NYC pension costs to balloon after worst returns since 2009

New York City's pension costs will rise by about $6 billion over the next three fiscal years as high inflation and fears of a recession have hammered the city's retirement plans.

Five of the city's pension funds lost 8.65% for the fiscal year, the most since the financial crisis. Taxpayer contributions of $861 million in fiscal year 2024, $1.97 billion in 2025 and $3.02 billion in 2026 will be required to buoy the pension funds, according to a city bond offering document. The funds count on a 7% annual assumed rate of return.

The rising pension costs threaten to strain the finances of the largest U.S. city. New York's financial plan — which was released in June and doesn't reflect the projected increase — already anticipates a $4.2 billion deficit in 2024 and gaps of $3.7 billion and about $4 billion in fiscal years 2025 and 2026, respectively. And with nearly all of the city's labor contracts expiring, Mayor Eric Adams will face pressure to boost pay amid the highest inflation in 40 years.

"Given other fiscal risks facing the city, this reinforces the need for the city to take swift and prudent actions to align recurring spending and revenues," said Ana Champeny, vice president for research at the Citizens Budget Commission.

Stocks have gone on a wild ride this year as investors speculated how aggressive the Federal Reserve will be in its fight against inflation. The stock-market tumble earlier this summer had already hurt New York's June estimated personal income-tax payments, which are closely tied to capital-gains realizations. The rise of remote work has also led to office vacancy rates of more than 20% and lower real-estate transaction taxes, according to S&P Global Ratings.

U.S. public pension funds lost a median 7.9% before fees for the year ending June 30, the worst since 2009, according to the Wilshire Trust Universe Comparison Service. The declines pared gains of almost 27% on average last year as easy monetary policy and the global economic recovery from the Covid-19 pandemic turbocharged stock and bond prices.

To be sure, New York City had benefited from stronger-than-expected personal income-tax collections, rebounding tourism, rising residential real estate values and unprecedented federal stimulus, which boosted its reserves to a record $8.3 billion. The $1.1 billion in general-obligation bonds that the city plans to sell on Wednesday has already received an AA rating by S&P Global Ratings and an AA- rating by Fitch Rating. The city's pension funds had returned 25.8% last year, which had allowed it to reduce public-employee retirement spending.

Government retirement systems, which count on annual gains to cover all the benefits promised to retirees, don't recognize outsized gains or make up the losses all at once. Instead they're forced to cushion shocks by making more room in their budgets.