As part of a series analyzing US state and local government pension risks, Moody's Investors Service finds New York State (Aa1 stable) and New York City (Aa2 stable) have kept their unfunded pension liabilities largely in check by increasing contributions as funding needs rise, although pension pressures on budgets have risen.
"New York governments have no legal flexibility to reduce pension benefits, meaning unfunded liabilities must be paid down," Tom Aaron, a Moody's Vice President – Senior Analyst says in "State and Local Governments - New York: Well-Funded Pensions Still a Source of Rising Budget Pressure and Investment Risk."
While increased pension costs have been absorbed so far, asset volatility and plan demographics are growing risks compounded by the state's strict legal protections against benefit changes.
For New York State, large increases in contributions prevented rapid growth in unfunded liabilities following stock market losses in the last 15 years. Moody's found New York had the eighth lowest adjusted net pension liability (ANPL) of all states, with pensions at only 28% of revenues as of FY 2014.
But maintaining that low balance sheet burden is requiring a growing amount of revenue. In 2000, required contribution rates to the Employees Retirement System and Police & Fire Retirement System were only 1% and 2% of payroll, respectively, but reached 20% and 28% in 2015.
New York City's plans are not as well funded as the state's on a reported basis, and unfunded liabilities have increased materially in recent years. The city's $102 billion ANPL has consistently tracked at 130%-140% of its revenues over the last four years.
Annual pension contributions for New York City have increased significantly in recent years, with pensions reaching 10.4% of the city's revenues in 2015 from less than 3% in 2001, even with city revenues rising at a compound average rate of 5% in that period. However, these higher contributions have prevented the city from accumulating an even greater burden on its balance sheet from pension liabilities.
Demographics are a growing risk with some city plans having fewer active employees than retirees. "The city faces much higher contribution requirements for pensions than in past years, and heightened retiree benefit payments increase plan funding risk from volatile investment returns," says Aaron.
