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N.Y. City Pensions a Victim of Politics and Mismanagement

In a scathing and far-reaching article, The New York Times outlined the real and difficult issues that New York City faces with its five pension funds. Unlike Detroit or New Jersey, which cannot afford to make big payments, New York City has been plagued by high fees, low returns, higher benefit payments to those people living longer and politics. In 2015, the city is expected to devote 11% of its budget, or $8 billion, to fund the $160 billion system, yet the funding gap is widening — from 1999 to 2012, the percentage has dwindled from 136% funded to 63%.

The Times cites a number of issues that have led to the problem. With five separate funds and boards of trustees, management is unwieldy and uneven. To catch up, these funds have invested in riskier funds, which means higher fees. The rate of return is determined by the state legislature. Virtually all investment decisions are made by money managers and consultants, which also leads to higher fees. And, of course, politics can plan a big part in the process with teachers’ plans eschewing funds that invest in charter schools, for example. Last November, the state’s securities regulator issued 20 subpoenas to pension consultants, looking into potential conflicts of interest.

Unlike corporate DB plans which started winding down, or — in the case of airlines and auto companies, going bankrupt — state and local governments have to deal with politics. Underfunded government pension plans is an issue that will not go away any time soon and could affect us all. 

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