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Harry Warns Albany: Don’t Gamble With Pensions

Posted by Team Wilson - Mon, June 21, 2010 at 02:53 PM

Harry warned lawmakers in Albany today to reverse course on the pension borrowing scheme. Wilson argued that the move jeopardizes pensions and could lead to an even bigger, more disastrous financial black hole in the future. His analysis of the proposal is below:

1. The State will borrow over $4.5 billion, and local governments will borrow in excess of $6 billion, totaling roughly $11 billion in borrowing;

2. The associated interest expense, assuming the midpoint of the publicly stated range, or 5%, will be in excess of $3 billion for the state and local municipalities combined;

3. Once the amortization plan expires, the State's annual pension payments, plus interest, will jump to more than $3 billion, vs. approximately $1 billion today. In short, a problem that is deemed unaffordable today will be three times worse in just six years. Local governments will face a similarly dramatic increase in the size of their obligations.

4. It has been reported that these scenarios are based on the State Comptroller's expectation that pension returns going forward will mirror returns from the period after the 1987 market crash. If those reports are correct, based on the current portfolio mix of the pension fund, the Dow Jones Industrial Average would have to hit 80,000 by 2022. If, instead, the Fund is basing its projections on its current, but also overly aggressive, 8% return assumption, then the Dow would have to hit nearly 30,000 by 2022. Both of these return scenarios dramatically exceed recent history and the expectations of professional investors. This enormous disparity highlights how important the Comptroller's assumptions are to the policy debate, and he should provide transparency so that voters can evaluate exactly what he is proposing.

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