The sky is falling: Not!

Here we go again! Public employee pension systems are supposedly crushing the life out of state finances. Just listen to part of a recent column by Leo Hindery, Jr --former CEO of AT&T Broadband and Liberty Communications--in the Huffington Post. He is referring to the Rhode Island State Pension Fund.

"Rhode Island's state pension fund now consumes 10% of every state tax dollar, and this figure is currently projected to double within just the next few years....And the root problem? Until just this year, Rhode Island calculated its pension number by assuming an average annual rate of return on its investments of 8.25% -- in fact, for the last decade its actual average return on investment was only about 2.40%. And in each of the last 10 years the state's fund paid more money to retirees than the fund collected from state employees and taxpayers combined....Rhode Island is a microcosm of what's wrong with the country's $3 trillion worth of public pensions plans in the aggregate, and it's truly the 'canary in the (national pension crisis) coal mine'. The state -- just like 49 other states -- made promises it didn't sufficiently fund along the way and now can't keep. That bill has come due, so to speak, and...the state is being forced to choose among the state reneging on both past and future promises to workers, undermining its future by cutting back on investing in everything from schools to green energy to health care, or, even though in the midst of an ongoing recession, raising revenues through large tax increases."

It's interesting to compare this with the recent news release by the New York State Teachers' Retirement System:"A robust total fund return of 23.2% net of fees for the fiscal year ended June 30, 2011 was the largest rate of return posted in 25 years by NYSTRS. The figure was nearly double the previous year's return of 12.1%."

"The two consecutive years of double-digit returns helped the System regain much of the loss sustained during the devastating 2008-09 economic crisis. "

"As of June 30, 2011, total net assets were valued at $89.9 billion, an increase of more than $13 billion from a year earlier. NYSTRS has achieved returns well above the 8.0% assumed rate of return in four of the past six years. The System's 25-year annualized rate of return stood at 9.0% — or 100 basis points above the actuarially assumed rate. " 

Remember that part about the Rhode Island system paying out more in benefits than it took in from members and employers? Here's the way the NYSTRS looks at it: "The NYSTRS plan has also proven to be extremely efficient and cost effective. For the 20-year period ended June 30, 2011, NYSTRS collected $15.3 billion in member and employer contributions while paying out $63.5 billion in benefits. Despite distributing nearly $50 billion more than it took in, System assets rose from $31 billion to $89.9 billion."

Are employer contribution rates skyrocketing out of control? Not for NYSTRS: "Due in large part to the System's long-term investment success, the employer contribution rate has remained in single digits over this same 20-year period. In the 1990s the average rate was 5.66% and in the 2000s it was 4.37%. The 11.11% rate applicable to 2011-12 payroll will be the first double-digit rate in 22 years."

It should be noted that the employer contribution rate is based on a rolling 5-year average of investment performance. That means that the losses which occurred in 2008-2009 will work their way out of the calculation in a couple of years. If the stock market doesn't plummet again, it is reasonable to assume that the ECR will actually decrease in the future.

Why is NYSTRS doing so well? The simple answer is that it is fully funded. Other state systems are also supposed to be fully funded, but in New York's case the required contributions by public employers were actually made each year. States such as New Jersey and California took several years off from making contributions as a way of keeping taxes lower.

As i have pointed out before, that's like contracting with someone to paint your house then, when the house is painted telling the painter, "I spent some of the money I was going to use to pay your bill on a big new flatscreen TV, so you'll have to accept less than the contract price." And then, you accuse the painter of being greedy when the painter insists that you pay him the agreed upon price!

Other state public employee pension systems may be in trouble, but it's not because of the "greed" of the public employees. If you hear anyone trying to lump NYSTRS in with those other systems, now you have the facts to set them straight!