Management of the teachers’ retirement fund is being merged with other public pensions systems under a proposal unveiled today by city officials and union leaders.
In an effort to chip away at the rising costs of the city’s $120 billion pension fund, Mayor Bloomberg and Comptroller John Liu announced a proposal to overhaul city unions’ scattered pension systems. Until now, each of the five different funds – for teachers, police, fire, school employees and other public sector — had been managed by a handful of trustees under the comptroller’s office.
Under the proposal, the pools of money from each union will be kept separate but the same professional investors will manage all of the funds. Those investors will not be part of the comptroller’s office and will not change when a new comptroller is elected, as they have in the past.
Bloomberg, Liu, and union leaders said today that the fund’s underperformance had resulted in part from its management structure.
But the proposal does not address other issues underlying the city’s growing pension costs, which have soared in the last 10 years. Last year, the city contributed $8.4 billion in payouts to retired city workers, up from just $1.2 billion a decade ago, when the pension funds do not generate enough earnings to match promised returns.
With over 200,000 members, the teachers’ $42 billion retirement fund, called the Teacher Retirement System (TRS), is also one of the city’s largest and costliest. As we reported last year, the fund took a hit from the 2008 financial crisis, which was compounded by a series of pension perks that were approved in the years before it:
The sweeteners reduced the retirement contributions for teachers and principals, putting more of the burden to pay for pensions onto the city. They also allowed per diem salary — money teachers make for taking on extra tasks like running after-school clubs and sports — to be counted in the overall final salary number. And, in 2008, a provision allowed teachers to retire early without being dinged in their pension earnings.
Together, the rising salaries and pension sweeteners have created a perfect storm: increasing costs just as the plan’s performance has plummeted in the down market. Although the TRS has not performed significantly worse than the market according to the new report, the annual rate of return it assumes — 8 percent — is high by most private standards. (To be fair, most public pension plans also use a number around 8 percent. Similar private sector plans assume a rate of around 4 percent.)
United Federation of Teachers President Michael Mulgrew downplayed concerns about specifics in the UFT’s pension plan today and lauded the reforms, saying the agreement shows that unions could collaborative with the city.
“Today what you see here is an announcement about the labor leaders of this city getting together with elected officials to say we can do things better on behalf of our city,” Mulgrew said at a press conference today where he was joined by leaders from each of the unions affected by the proposal.
But fiscal watchdogs said the proposal would not create lasting improvements in the city’s pension situation.
“This is a drop in the bucket and doesn’t begin to address the real problems the city has on its hands,” said Steven Malanga, a senior fellow at the conservative Manhattan Institute who studies urban economics. “The only way to solve this problem is to reduce the benefits of workers, which are extravagant.”
Mayor Bloomberg said he would travel to Albany to lobby the reforms with state legislators, who ultimately have to approve the proposed changes.