Release Date: August 12, 2009

Released By: Long Islanders for Educational Reform

• New York State legislators have continually enhanced public employee pensions and have delayed reforming an unsustainable State teacher pension system.

• The New York State Teachers Retirement System (NYSTRS) was consequently compelled to pursue an aggressive investment strategy that was in itself aggressive and in relation to that of other state pension funds. This policy imploded in 2008. At the March 2009 market bottom the system portfolio had fallen by a third from its June 2007 high meaning it would have to double to regain this value. To return to trend it would have to increase by a stupendous seventy-five percent.

• As of now the NYSTRS is probably a third off where it should be if it was meeting its own target. To return to trend growth the NYSTRS portfolio would have to increase by about fifty percent. Worse, a good portion of its private equity and real estate portfolios are not being marked to market.

Legislature pandering to public unions forced the NYSTRS to pursue a particularly risky investment strategy. It had a particularly large commitment to equities and had strayed outside the standard pension S&P 500 investment universe. It also ventured into the risky world of alternative investments in the form of private equity despite academic research showing that private equity returns would likely be disappointing. It had a particularly low bond exposure. NYSTRS investment strategy was far more aggressive than that of it peers. After market collapses similar to that of the present, financial markets have taken from six to fourteen years to regain their former highs. Since the NYSTRS must not only regain its former high, but must earn eight percent a year while doing so it might well be many a year before its portfolio returns to trend growth.

Even before the 2008 market implosion the NYSTRS was dependent upon capital gains to pay current benefits. In other words its portfolio failed to generate sufficient income to pay current benefits.  accordingly, it envisioned doubling the employer contribution rate. Now it must do more than that. In the 1970s, when equity markets last suffered years of sub-par performance, employer contributions rose to almost a quarter of payroll. A figure of one-third would not be surprising.

The great NYSTRS mistake was not to increase its bond allocation in the late 1990s when it was twenty percent over funded. Instead it left money on the table for the Legislature to give away to those who fund and man its election campaigns. In short, the Legislature, forever in thrall to the public sector unions, failed to reform an already unsustainable pension system. Thanks to its State Legislature school property taxpayers can look forward to years of rapidly escalating taxes. Children can look forward to program cuts. As always blame it on the ‘most dysfunctional legislature’ in the land.

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