Letters to the Editor

Undue Alarm on Pension Costs

To the Editor:

There is a little-known fact about pension expenses at the New York City Employees' Retirement System. Over the 10-year period from fiscal year 1995 to 2004, members of NYCERS contributed $2.7 billion into their pension system, while the city and the authorities paid in only $1.9 billion. This difference is due to the fact that the city's contributions fluctuate with the stock market, but employees' contributions are a fixed percentage of their paychecks.

You might wonder why the city is complaining about rising pension costs. The city's costs have risen recently due to the collapse of the stock market bubble. NYCERS assets went from $42.9 billion in June 2000 to $30.8 billion in June 2003, roughly the bottom of the market.

In fiscal year 2004, the city's costs increased to $311 million. Employees, however, paid $298 million out of their paychecks that year.

In fiscal 2005, the city's cost was $701 million and employees paid $300 million. This is an estimate, since NYCERS has not yet posted its fiscal 2005 CAFR on its Web site.

The city's fiscal 2006 pension costs will be higher, maybe around $900 million.

The investment markets, however, have been recovering since fiscal 2004. NYCERS's assets were $34.7 billion as of June 2005. The assets for after the first quarter of fiscal 2006 were $35.7 billion, a three-month increase of $1 billion. This has stopped the losses that have recently increased the city's pension costs. If the market continues its current trend, the city's pension costs will stabilize and gradually come down.

As a reference, the $701 million pension cost was based on a total annual payroll of $9.1 billion. This means that the city's fiscal 2005 pension cost was 7.6 percent of payroll. That is hardly an overwhelming cost, especially considering the minimal cost over the last 10 years and the projected reductions in the future.

In a related area, NYCERS has budgeted $60.6 million for fiscal 2006 to pay the fees of its investment managers, NYCERS has so far reported spending $41.3 million on these fees in fiscal 2005. Unfortunately, these fees will be going much higher in future years because of investment decisions made by NYCERS. NYCERS exercises no oversight or control over the payment of these fees.

It might be a valuable exercise to analyze what NYCERS gets in return for these fees. It's quite possible that an exclusively indexed portfolio of bonds and equities would produce greater returns with lower risk - and much lower fees - than the current investment policy at NYCERS. Of course, indexed funds don't make campaign contributions or pay for golf outings.

NYCERS pays very little ($368,500 in fiscal 2005) to its primary investment advisor relative to what it pays the investment managers who this advisor is supposed to monitor. There might be an advantage to increasing the advisor's fee and demanding in return that the advisor takes no money from the investment managers.

JOHN J. MURPHY

Editor's note: Mr. Murphy was Executive Director of NYCERS from 1991 to 2005.