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New York City Mayor Bill de Blasio hasn’t had a good year so far. State Senate Republicans, angered over his effort with the American Federation of Teachers’ Empire State affiliate last year to end their control over that legislative body, weakened his control over the Big Apple’s traditional district by extending mayoral control for just another year. De Blasio’s arch-rival for supremacy as the Empire State’s most-powerful politician, Gov. Andrew Cuomo, steamrolled over him during the legislative session, convincing legislators to increase the number of public charter schools that can open, and allowing the Board of Regents to take over 62 of the district’s failure mills if their performance doesn’t improve within a year. Cuomo also made sure to remind De Blasio who was boss last month when he declared that the mayor must prove that he deserves to keep control over the city’s traditional district.

wpid-threethoughslogoDe Blasio’s successful tag-team with public-sector unions and Big Apple political bosses to put Carl Heastie in control of the state assembly didn’t work out as expected: Heastie, who succeeded the notorious Sheldon Silver as Assembly Speaker in February after his indictment on corruption charges, largely gave in to Cuomo’s demands and those of his Senate Republican colleagues. Meanwhile mayor’s unnecessary alliance with the American Federation of Teachers’ Big Apple local, the United Federation of Teachers, has also not proven to be of much value; the local, along with the AFT’s state affiliate, New York State United Teachers, lost big in Albany as Cuomo and school reformers succeeded in enacting another teacher evaluation regime.

But none of those current problems facing De Blasio are as big as the long-term fiscal woe facing him and Big Apple taxpayers: The city’s virtually-busted teachers and school employee pensions. As a Dropout Nation analysis reveals, the pension shortfalls for the Teachers Retirement System and the Board of Education Retirement System continue to increase unabated.

Start with TRS, the larger of the two pensions. It officially reports a shortfall of $25.8 billion (as of 2012-2013, the latest year available), a 3.4 percent increase over the underfunding in the previous fiscal year. But as readers already know, the official numbers do not reflect reality. For one, this doesn’t include $5 billion in unrealied gains that have been left out as part of “smoothing” efforts by the city to avoid dealing with the shocks that come with the volatility of financial markets. If those gains were calculated, TRS’ unfunded liability would be a just slightly more manageable $20.7 billion. Such accounting tricks can either make pensions more-solvent — or in the case of TRS, less-solvent — than they really are, making it difficult for policymakers to make smart fiscal decisions.

The bigger problem lies with the fact that TRS assumes an investment rate of return of seven percent. That’s higher than the six percent median rate of return Wilshire Associates expects over the next decade. In fact, TRS’ rate of return for 2014-2015 so far is just 4.46 percent, or more than two percentage points below the assumed rate, according to data from the New York City Comptroller. As a result of this inflated rate of return, TRS (and ultimately, the Big Apple) understates what is likely the true level of insolvency that taxpayers will ultimately have to bear.

To figure out TRS’ true insolvency, Dropout Nation uses a version of a technique developed by Moody’s Investors Service, which assumes a more-realistic 5.5 percent rate of a return on investments. [Moody’s bases its rate of return on the performance of a bond index, which can range between four and six percent.] Based on the formula, using just TRS’ officially-reported number, Dropout Nation concludes that the pension is underfunded to the tune of $30.9 billion. This is 20 percent more than it officially reports. If the shortfall had to be made up (or amortized) over the next 17 years, Big Apple taxpayers and teachers would have to contribute an additional $1.8 billion a year, or 59 percent more than the $3.1 billion paid into the pension in 2012-2013.

That number, of course, doesn’t include the unrealized gains. Account for those and Dropout Nation estimates that TRS’ insolvency is $25 billion, 20 percent more than the unfunded liability adjusted for unrealized gains. Based on a 17-year amortization schedule, taxpayers and teachers would have to pay an additional $1.5 billion a year, or 48 percent more than contributed to the pension in 2012-2013.

But there’s another catch: Because of the actuarial tricks used by TRS, the pensions assets can be overstated or understated compared to market value. As Dropout Nation noted in its analysis last year, TRS overstated the actuarial value of its assets by $1.1 billion in 2011-2012. This time around, the pension understated the value of its assets on an actuarial basis by $1.7 billion; on a market value basis, the assets are worth $36.9 billion. Subtract that number from the $61 billion in annuity payments owed to Big Apple teachers, TRS’ insolvency would stand at $24 billion. Over a 17-year period, taxpayers and teachers would have to contribute an additional $1.4 billion to TRS, or 46 percent more than what was paid into the pension in 2012-2013.

But TRS’ virtual insolvency isn’t the only pension woe weighing on New York City’s finances. There’s also the Board of Education pension, which is also busted.

Board of Education officially reports a shortfall of $1.6 billion for 2012-2013, an 11.6 percent increase over the previous year. But like TRS, Board of Education’s numbers don’t reflect reality because it also assumes an investment rate of return of seven percent. The pension is only earning 4.86 percent so far into 2014-2015, according to the City Comptroller. Based on the Moody’s formula, which uses a more-realistic 5.5 percent rate of return, Dropout Nation concludes that Board of Education is actually underfunded to the tune of $1.9 billion, or 20 percent more than officially reported. If the shortfall had to be amortized over 17 years, taxpayers and school employees would have to pay an additional $110 million a year into the pension, 47 percent more than the $235 million paid in 2012-2013.

Altogether, the Big Apple must pay down as much as $33 billion in shortfalls for the two school pensions. This, of course, doesn’t include the virtual insolvencies of the city’s pensions for cops, firefighters, and other city workers. How big a drain is that on the city and its traditional district? The two pensions account for 38 percent of the $85 billion in total pension insolvencies facing New York City, according to a Dropout Nation analysis of the municipality’s pension shortfalls, a difficult burden for taxpayers to bear.

The additional $1.9 billion that the New York City would have to pay to bring TRS and Board of Education to solvency over 17 years would have forced the city’s traditional district to devote 27.3 percent of its budget to pensions and debt service on capital projects in 2012-2013, versus the 19.3 percent that those costs actually took up. More than likely, the city would have either had to increase taxes, shut down schools, or reduce the number of guidance counselors and so-called classified staff (including janitors and other employees).

For De Blasio and for New York City taxpayers, matters on the pension front aren’t going to improve anytime soon. The most-recent bull market has helped TRS and Board of Education (along with other state and local teachers’ pensions) avoid even-faster increases in unfunded liabilities. But the financial meltdown in China — whose economy accounts for as much as a fifth of revenues for many companies — is now leading to declines in stock market prices. This bodes ill for TRS and Board of Education, because stocks make up the bulk of their investment portfolios. Because of actuarial smoothing techniques, the likely losses will be hidden on an actuarial basis for at least the next five years, resulting in both appearing in better financial condition than they actually are.

Certainly De Blasio isn’t responsible for much of the mess. The blame can be laid at the feet of predecessor Michael Bloomberg, who struck more-than-generous pension and salary deals with UFT and other school worker union in order to gain support for his otherwise-laudable reform efforts. New York City teachers contribute a mere five cents of every dollar put into TRS, while other school employees pitch in a slightly-higher 17 cents for each dollar contributed to Board of Education. Thanks to Bloomberg’s fecklessness, TRS’ liabilities increased by 84 percent between 2004 and 2013, even as the actuarial value of its assets increased by a mere 6.1 percent; Board of Education’s liabilities increased by a two-fold in that same period while assets increased by just 31 percent. As in the case of other busted teachers’ and school employee pensions, the bet was that stock market gains would cover boosts in pension payouts. It didn’t panned out.

But De Blasio hasn’t exactly helped matters during his two years in office. The contract De Blasio struck last year with the United Federation of Teachers, which increases salaries by 18 percent, didn’t require teachers to contribute more toward their retirements. That the deal included an eight percent salary increase to those teachers who retired from the city’s employ by the end of June 2014 — which led to 777 more teachers retiring last year than the previous period — adds to the city’s pension woes; after all, annuity payouts are based on the salary a teacher earns in the last year before retirement. Given De Blasio’s cold war with Cuomo and Senate Republicans, he can expect no help in the form of a pension bailout.

At this point, De Blasio may only have two years left on a tenure that was never all that promising in the first place. He just as well go ahead and address New York City’s pension woes while he has time.

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