In the last fiscal year, New York City’s pensions for police officers, fire fighters, teachers, civil employees, and school personnel surpassed their investment targets with a 10% return, outperforming their 7% goal. This success was largely driven by the booming U.S. stock market, with the S&P 500 posting a remarkable 22.7% return for the year ending in June.
Despite facing challenges, such as investments in real estate and private equity that dragged down overall performance, New York City’s pensions outperformed the $514 billion California Public Employees’ Retirement System, as well as California’s $341 billion teachers pension. However, it fell short compared to a portfolio consisting of 60% global stocks and 40% US bonds, which delivered a 13.2% return.
The city’s investments in real estate and private equity were hindered by high interest rates impacting property valuations and distress in commercial real estate due to the slow return of workers to offices post-Covid-19 pandemic. Additionally, higher borrowing costs have weighed on private equity, which relies heavily on debt for buyouts, further complicating the investment landscape.
In an attempt to reduce volatility and diversify their portfolios, four of New York City’s five public employee pension funds increased their allocations to illiquid investments like private equity while reducing exposure to publicly-traded stocks. This strategic move, aimed at alternative investments such as hedge funds, private real estate, and infrastructure, is expected to enhance performance in the long term.
The strong returns of New York City’s pensions for fiscal 2023 will result in a reduction of the city’s required contributions to the funds by approximately $1.8 billion over the next five years. This, in turn, will free up more funds to be allocated towards city services, benefiting the overall well-being of the community. With the city set to spend about $10.3 billion on public employee pensions this fiscal year, the positive performance of the pension funds is a welcome relief.
New York City’s pensions manage funds for over 750,000 current and retired employees, with assets covering about 83% of promised benefits as of fiscal year 2023. Despite the challenges faced by the investment landscape, the city’s pension funds have demonstrated resilience and sound financial management in navigating through turbulent times. As they continue to adapt to market conditions and explore new investment opportunities, the future looks promising for New York City’s pension system.