New York state pension systems are better funded than California state pension systems, currently take a smaller bite out of state and local government budgets, and still provide pension benefits well above the national average.

How do they do it?

Part of the answer seems to be that the New York systems, following state law, more quickly pay down the debt or “unfunded liability” mainly created when pension fund investments earn less than expected.

Investments are crucial, often expected to pay two-thirds of future pensions. To hit earnings targets critics say are too optimistic (7 percent for CalPERS and CalSTRS), half of investments usually are in the unpredictable stock market, with higher yields and larger losses.

Much of the pension funding debate in California has been about whether investment earnings can hit the target over the long run. The California-New York gap shows how quickly raising employer rates, when earnings fall below the target, can keep a lid on pension debt.

Last month, the Pew Charitable Trusts, using the most complete data available, reported the nationwide funding gap for state pensions two years ago was $1.1 trillion.

The New York state systems had 98 percent of the projected assets needed to pay future pension obligations in 2015, said the Pew report, and the California state systems had 74 percent.

“Large increases in state contributions prevented rapid growth in unfunded pensions following stock market losses created in part by the bursting of the (in the early 2000s) and housing (in 2008) bubbles,” said a Moody’s rating service report on New York state pensions last July.

The importance of continuing to make annual pension contributions large enough to pay down debt is getting more attention, driven in part by additional information reported under new government accounting rules.

Pew and Moody’s both have developed new benchmarks showing when employer-employee payments into the pension system are enough, if investment returns are exactly on target, to prevent debt from growing.

Using its “net amortization” benchmark, Pew said the combined pension contributions of the California Public Employees Retirement System and the California State Teachers Retirement System were 79 percent of the $18.9 billion needed to keep debt from growing.

While the California contribution in 2015 was under the benchmark, the New York State and Local Retirement System contributed 163 percent of the $3.7 billion needed to keep debt from growing.

Similarly, Moody’s reported last October that in 2015 California state pension contributions were 74.3 percent of its “tread water” benchmark needed to keep debt from growing, while New York state contributions were 120.8 percent.

“If all plan assumptions are met, including investment returns and demographic changes, a contribution equal to the tread water benchmark would result in a yearend NPL (Net Pension Liability) equal to its beginning of year value,” Moody’s said.

Moody’s makes an adjustment of pension debt by using a less optimistic earnings forecast to discount future pension debt. For California it’s 4.33 percent, for New York 4.54 percent.

The total adjusted net pension liability for all state pension systems was $1.25 trillion in fiscal 2015, said Moody’s. Using its method, half of the states are not contributing enough to halt debt growth, less than the 32 states with positive amortization under the Pew benchmark.

Eye-popping pension debt can be a slippery number, unintentionally changed by demographics or investment gains and losses, deliberately pushed further into the future by longer payment schedules or annual refinancing.

One benefit of rigorous debt payment, and a high funding level like New York’s, is a cushion against huge investment losses. CalPERS investments plunged from $260 billion to $160 billion during the 2008 financial crisi, dropping funding from 101 percent to 61 percent.

The CalPERS funding level was 64 percent in January. For several years, some CalPERS board members have been saying experts think dropping below 50 percent could be crippling, making a return to 100 percent funding very difficult.

CalSTRS was 64 percent funded last June. Last month, Nick Collier, a Milliman actuary, told the CalSTRS board: “I would say if you get below 50 percent, it’s really hard to recover. Maybe the number is a little bit higher than that. But I wouldn’t go below 50 percent.”

Pew said Illinois state funds in 2015 were 40 percent funded and Connecticut state funds 49 percent. Moody’s said: “If Illinois made at least a tread water contribution, its fixed costs would consume 33.5 percent of revenue, followed by Connecticut’s 30.6 percent.”

The New York State and Local Retirement System, like CalPERS and CalSTRS, has lowered its earnings forecast used to discount future pension obligations to an annual average of 7 percent.

The New York employer contribution rates for 2016, the same for state and local government, were 17.9 percent of pay for miscellaneous employees and 25.6 percent for police and firefighters, according to the NYSLRS annual financial report.

The CalPERS state rate for 2017 is 54.1 percent of pay for the Highway Patrol and 28.4 percent for miscellaneous. The average 2017 rate for local government police and firefighters is 40.6 percent of pay and 28.6 percent for miscellaneous.

An Urban Institute study of New York state pension costs last year said the average pension benefit was $31,300 in 2014, compared to the national average of $26,500. A half dozen states had higher average benefits than New York, including California at about $36,000.

Unlike a modest California reform for new hires, the Urban Institute said a New York reform in 2012 gives new hires a pension that, depending on how long they work, will only be 10 to 60 percent as large as the pensions of workers hired four decades ago.

New York has cut employer contributions when the pension fund had a surplus, like CalPERS. But a chart in the Urban Institute report shows that New York, twice in this century, more than doubled employer rates in just several years.

“After the 2000 collapse of the dot-com bubble and the 2008 financial crisis, the state passed ad hoc legislation easing plan funding rules and allowing public employers to make up funding shortfalls gradually over time instead of in a single year,” said the Urban Institute report.

Only a handful of the 717 employers in the New York State Teachers Retirement System opted to pay the rate increase gradually, Moody’s said. The NYSTRS employer contribution rate was 13.3 percent last year, down from 19.5 percent the previous year.

While CalSTRS was 64 percent funded last year, NYSTRS was 104 percent funded, according to its annual financial report. Under legislation three years ago, the CalSTRS employer rate for school districts is doubling in annual steps to 19.1 percent in 2020.

The CalPERS rate for non-teaching school employees is projected to be doubling to 27.3 percent of pay in 2023, further straining school budgets.

Unlike CalPERS and other California public pension systems, CalSTRS has lacked the power to raise employer contribution rates, needing legislation instead. For years CalSTRS officials pleaded with legislators: “Pay now or pay more later.”

So, here’s another way of looking at the gap between pension funding policy in New York and California. With a funding level of 64 percent in January, CalPERS has only kept pace with a pension system whose rates were frozen until recently.

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Originally posted at Cal Pensions.