and maybe for the next few years” to earn the assumed rate as a weak U.S recovery and the deepening debt crisis in Europe weigh on global equities. The Standard & Poor’s 500 index of stocks has fallen 8 percent this year.
Actuaries calculate the assumed rate of return on pension investments over a prolonged period -- 15 years for Calpers -- to blunt the impact that annual swings may have on the amount of money the fund charges taxpayers to finance retirement benefits for government workers.
In an interview today, North said he would finish his study by the end of November and present his findings in December. He declined to say what the assumed rate of return would be. Any change in the rate must be approved by the state Legislature.
In December, North said the new proposal would “likely result in significantly greater employer costs.”
Bloomberg must present next year’s preliminary budget to the City Council by February, and the mayor and council must approve a final spending plan by the end of the 2012 fiscal year on June 30. The city’s current financial plan contains projected budget deficits of about $5 billion in each of the next two years.
“A realistic rate of return would be lower than 7 percent, compounding our problem,” Bloomberg said today. Such a drop in the expected rate of return would cost the city at least $1 billion it hasn’t anticipated, LaVorgna said.
“We are staring into the abyss of $5 billion deficits going forward without more of a problem from the pension system,” Bloomberg said.
The mayor is founder and majority owner of Bloomberg News parent Bloomberg LP.
--With assistance from Martin Z. Braun in New York and Michael Marois in Sacramento. Editors: Mark Schoifet, Stephen Merelman.
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