Here’s a chart of my own that summarizes the report’s key take-away:

From the Reason report:

New York ranked 46th in overall highway performance in 2008, falling one spot from 2007 when it was 45th. Its best ranking was for fatality rate (6th). Its worst ratings were for administrative disbursements per mile (49th), maintenance disbursements per mile (48th), rural narrow lanes (47th), deficient bridges (47th), rural Interstate condition (46th), total disbursements per mile (45th) and urban Interstate condition (45th).

In 2008, New York reported a sharp improvement in urban Interstate congestion, from 50.3 percent congested in 2007 to 46.0 percent congested in 2008. It also reported a sharp improvement in its rural other principal arterial condition, from 1.50 percent in poor condition in 2007 to 0.67 percent in poor condition in 2008. On the other hand it reported a significant increase in the rural narrow lanes, from 28.2 percent narrow in 2007 to 33.7 percent narrow in 2008, which may be due to remeasuring.New York also registered a sharp rise in its administrative disbursements per mile, at $89,194 per mile of responsibility in 2008, up from $20,085 per mile of responsibility in 2007.

Why do New Yorkers get such a lousy return on their oversized transportation investment?   Empire Center’s Blueprint for a Better Budget suggests the answers include costly contracting and procurement laws, as well as the staffing levels and work rules of the state Department of Transportation.

This is no surprise.  In fact, almost precisely the same rate of change in pension contributions was projected by Governor Paterson’s Division of the Budget (DOB) eight months ago, in the 2010-11 Five Year Financial Plan (see table on page 59).

And this is just the beginning of a steady climb in pension bills.   Although the state comptroller avoids projecting contribution rates more than a year in advance, DOB estimates they will hit 23.5 percent for ERS and 31.4 percent for PFRS for by 2013-14.   However, thanks to a newly enacted law first proposed by DiNapoli, the state intends to “cap” the increase in its annual payments to the fund at a percentage point a year.  It will send the pension fund an IOU for anything over that amount, repayable in 10 annual installments with interest.  Local governments can similarly kick the can down the road by opting into the same Cap-and-Owe gambit.

By 2015-16, the state alone will owe the pension fund about $2 billion, according to DOB estimates.  This is prudent, the comptroller essentially argues, because sooner or later the fund will start earning hefty returns again, which will make it possible to reverse the rate run-up.

Speaking of returns, DiNapoli’s announcement today was actually a two-fer: in addition to disclosing new contribution rates, he announced the pension fund’s updated actuarial assumptions.  Among the changes, also as expected, the fund will be reducing the assumed rate of return on its investments from 8 percent to 7.5 percent.

Like other state public pension funds, New York’s retirement system discounts its future liabilities based on its assumed returns, a practice that has come in for much criticism by independent financial economists and actuaries and other analysts.  Private pension funds, covered by more stringent accounting rules, must discount based on a low-risk bond rate.

Any reduction  in the assumed rate of return also means a slight increase in the estimated present value of future liabilities.   However, it’s not clear whether the change in the discount rate announced by DiNapoli today played a major role in the announced increase in contribution rates, since other changes in actuarial assumptions may have offset that impact.

DiNapoli disclosed that the market value of the fund’s assets had decreased 4.38 percent in the April-June quarter of this year “due to market volatility.”  But the financial markets weren’t just “volatile” in first quarter.  They were down.   And since June 30, equity values have basically moved sideways.

Will the economy and the financial markets snap back strongly enough for the pension fund to turn the first quarter’s 4.38 percent loss into a full-year gain of 7.5 percent between now and next March 31?   No one can say, which is just part of thrill and excitement of constitutionally guaranteeing tens of billions of dollars in pension payouts based on risky investments and optimistic market assumptions.   After all, Mr. and Ms. Taxpayer, we’ve always got you as a safety net!

DiNapoli also emphasized that New York’s assumed rate of return and discount rate will be among the lowest of any public pension fund.  This won’t be true for long, though, as pension systems across the country are wrestling with the same issue.  For example, the giant California Public Employees’ Retirement System (CalPERS) currently assumes a return of 7.75 percent and says it needs at least 7.6 percent to meet its obligations over the next 15 years.   But CalPERS is also expected to reduce its return assumption after a year-long review in which its trustees have repeatedly been told to lower their sights.  Here is what they heard from a top investor around this time last year:

“You’re not going to get a 7.6 percent return when the U.S. is seeing a subpar (economic) growth rate of 2 to 3 percent,” BlackRock Inc. chairman and CEO Laurence Fink told the CalPERS board. “You’ll be lucky to get 6 percent on your portfolios, maybe 5 percent.”

The New York State pension fund’s time-weighted annualized return has been 4.2 percent over the past five years and 3.7 percent over the past 10, according to today’s actuarial report. Nonetheless, the fund could easily meet its 7.5 percent target in the long run if asset returns retrace the path of the mostly booming 1980s and 1990s.   It has happened before, and it could happen again.  Or, then again, maybe not.  If not — well, there’s always that safety net.

DiNapoli’s Republican opponent, Harry Wilson, today issued a report with a completely different take on pension funding.

HHS Secretary Kathleen Sibelius announced yesterday that 2,000 employers throughout the country had applied for a piece of a $5 billion “Early Retirement Reinsurance Program” set up under the new federal health care law to subsidize employer-sponsored health insurance for retirees who haven’t yet reached the Medicare eligibility age of 65.  Specifically, the plan will reimburse 80 percent of claim costs between $15,000 and $90,000 for early retirees.

And who might those employers be?  Sebelius highlighted corporate applicants, noting that they included “50 percent of Fortune 500 employers.” The HHS release also featured a guest quote from Commerce Secretary Gary Locke, citing business complaints about rising health costs.  Much of the resulting media coverage obligingly focused on the private sector side, highlighting applications from firms like General Motors, General Electric, Pfizer and Alcoa.

In reality, however, the lion’s share of this particular federal honey pot is likely to be slurped up by state and local governments, which account for the bulk of the nation’s retiree health insurance expenditures.  Among larger employers — those with 200 or more workers — 81 percent of large state and local governments offer retiree health care, while only 29 percent of private firms do, according to the latest annual Kaiser Family Foundation employer health benefits survey.  Ninety-five percent of smaller businesses, which employ more than 40 percent of the workforce, don’t offer any retiree coverage.

Government retiree health costs are especially high because they include the youngest early retirees of all: cops and firefighters, most of whom can collect employer health benefits for two decades or more before they are eligible for Medicaid Medicare.  Public-sector benefits in general also tend to be more generous than those in the private sector.  For example, while new retirees paid an average of 41 percent of the premium in the largest private plans covered in the Kaiser-Hewitt survey a few years ago, state government retirees in New York kick in just 9 percent of their premium costs, according to data from the Department of Civil Service (DCS).

Of the 156 New York employers applying for subsidies from the reinsurance fund, 66 were government entities, including counties, municipalities, school districts and public authorities.  Another 33 were unions or union trust funds, including several representing government employees.  Of the remaining 57 applicants, only 33 were for-profit businesses, including IBM and Kodak.

By far the biggest employer on the New York list was the state government, whose largest public-sector health insurance plan apparently is poised to soak up 7 percent of the national reinsurance fund all by itself.*

The New York State Health Insurance Plan (NYSHIP) expects to receive $346 million over the next two years, DCS announced soon after HHS issued its release yesterday.  Civil Service Commissioner Nancy Groenwegen said the money would be used to reduce premiums for “all participants” in the plan, including covered employees and retirees.  The NYSHIP plan has 900 participating employers in the public sector, including 154 school districts, 11 county governments and 196 municipalities in addition to the state.

On a NYSHIP premium base estimated by DCS at $12 billion over the next two years, $346 million works out to a little less than 3 percent. So, from the state government’s standpoint, a projected 19 percent increase in health insurance premiums over the next two years will be shaved down to about 16 percent.  That works out to a two-year savings of about $180 million–not all that much, really, in the context of a two-year budget gap of at least $20 billion.

News coverage of reinsurance fund predictably greeted it as free money.  “Feds give NYSHIP $346M boost,” as one Albany headline put it.  In fact, this is simply a transfer of tax money from one pocket to another.  Think of it as another form of temporary stimulus whose disappearance will leave a bigger hole to fill in a couple of years.

What happens after the reinsurance program expires in two years?  The HHS press release said the fund was “created … as a bridge to the new health insurance Exchanges in 2014,” a reference to the federally subsidized plan that will become available then under the health care law.  Hmm. Is the Obama administration inviting states and local governments to dump $1.5 billion trillion in unfunded retiree health care liabilities into Washington’s lap?  Stay tuned.

* Oddly, the City of New York was not on the New York list of applicants for reinsurance subsidies.  Neither were Nassau and Suffolk counties, which have enormous retiree health care liabilities, although Westchester County did apply.  California’s state government also seemed to be missing from that state’s list.

But read the fine print elsewhere. In today’s Times (p18, right below Rick Lazio and the mosque), the MTA ran a legal notice for public hearings with a new option to “increase the price of a 30-Day Unlimited Ride MetroCard to as much as $130.00 and/or introduce a 30-Day MetroCard, priced at less than $130.00, with use capped at no less than 90 paid trips.”

The MTA is keeping its options open, then. While the authority’s goal is to raise total revenues by 7.5 percent starting in January, it could do this in a variety of ways. It could introduce a new “limited” unlimited pass, for example, allowing 90 rides, for, say, $104, along with the higher-priced unlimited card.

Or, it could leave bonuses for pay-per-ride purchases at 15 percent with a minimum $8 purchase, rather than slashing them to 7 percent with a minimum $10 purchase as planned.

To either of these options, though, the MTA would have to hike the 30-day passes by more than it has previously proposed — obviously, as the new legal notice points out, to as much as $130.

The MTA could face some pressure to take this tack and push the unlimited card up further, even if not to $130. Purchasers of the 30-day passes earn more money than people who buy their fares by the ride. The MTA’s progressive fare system, then, could become more progressive.

Middle-class riders should know that they may be in for a bigger January surprise than they thought.

And as I wrote here last month, fares in general once lagged inflation, but not anymore.

The comptroller’s move comes as no surprise, given the recent performance of the pension fund’s assets.  The problem is that even a 7.5 percent rate — the lowest used by the fund since 1985 — will significantly understate the true size of the pension fund’s liabilities.

The discount rate applied to future obligations is a crucial determinant of any pension system’s necessary funding levels: the lower the rate, the larger the contributions required to maintain “fully funded” status. Private pension plans must discount their liabilities based on a market rate—typically, a corporate or U.S. government bond rate—which is often much lower than the plans’ projected returns.

Public funds, however, are allowed by government accounting standards to discount their long-term liabilities based on the targeted annual rate of return on their assets—which, for most public funds, is still pegged at an optimistic 8 percent or higher. In other words, the risk premium in the investment target is compounded in the liability estimate.

The typical public pension manager doesn’t just hope to earn 8 percent a year. For all intents and purposes, he or she assures trustees, beneficiaries, and taxpayers that the fund is certain to earn an average, long-run return of 8 percent.  In New York’s case, it appears this target is about to be lowered every so slightly.

But ask yourself: do you know anyone in the world of private investing (anyone not named Madoff, that is), who is willing to guarantee you a 7.5 percent rate of return?  How about 7 percent?  Or even, for that matter, 6 percent?  No junk bonds allowed.  Remember: public pensions are guaranteed by the state Constitution.  The money has got to be there.

While most public pension managers continue to resist the idea, a growing number of independent actuaries and financial economists agree that the net present value of risk-free public pension promises should be calculated on the basis of low-risk interest rates such as the rate on a thirty-year U.S. Treasury bond, most recently dropped below 4 percent.  This is not an argument for actually investing pension funds in T-bills, mind you; it is simply a way to recognize how much it actually costs to guarantee generous such generous pension benefits.

At 8 percent, the state pension fund discount rate is an economic fallacy.   At 7.5 percent, it will still be an economic fallacy.

** PS — For the state government, and for local governments that opt into a pension “amortization” (i.e., borrowing) plan initially proposed by Comptroller Thomas DiNapoli, a change in the discount rate won’t necessarily affect annual pension fund contributions.  Under a gimmick approved as part of the 2010-11 state budget, the annual increase in contributions will now be  capped at a percentage point a year and required payments over that amount in any given year can be spread over a 10-year period.  For participating  employers, a higher discount rate effectively will translate into more borrowing from the pension fund, pushing an even larger (but still underestimated) liability onto the backs of future taxpayers.**

PPS — New York City has separate public pension plans unaffected by the state comptroller’s action.  The city’s pension actuary recently began a customary five-year review of assumptions,  which could easily lead to a similar change, however.

Projected gaps over the next three years now total $37.2 billion. That’s up more than 30 percent from the $28.4 billion three-year cumulative gap projected in the February financial plan, which was issued in conjunction with the Governor’s 21-day amendments to the Executive Budget.

In short, New York’s budget hole got deeper during the protracted budget process that ended Aug. 3.  And it could grow deeper still by the time the governor elected this coming November presents the 2011-12 Executive Budget next Feb. 1.

The following chart contrasts the February gap projections with those in the latest financial plan update.

We haven’t had a situation like this in quite a few years. We have this impending tax increase, and people are trying to look for ways to hide from that, but they’re not seeing many from the federal perspective. One of the ways they’re looking to do it is changing their state income tax rate.

A cottage industry exists to help people with this transition, overseeing everything from changing driver’s licenses to veterinarians.

A few more months of quiet trading, and Mayor Bloomberg won’t be able to count on yet another unexpected multi-billion-dollar surplus from record financial-industry profits to close next year’s $3.3 billion deficit.

The good news is that commercial and consumer banking are doing better as mortgage and credit-card defaults slow. That’s nice for the national economy, but small comfort to New York City, which needs banks to reap huge trading profits year in and year out to keep the budget bubble going.

Just when it looked like New York’s free-spending public schools were finally about to meaningfully tighten their belts, news came from Washington yesterday that the U.S. Senate had cleared the way for another $26 billion dose of “stimulus” that will earmark $600 million for K-12 education in the Empire State.  This is enough to restore a large chunk of the $1.4 billion school aid cut in the recently enacted 2010-11 state budget.   The aid package also includes **$800 million of an added** $1 billion in extra Medicaid reimbursements the state has been counting on.

Chuck Schumer and Kirsten Gillibrand now get to bask in the media afterglow. “DC coming to NY’s re$cue,” the New York Post headlined, next to a photo of Schumer (who is seeking a third term this year).

In fact, assuming the House follows suit in a couple of weeks next week, the added federal aid will translate into another year of spending at levels that the state cannot afford to sustain—and Washington cannot afford to continue subsidizing (in part with New Yorkers’ own taxes).   And then what? Concerning education in particular, keep in mind:

• New York’s spending of $17,173 per pupil as of 2007-08 was the highest of any state, 67 percent above the national average, according to the latest data from the Census Bureau.
• Between 2000-01 and 2008-09, New York schools added 14,746 teachers and 8,655 non-teaching professionals–even as enrollment was dropping by 121,280 pupils.
• Confronted with an average 5 percent state aid cut, school districts tapped their (often sizable) reserves, trimmed programs and held down tax increases in their proposed 2010-11 budgets.  As a result, 92 percent of school budgets were approved by voters in May.  The bottom line: for the most part, schools and the public signalled they could live with the sort of aid reduction that stimulus fans have portrayed as destructive and intolerable.
• Mayor Michael Bloomberg announced in June that he would avoid layoffs in New York City schools by withdrawing his offer of a pay hike for city teachers. A partial aid restoration, courtesy of Congress and the Obama administration, is likely to mean that members of the United Federation of Teachers will collect on at least a portion of the 4 percent raise they had been seeking, expanding the base of school expenditures that city taxpayers must fund in future ye ***But a partial aid restoration could find its way into teachers’ pockets.***[see note below]
• Next year’s state budget gap of at least $7.5 billion cannot be closed without further cuts in education aid, which is one-third of state-funded expenditures.  In short, schools can’t put off the inevitable, even if Schumer & Co. would like to pretend they can.

Congressional Republicans who opposed the latest stimulus measure are right about this much: the new stimulus package, including funds which must be spent to rehire teachers or sustain current payrolls, is an enormous gift by congressional Democrats to their allies in public employee unions.   It will vindicate the recalcitrance of teacher unions in places like Yonkers, where the superintendent of schools this year offered union members one-year contract extension in exchange for a wage freeze that would save $16.5 million, enough to preserve hundreds of jobs slated for elimination.   The union president called the overture a “nonstarter.”  So the Yonkers teachers have pocketed their 3 percent base pay raises for 2010-11–on top of 12.5 percent in base pay increases over the last three years–and the district will use federal aid to restore, for one more year, some of teaching positions it still will not be able to pay for a year from now.

Lt. Gov. Richard Ravitch pointed out in a Wall Street Journal op-ed earlier this year that federal stimulus aid had come with strings attached that actually prevent states from economizing in areas such as education and health care.   “The federal stimulus has led states to increase overall spending in these core areas,” he wrote, “which in effect has only raised the height of the cliff from which state spending will fall if stimulus funds evaporate.”

The cliff just got raised a little higher.

Some “re$cue.”

** Bloomberg issued a statement Wednesday estimating the city’s share of added federal education aid at $200 million.  Combined with $400 million in projected additional Federal Medicaid Assistance (FMAP), he added, the total “is equal to the total funding assumed in the City’s budget based on the original FMAP extension legislation.”  In other words, treating the money as fungible, he is not immediately conceding its use for salary enhancements.   The United Federation of Teachers so far has had nothing to say on the subject.

P.S. — Elsewhere around the country, Education Intelligence Agency reports, school districts were already rescinding teacher layoff notices before the latest round of K-12 stimulus funding was resurrected by this week’s Senate vote.  For added political perspective on the issue, see The Foundry.

PPS — Here is the language of the “state fiscal relief and other provisions” cleared for approval in the Senate.  Note: education funds “may be used only for compensation and benefits and other expenses, such as support services, necessary to retain existing employees, to recall or rehire former employees, and to hire new employees, in order to provide early childhood, elementary, or secondary educational and related services,” and cannot be used by states to build up rainy-day reserves or retire debt.  They really want to make sure the dough goes directly to teachers.

In other words, if we’re so wealthy, why does Albany still have a budget deficit?  Well, aside from the state’s lamentable failure to, you know, actually reduce spending from boom-time levels, the answer is simple.

Frank’s hook was a reported rebound in the number of “high net worth individuals,” or HNWI’s, in the New York metropolitan area.  HNWIs are further defined as “those having investable assets of $1 million or more, excluding primary residence, collectibles, consumables, and consumer durables.”  In other words, stocks, bonds, certificates of deposit, money-market funds, and cash sitting in the bank or stuffed in the mattress.

New York HNWIs

New York State does not tax financial assets, per se.  It taxes interest income, dividends and capital gains derived from those assets by state residents.  However, some New Yorkers with $1 million or more in financial assets are nonetheless living on modest incomes, and thus pay little or nothing in taxes.  This is especially true for retirees who have much of their net worth invested in low-risk assets now yielding very low returns.  If you have $1 million or more invested entirely in tax-free municipal bonds, you pay zero in state taxes.  If you’re heavily into stocks and have been lucky enough to match or even beat the market during its recent recovery period, you also may still have a backlog of capital losses from the 2007-08 bear market, which can be used to offset your taxable income.

Consider the example of a wealthy retired federal government employee living in Chappaqua.  The stocks he owns may have been worth $1.2 million in 2007, dipped in value to $900,000 in 2008, and rose back over $1 million in 2009.  However, his 2009 state tax bill wouldn’t necessarily have been any higher unless he cashed in some of last year’s market gains to meet higher expenses — say, the down payment on a lavish wedding for his daughter.  And even then, he might still be able to offset his tax bill with capital losses he experienced in the 2007 market downturn.  Indeed, if his capital losses were big enough and his income from other sources hasn’t grown, he may not be paying more for a few years to come (although, to be sure, he’s still paying a much higher effective rate than, say, the guy who picks up his garbage).

New York’s largest single revenue source has long been the income tax generated by salaries, wages, bonuses and other payments for personal services earned in the state, which is why Wall Street has become so important to our state finances.  However, the taxable incomes of New York’s wealthiest households remained lower in 2009 than they had been in 2007, according to data in this volume of 2010-11 Executive Budget (see p. 193).  Nicole has blogged here on this issue.

In fact, the temporary income tax increase imposed on high-income earners by the Legislature last yea–including a whopping 31 percent tax hike on those with incomes of $1 million or more — has fallen at least 10 percent short of its $4 billion target.  One reason for the continued weakness in tax receipts from high earners: while investment banks have reported huge profits stemming from federal TARP subsidies and free money from the Fed, they paid out a larger share of their bonuses this year in stock options rather than in cash.

Bottom line: Many of the same people whose net asset values are rising, thanks in large measure to the stock market’s recovery, are still not taking home much more money than they did a couple of years ago.  Some are still taking home less.  And tens of thousands or former investment bankers remain unemployed, although their net worth in many cases no doubt qualifies them for HNWI status.

The rebound in the number of HNWI households in the New York region no doubt stems largely from the stock market’s recovery in 2009.  But the state’s revenues won’t recover strongly until the economy does.  And even then, a sizable budget gap will remain unless more is done to curb spending.

We’ll be writing more on this subject in the near future.   Meanwhile, expect the report on wealth to touch off more soak-the-rich tax demands from the usual suspects.