In the last fiscal year, New York City’s five pension funds exceeded their investment targets, with a combined $274 billion in assets returning 10% through June. This performance outpaced their 7% target and was mainly driven by a booming U.S. stock market. The city’s pensions for police officers, fire fighters, teachers, civil employees, and school personnel all saw positive returns, reflecting a resilient economy and the anticipation of interest rate cuts by the Federal Reserve.
The S&P 500 experienced a record-breaking 22.7% return for the year ending June 30, fueled by exuberance over artificial intelligence and a favorable economic environment. U.S. and foreign stocks, which constituted about 42% of the city’s pension assets, returned 12.4%. This strong performance contrasted with the gains of other major pension funds such as the California Public Employees’ Retirement System and California’s teachers pension.
Despite the overall success, New York City’s pension funds faced challenges in their investments in real estate and private equity. High interest rates had a negative impact on property valuations, while the slow return of workers to offices after the Covid-19 pandemic led to distress in commercial real estate. Additionally, higher borrowing costs affected private equity investments, which rely heavily on debt for buyouts. The lackluster dealmaking market further added to the difficulties faced by asset managers in generating distributions for investors.
In response to the challenges in real estate and private equity, New York City’s public employee pension funds adjusted their investment strategy. They increased allocations to illiquid investments like private equity and reduced exposure to publicly-traded stocks to diversify their portfolios and reduce volatility. The boards of directors for the retirement funds raised the share of assets to be invested in alternative investments, including hedge funds, private real estate, and infrastructure, to a range of 29% to 35%. These strategic changes are intended to improve the long-term performance and stability of the pension funds.
The strong returns of New York City’s pension funds in the last fiscal year are expected to have a positive impact on the city’s finances. The returns will reduce the city’s required contributions to the funds by approximately $1.8 billion over the next five years, freeing up more money to be allocated to essential city services. This reduction in pension contributions is a significant development that will benefit both current and retired employees who rely on these funds for their financial security. As of fiscal year 2023, New York City’s pensions manage money for over 750,000 individuals and are adequately funded to cover about 83% of promised benefits.