Rein in Pension Costs
To The Editor:

This year the city is paying $6.2 billion to the five city pension funds. This is 18 percent of the city's payroll.

You don't need to be an actuary to know that this situation is out of control. This huge cost is due to chronic underfunding, bad investment decisions, and increasing benefits. Many of those increases the city approved of.

Unfortunately, this $6.2 billion does not reflect the market collapse that started more than a year ago. The five pension funds have probably lost 30 percent of the worth of their assets since October 2007, and this loss may easily increase along with increasing unemployment.

This will increase the coming years' pension costs. For example, as an estimate the city will have to pay $7.5 billion next year and $12 billion the following year. These pension costs could easily overwhelm the city's $59- billion budget. There are similar impacts for the Metropolitan Transportation Authority.

There will be pressure on the Actuary to delay these costs, as there was with the 2000-2003 stock market losses. Over time the Actuary has been aggressive in projecting investment profits of the pension funds, which has allowed the city to put less money into the pension funds. This has now created the perfect storm with a budget crisis, massive investment losses, and a history of delayed contributions. I guess we could get in line behind AIG and Citibank.

In the midst of this havoc the five pension funds are spending approximately $400 million this fiscal year on fees to investment managers. The city, in turn, has to pay back this money to the five pension funds next year, with an 8-percent interest charge.

It is possible to reduce this expense to $100 million for the five pension funds and to actually improve the total return on their investment portfolios, a win-win situation for the city and the pension funds.

The trustees would have to terminate many managers and force the remaining managers to deal with radically lower fees. The trustees would have to stop subsidizing novice investment managers, and stop paying 2-percent fees for illiquid assets. They would have to cut fees for both foreign stock managers (10 times higher than for U.S. stock managers), and junk bond managers (4 times higher than for topgrade bond managers). These fees were never reasonable in the first place.

The trustees of the pension funds, however, would then become low-profit clients, and the investment managers would no longer have any reason to cater to the trustees and their political aspirations. The members and the retirees, however, would get pension benefits that would be more stable, and less expensive.

The trustees of the pension funds should pursue this suggestion with its large potential for reduced expense and increased returns. Of course, maybe they are worried that someone would ask the obvious question: why they hadn't done this earlier.

Since 2002, the Comptroller has had a poor record in recruiting and retaining a chief investment officer. This has not helped the performance of the pension funds. It did not, however, hinder the Comptroller's former representative at the pension fund boards from finding work in 2006 with a private equity manager that he had voted to hire in 2004. It is interesting that the Comptroller stopped posting quarterly pension investment returns on his Web site in March 2005.

The Mayor with his extensive exposure to the investment community should appoint a skeptical non-political expert as the chair of the New York City Employees' Retirement System and the city Teachers' Retirement System. Wise investment decisions are very often counter to political self-interest. The current chair has brought no experience to this position. The OMB Director with his capital market experience would have been a much more thoughtful appointment.

JOHN MURPHY

Editor's Note: Mr. Murphy is the former Executive Director of the New York City Employees' Retirement System.