DiNapoli announced today that he’s approved a recommendation by the State Retirement System Actuary to reduce, from 6.8 percent to 5.9 percent, the assumed rate of return (RoR) on investments by the $268 billion Common Retirement Fund, which underwrites the New York State and Local Employee Retirement System (NYSLERS) and Police and Fire Retirement System (PFRS), of which the comptroller is the sole trustee.
To be sure, even at 5.9 percent, the RoR that the pension fund literally counts on to pay constitutionally guaranteed benefits will remain considerably higher than the yields from commensurate low-risk U.S. Treasury or high-quality corporate bonds, which currently range from 2.3 percent to 3.3 percent. Nonetheless, in isolation, cutting the RoR assumption is an unequivocally good and prudent thing for the comptroller to do.
Assuming lower earnings also tends to result in higher required contributions by employers—which is why politically sensitive public pension fund administrators across the country have tended to set their RoRs at much higher levels than those required for private corporate plans. To guard against volatility in investment returns, which has been especially pronounced over the past 25 years, DiNapoli and other pension fund administrators also resort to “asset smoothing” — i.e., counting average market returns over several years—as a basis for estimating the assets available to pay retirement benefits. In New York’s case, the smoothing period is five years.
As Governor Cuomo already has pointed out on the state level, the federal stimulus aid amounts to “the ultimate one shot . . . a sugar high.” The highest priority of state and local officials should be to avoid plowing the federal money into recurring spending commitments that will create bigger budget deficits in the future.
In an ideal world, New York pols will embark on a careful, painstaking assessment of needs, weighing short-term relief against recurring long-term benefits. Since most upstate cities are very old, with crumbling physical infrastructures, they would be well advised to invest the bulk of their “Biden bucks” into streets, sidewalks, water and sewer systems. This will save money on maintenance costs—which are high in many of these places. It also will help these cities retain and attract business activity they cannot afford to lose—and were already losing before the pandemic.
Local governments could also consider ways to help small local retail businesses and their landlords, especially restaurants and entertainment venues, which were crushed by the pandemic. One way of doing this might be a property tax holiday, or a long-overdue assessment and equalization update, whose transitional costs could be covered by the federal money.
Governor Cuomo’s Division of the Budget (DOB) and the Legislature’s fiscal committees have agreed to boost New York State’s revenue projection for fiscal years 2021 and 2022 by $2.45 billion—the latest in a series of upward adjustments that have dramatically improved Albany’s short-term outlook, even as sexual harassment allegations against the governor will complicate negotiations towards a new budget for the fiscal year beginning April 1.