What happens when public employee pension plans lose money on the investments they rely on to pay benefits? Well, the government has to make up the shortfall or cut out the benefits. Today we see for example, New York City pension funds are losing money on their investments. The City of New York will have to make up the shortfall. With what? Tax revenues. Unfortunately, at current tax rates, those tax revenues are also falling.
This will affect every state and municipality. This will include pension plans for teachers, firefighters, police, and many more. It’s not just New York. But, for illustrative purposes, here’s the New York example: “In the nine months leading up to March 31, the city’s five pension funds lost a total of nearly $5 billion, or 4.4%, according to data from the city comptroller’s office. This is a far cry from projections published as recently as last month, when budget planners assumed the pension system would post no losses.
If those losses are not recovered by the end of the fiscal year, which ends Monday, the city will have to pay out several billion dollars through 2015, with the first payment of $190 million set for 2010.
The government will have to make up the shortfall from the poor performance of the pension funds at a time when it is already suffering from tax revenue losses due to a souring economy.
“In itself, it’s manageable,” the research director for the Citizens Budget Commission, Charles Brecher, said of the pension fund losses. “The fact that it’s going to be combined with revenue shortfalls means that we’ve got serious problems.”