As reported yesterday, a Dropout Nation analysis of the financial condition of New York City’s defined-benefit teachers’ pension, the Teachers Retirement System, shows that the Big Apple is understating the virtual insolvency of the pension by at least $6 billion — and likely, even more — thanks to shoddy actuarial practices that hide the extent of the annuity’s woes. But TRS isn’t the only pension for the city’s teachers and other employees of its traditional district. There’s also the Board of Education Retirement System, which, like the teachers’ pension, faces its own large underfunding. And as in the case of TRS, the latest comprehensive annual financial report shows that the city is understating the extent of the pension’s shortfall.
Board of Education officially reports a pension deficit of $1.6 billion as of 2010, the latest year available. But as with TRS, the liability is based on an assumed rate of return of seven percent for its investment portfolio in the hopes that gains in the financial markets will cover what is owed to retired and current district employees. That rate of return is overly optimistic and inflated, nearly double the four percent annual gain on the Standard & Poor’s 500 over the past decade, and three times the pension’s own five-year rate of return of two percent. [The pension only experienced a one-tenth of one percent gain in its investments in 2012.] The shortfall also fails to include any unrealized gains or losses, which are not counted against the pension deficit; the pension smooths out those gains and losses — and makes its numbers look better (and occasionally, worse) than reality by counting them against the underfunding over a six-year period (instead of immediately, as required by annuity funds in the private sector).
So Dropout Nation got to the bottom of Board of Education’s pension shortfall by using an analytic model based on one developed by Moody’s Investor Service to bring more transparency to the credit-worthiness of state and local governments. Under this model, DN assumes a 5.5 percent rate of return that is more-realistic than the Board of Education’s assumptions; for every percentage point decrease in rate of return, shortfalls increase by 13.3 percent. Based on the analysis, Board of Education’s underfunding is $1.8 billion, or 20 percent greater than what New York City officially reports. Based on a 17-year amortization schedule, the city would have to contribute an additional $106 million every year just to address the insolvency. That’s 72 percent more than the $147 million the Big Apple contribute in 2010, and 49 percent more than the $214 million contributed in 2012.
But as with TRS, the Board of Education’s officially-reported debt is based on actuarial value of its assets, not on market value. In fact, the actuarial value of $2.1 billion in 2010 is $270 million higher than the market value of $1.8 billion. Divide the $1.8 billion in market value from the $3.6 billion in money owed to district workers (based on the assumed rate of return of seven percent), and the shortfall would be $1.8 billion. Use the more-realistic 5.5 percent rate of return, and the shortfall would be $2.1 billion. Over the next 17 years, the city would have to contribute $125 million more to the pension just to address the insolvency. That’s 85 percent more than what the city contributed in 2010, and 58 percent more than was contributed last year.

Mayoral candidates Joe Lhota (left) and Bill deBlasio may not exactly want the second-hardest job in America once they look at the Big Apple’s pension woes. Photo courtesy of Fox News.
Certainly those are small numbers compared to the massive shortfall for the teachers’ pension. But in many ways, Board of Education’s pension deficit may be even more disconcerting and out of control. Back in 2003, the pension had more than enough assets, both on an actuarial and market value basis, to cover what was then $1.7 billion in annuities owed; in fact, actuarial value was based on market value. But between 2003 and 2010, the surplus became a deficit thanks to a two-fold increase in pension liabilities. The culprit: New York City began boosting the generosity of its annuity payouts as part of current Mayor Michael Bloomberg’s efforts to buy acquiescence from the American Federation of Teachers’ Big Apple local and other unions in order to advance his school reform efforts. It is a reason why New York City spent 53 cents on benefits for every dollar in salary in 2010, according to a Dropout Nation analysis of data from the U.S. Census Bureau, a 62 percent increase over the 33 cents spent on benefits for every dollar in salary in 2003. [The city spent 56 cents on benefit for every dollar in salary in 2011, the latest data available.]
But Board of Education’s investment portfolio wasn’t growing at a rate fast enough to cover those promises. On a market value basis, Board of Education’s assets grew by just four percent between 2003 and 2010; although the actuarial value of assets grew by 21 percent in that same period, those estimates are an accounting illusion. Meanwhile New York City failed to boost contributions in order to deal with the reality that the market wouldn’t help Board of Education grow out of its pension deficit. Nor did it require district employees to contribute more toward their own retirement, which are already lower than what private-sector employees must contribute into defined-contribution plans. Employees contributed only 21 cents for every dollar put in by the Big Apple in 2010; that gap has grown, with employees contributing 15 cents to retirement for every dollar put in by the city. Certainly employees covered by Board of Education are paying more than teachers (who contributed just five cents for every dollar paid by the city in 2010, and six cents for every dollar in 2012). But the low employee contribution levels are unsustainable, especially in light of New York City’s other massive pension deficits.
For whoever succeeds Bloomberg as mayor, the Board of Education pension insolvency is just another problem that will complicate his tenure. And for the current mayor, the insolvency is a stain on his otherwise-stellar school reform legacy.
Photo courtesy of Getty Images.