This begs the question, why does NY State have one of the best funded state pension systems in the nation, and RI sits at the extreme opposite end in the toilet? After all, NY faced the same ups and downs in the markets as we did.

It does appear to go beyond union control and probably has more to do with the average RI citizen being so tolerant of crooked behavior in their political system.

I’ve wondered about that, too. The last Pew study of all the states’ pension systems showed New York’s was 101% funded, while Rhode Island’s was at 59%. (It’s now at 48% after those much-discussed assumption changes.)

What gives? I put the question to Nesi’s Notes regular Josh Barro, a senior fellow at the Manhattan Institute and a New Yorker himself. In an email, Barro said Empire State pensioners have the judiciary to thank:

New York’s pensions are subject to a court decision that has forced the state to fund the system aggressively. The state and its municipalities are forced by the courts to pay their ARC [annual required contribution] annually.

An attempt during the [1983-1994] Mario Cuomo administration to reduce funding by shifting from the aggregate funding method to the more lax projected unit credit method was blocked by the courts. The aggregate funding method is even more aggressive than the entry age normal method, which is usually the method of choice for states that want to be responsible about pre-funding. The key difference from entry age normal is that EAN can be used with an amortization period of up to 30 years, while the aggregate funding method requires amortization over the weighted average remaining service life of the active workforce – approximately 12 years. [Ed.: EAN is what Rhode Island uses.]

A couple of years ago, the state did pass a law to effectively reamortize the unfunded liability in one of the two statewide systems – ERS, the non-teacher system. The unions agreed to this change and nobody has sued to block it (though I wonder if a retiree might have standing to do so).

Oddly, the fund did not really treat this as a reamortization – they count the unpaid amortization payments as assets held on their books, effectively like bonds issued by the participating public employers, bearing 5% interest. They say this does not reduce their overall investment return target because these “assets” make up a portion of the fixed income portfolio – the real assets held by the fund are more heavily weighted toward equities than they otherwise would be. Now that I think about it, this may make ERS’s claims about its funding ratio misleading; part of what it holds is really just a promise by participating employers to make payments in the future.

The legislature passed a bill this year allowing similar reamortization by school districts participating in [the New York State Teachers' Retirement System], but Governor Andrew Cuomo vetoed it.

I would note that New York has, arguably, the most generous pension benefits of any state in the country. Only Colorado’s system offers a greater salary replacement ratio – but unlike in Colorado, New York workers also get Social Security benefits. Employee contributions, in most cases, are limited to 3 percent of salary (plus FICA tax).

(photo: Wikipedia)