NEW YORK - New York City Mayor Rudolph Giuliani is underestimating the city's contribution to its retirement systems by $300 million to $500 million annually during the next three years, according to City Comptroller Alan Hevesi.
That figure could rise another $160 million per year if the state Legislature approves a pension supplementation bill that would compensate retirees for the effects of inflation, Mr. Hevesi said.
"Pension-related issues, therefore, constitute a large risk to the city's budget, starting in the next fiscal year," Mr. Hevesi said in a response to the mayor's proposed city budget.
According Mr. Havesi's report, the impact of the city's contribution could be mitigated by the manner in which it is handled.
"There are several ways of implementing these changes that would have vastly different costs, for instance, whether to create an unfunded liability for the changes or pass them through the normal cost," the report said.
The shortfall is the result of a preliminary city charter-mandated actuarial study that is expected to become final in December. The comptroller's comments were in response to Mr. Giuliani's revision of the current budget (fiscal year 1995).
Norman Rosner, director of the mayor's pension unit, was unavailable for comment. Mr. Hevesi also was unavailable. New York City Actuary Robert North has declined to comment until the report is final.
In October, the mayor announced plans to close a $1 billion fiscal year 1995 budget gap. Underperformance of retirement system assets contributed $60 million to the deficit.
The preliminary actuarial study estimates the annual shortfall will be between $400 million to $600 million. However, Mr. Giuliani already has allocated $100 million "to improve actuarial assumptions," according to budget figures provided in the report by Mr. Hevesi.
The shortfall is attributed to "possible changes in some of the demographic and economic assumptions used (by the actuary) to determine the city's annual pension contribution," according to Mr. Hevesi's report.
In total, the city plans to contribute $1.58 billion to the pension funds beginning in fiscal year 1996, which begins next July 1.
The increased pension costs are the largest item contributing to a preliminary fiscal year 1996 budget deficit of between $2 billion and $2.4 billion, according to Mr. Hevesi.
By 1998, the deficit is projected to be between $3.5 billion and $3.8 billion.
The New York City charter requires an independent actuary to review the retirement system's actuarial assumptions every two years. William M. Mercer was selected, and the firm "has made rough estimates" of the pension costs, Mr. Hevesi said in the report.
"The changes that will have the most significant cost impact are changes in the assumptions for an increase in the expected life spans of pensioners, changes in the 'merit' component of salary increases and the amount of overtime pay that is included in fiscal salary," Mr. Hevesi said.
If an unfunded liability is created, and if the actuarial cost method used to calculate the city's pension costs is changed, the estimated cost to the city could increase or decrease, according to Mr. Hevesi.
"Therefore, the actual final impact of all these revisions cannot be estimated with any degree of certainty at this time," said Mr. Hevesi in his report. "Hence, a reasonable estimate of the range of the increases resulting from Mercer's recommendations would be between $400 million and $600 million annually, beginning in fiscal year 1996."
Increased steadily from 1984 through 1988, the city's contribution to the retirement system has declined since 1989 because of strong investment returns, a change in the actuarial asset valuation method used for pension cost and a change in the method the city uses to amortize unfunded actuarial liabilities, according to the comptroller's report.
But in 1994, poor market returns led the pension funds to underperform their actuarial investment earnings assumptions. The result was a $60 million deficit in fiscal year 1995, $120 million in fiscal year 1996 amd $180 million in fiscal year 1997, according to the report.
"When the pension funds' investments earn more than the assumption, the additional earnings will reduce the city's pension fund contribution for several years," Mr. Hevesi said in the report.
"When the earnings are less than the assumption, the city's contributions will increase over a number of years."