New York University (NYU) has issued a report saying the New York City Teachers’ Retirement System’s (TRS) funding concerns, which are being amplified through the economic distress caused by the COVID-19 pandemic, threaten to become a significant stimulant to a “fiscal and political crisis” in the city.
NYU claims that two distinct attributes of the TRS—a relatively conservative contribution policy, whose rates rise when the pension’s funding ratio falls, and a Tax-Deferred Annuity program—pose a great risk to the city.
The basis for the report was the extreme volatility in public exchanges caused by the pandemic, the effects of which would be magnified by the two aforementioned qualities of the pension, which was last reported to be approximately 74% funded.
TRS’ Tax-Deferred Annuity program pays out a fixed rate of return, typically set at 7% by the state legislature, backed by the defined benefit pension fund and subsequently taxpayers and the city budget. If, in any given year, the pension’s actual return profile exceeds the 7% target, the excess funds above the rate are housed within the pension system.
However, if the return profile falls short of 7%, as can be expected after the recent market downturn, the pension fund is responsible for shoring up the difference, meaning more strain on the city budget.
“The TDA fixed-return fund had $24 billion in assets in 2018, so a shortfall of 5%, for example, would require the defined benefit pension fund to make up approximately $1.2 billion to the TDA,” the report said.
“The guarantee provides valuable benefits to plan members but creates special risks to the city,” the report said. “It does not have the constitutional protection that the regular retirement benefit has and therefore is more directly under the control of state and city policymakers.”
The university conducted a few studies using the pension’s 7% return baseline scenario, and found that the TRS poses substantial contribution risks to the city budget. The university estimated there’s a 20% chance the contributions will rise above 60% of payroll within the next 30 years, citing that there’s almost a 50% chance of severe underfunding to the pension within that timeframe.
The university said if the system did away with the Tax-Deferred Annuity program, the risk of it becoming severely underfunded within the next 30 years drops to just 2%.