New York City pensions gain 10% in fiscal year, beating target

New York City’s five pensions beat investment targets in the last fiscal year, propelled by a record-breaking U.S. stock market.

The city’s pensions funds for police officers, fire fighters, teachers, civil employees and school personnel, with a combined $274 billion in assets, returned 10% in the year through June, beating their 7% target, according to a news release Thursday from city Comptroller Brad Lander.

A resilient economy, the anticipation of interest rate cuts by the Federal Reserve and exuberance over artificial intelligence powered the S&P 500 to a 22.7% return for the year ending June 30. US and foreign stocks, which returned 12.4%, made up about 42% of the city’s pension assets.

New York City’s returns beat the 9.3% gains of the $514 billion California Public Employees’ Retirement System and the 8.4% return of California’s $341 billion teachers pension.

Still, the pension funds’ underperformed the 13.2% return of a portfolio made up of 60% global stocks and 40% US bonds, according to investment consultant Wilshire. New York City’s investments in real estate and private equity dragged down overall performance.

High interest rates have depressed property valuations and a slow return of workers to offices after the Covid-19 pandemic has led to distress in commercial real estate. Higher borrowing costs have also weighed on private equity, which relies on debt for buyouts. 

In addition, a lackluster dealmaking market makes it harder for asset managers to sell companies to generate distributions for investors. Distributions are at their lowest level since the 2008 financial crisis. 

Late last year, four of New York City’s five public employee pension funds boosted their allocations to illiquid investments like private equity and reduced exposure to publicly-traded stocks to diversify their portfolios and reduce volatility. Boards of directors for the retirement funds voted to raise the share of assets to be invested in so-called alternative investments — which include hedge funds, private real estate and infrastructure — to a range of 29% to 35%, up from 23% to 29%.

The pensions’ returns for fiscal 2023 will reduce the city’s required contributions to the funds by about $1.8 billion over the next five years, leaving more money available to spend on city services, Lander said. New York City will spend about $10.3 billion on public employee pensions this fiscal year, according to a five-year financial plan released last month.

New York City’s pensions mange money for more than 750,000 current and retired employees and had assets sufficient to cover about 83% of promised benefits as of fiscal year 2023.