With the retirement plans said to be financially sound, state politicians have happily showered city employees with generous pension enhancements — annual cost-of-living increases, holiday bonus payments, early retirement with full benefits — that are the envy of private-sector workers, whose pension benefits have eroded. 

But a close inspection of city pension records shows that the funds committed to the plans may fall well short of the city’s promises to hundreds of thousands of current and retired workers. They look fully funded chiefly because the city has been using an unusual pension calculation that does not comply with accepted government accounting rules. Even the city’s chief actuary, who helps produce the annual reports, says the official numbers are “meaningless” when it comes to showing the plans’ financial health.

The chief actuary, Robert C. North, has prepared a little-noticed set of alternative calculations showing that the gap in the pension funds could be as wide as $49 billion. That is nearly the size of the city’s entire annual budget and the equivalent of the city’s publicly disclosed outstanding debt.

The existence of a big gap between the city’s future obligations and the resources committed to meet them does not mean the pension funds are about to run out of money. But it does mean that New York City is promising its current employees future benefits it might not be able to provide without big tax increases or major budget cuts. When such a reckoning might occur, if at all, is hard to predict.

Pensions are now one of the city’s fastest-growing expenses. In recent years the city’s required contributions to its pension funds have more than quadrupled, to $4.7 billion this year from $1.1 billion in 2001. 

Two years from now, the city expects to spend one out of ten dollars in its budget on pension contributions.

Senior city officials vehemently dispute the suggestion that their pension funds are weaker than the official numbers claim and point out they are contributing more money to them every year. But a number of outside experts said the city’s accounting method was flawed because it provides a misleading portrait of the plans’ real condition.

In New York, public workers’ pensions are guaranteed by the State Constitution, so once they are granted, they cannot be reduced, even if they cost more than expected.

Many economists say government pension accounting routinely understates the cost of benefits promised to state and local workers, because the rules allow the plans to take credit for investment gains not yet achieved. But there is no agreement on whether the rules should be changed and if so, what the new method should be.

Mr. North said he believed that if there were a uniform standard among cities, the health of New York’s plan would be about average.

Mr. North, the city’s chief actuary since 1990, is well regarded in his field and has been a visible participant in the debate over whether actuarial methods have themselves contributed to the weakness of both public and private-sector pension funds. He said that he decided to recalculate the city’s five pension funds because the official numbers were so uninformative. 

“You’re getting no new information,” he said, even as the value of investments in the funds change.

He said he came up with the $49 billion gap by using a very conservative method, based on the use of risk-free investments, not stocks, similar to the way life insurance companies calculate the premiums for products that are comparable to pensions. 

Mr. North acknowledged that other governments did not use this method and other analysts might call for a less stringent approach, which would make the shortfall look smaller. But aside from that broader debate over how to credit investment gains, experts who looked at the city’s official pension reports also said the reassuring numbers shown there were incorrect. 

“It makes me shudder,” said Penny Wardlow, a government accounting specialist who served as a consultant to the Governmental Accounting Standards Board, an independent body of experts, when it drafted its pension rules in 1994.

She said New York City’s unusual way of reporting its pension values did not comply with the rules, because it artificially pegged each plan’s shortfall at zero, or close to it. This could easily mislead public officials into thinking the pension funds are healthier than they really are, she said.

New York City adopted the new method with the best of intentions in 1999, during a robust economy, as a tool to encourage officials to put enough money aside to pay for future pensions, even at times when it might appear that the fund had a surplus. 

But no other large city or state plan uses this method, which is not among the six that accounting rule-makers have authorized for municipalities to rely on when reporting the status of their pension funds. And it has failed at its goal: for the last five years, lawmakers have repeatedly postponed committing the full amount of money necessary to keep up with the rise in benefits.

Differing Views

Senior New York City officials bristled at the suggestion that their annual reports were flawed and strongly disagreed with any suggestion that the pension plans might be under-funded. 

“The city’s pension funds are 99.6 percent funded by acceptable methods for evaluating and disclosing pension fund assets and liabilities,” said Martha Stark, the New York City finance commissioner. “While there are other methods for determining funded status that are being discussed, those methods are academic at this time.”

Ms. Stark said that she was sure of the pension funds’ health because the city was contributing responsibly to them every year, and because she was confident that the investments in the funds would meet their targets of 8 percent average annual returns over the long haul. Many other public plans have investments targets in this range.

She said that there were many ways to measure the health of the pension funds, and that while one method may show a large hidden shortfall, another would show that at least one of the plans had a slight surplus. She contended that no one method was better than another for all purposes.

Asked why the pension funds appeared to be fully funded back in 1999, when they were swollen with gains from the stock market boom, and still appear to be almost fully funded now — after losing billions of dollars in the stock market and granting billions of dollars worth of new benefits — she said that the numbers were “smoothed” to avoid short-term fluctuations. She also noted that the city had been increasing its annual contributions in recent years.

The independent governmental accounting board, which sets standards for state and local jurisdictions across the country, is not allowed to comment publicly on New York City’s financial statements.

“But I can tell you that our standard is very clear on this issue,” said Gerard Carney, a spokesman for the board, “and we fully expect it to be followed accurately. Moreover, history has shown that bad things can happen when accounting standards are not accurately followed.”

Unlike the accounting board for companies, however, the governmental accounting board has no enforcement agency backing it up. A company that breaks an accounting rule may hear from the Securities and Exchange Commission; a government will not. The rules board relies on each local government’s outside auditor to police violations.

New York City’s outside auditors defended its unusual accounting approach. 

Robert Rooney, an audit director at Deloitte & Touche who worked on New York City’s audit, said he was not permitted to discuss the details of New York City’s financial reports because of confidentiality rules. But in general, he said, it was possible to modify accounting standards without violating them. 

When Deloitte’s auditors see such a modification in a city’s financial report, he said, they discuss it with the city’s officials to make sure they understand it. If the modification is not material or misleading, he said, then the city can use it and still get a clean audit.


New York City’s comptroller, William C. Thompson Jr., who has ultimate responsibility for the city’s financial statements, said through his spokeswoman that he believed New York was compliant with the accounting rules. He also said that pension calculations were “the subject of much debate.” 

Although the city pays the bills for its workers’ pensions, all increases in public employees’ pensions must be enacted by the State Legislature and approved by Governor George E. Pataki. And the reports by New York City that it has sound pension plans have been cited again and again in Albany in the last few years, as lawmakers have granted billions of dollars worth of new benefits, often over the city’s objections. 

These new benefits were doled out on the understanding that the nation’s seventh-largest pension system, counting both public and private plans, posed no threat to future generations of New Yorkers who must foot the bill.

Stuck With the Bill

On their face, New York City’s pensions do not look particularly extravagant. As an example, a teacher retiring at age 55, after 30 years of service, could expect to receive a pension of about $51,000 a year today. The New York City police, who are compensated extra for the risks they face on the job, can retire after 20 years, at any age, with pensions of about $53,000 a year.

But compared with that of other workers — particularly in the private sector, where large companies have been freezing their pension plans and offering workers leaner benefits — the pensions are already relatively generous and becoming more so.

In recent years, for example, city retirees were given annual cost-of-living increases in their pensions, a benefit virtually unheard of in the private sector. And the pension fund contributions that many workers had been required to make in the past were eliminated. 

The state also added more jobs — most recently auto mechanics — to its list of “physically taxing” positions that entitle employees to retirement at age 50, or after they have served 25 years on the job, with full benefits.

In addition to the pensions, New York City has promised to pay for its retirees’ health care. The total cost of those obligations has not been tallied or reported yet, but Mayor Michael R. Bloomberg has estimated it at about $50 billion in today’s dollars. (New York and other cities are adding up such obligations in response to a new accounting requirement.)

So, with the health care and the potential pension shortfall, New York City could have as much as $100 billion in long-term obligations that it has never formally reported.

Mr. Bloomberg did not comment for this article, but in the past he has repeatedly expressed concern about Albany’s habit of unilaterally enacting new benefits that the city must pay for. “The question is, can the city residents pay for it?” he asked last week after the state promised more benefits to city employees, including some workers suffering health problems from 9/11.

While the city would like to do more for its workers, Mr. Bloomberg said, “if we pay for this, that will be some library that won’t be able to stay open an extra day. It’ll be some firehouse that we won’t be able to keep open. It’ll be some other project that everybody in this city wants. It’ll be the level of taxation, which is going to have to go up. Somebody’s got to pay for all of these things.” 

New York City is not the only place where pension obligations may be far larger than reported. But comparisons are difficult. State and local government pension plans do not have to report their numbers according to any single actuarial methodology, as company plans do.

Government pension plans also have much greater latitude to fiddle with such critical assumptions as how long they expect their workers to live after retirement. And because they are not monitored by a federal guarantor or outside investors, they have not received the kind of scrutiny corporations have. 

The magnitude of the potential discrepancy in New York City alone, which has often been held out as an exemplar in funding its pensions, suggests how poorly understood the looming public pension debt may be nationwide. New York State’s pension fund uses another reporting method, but it also tends to make the plan look fully funded at all times.

Uncertainty about the city’s pension numbers has attracted the New York State Insurance Department’s attention, which has regulatory authority over public pension plans. The department has been auditing the city’s pension plans and asking pointed questions about their financial health. 

Mr. North said New York City took on its unusual calculation for the purpose of determining the city’s annual pension contribution, not as a financial status report. 

But it does not show the volatility of the city’s pension fund investments or the long-term soundness of the plans. Some of the other six approved models do, to some degree. 
Other actuaries confirmed that the method was sound when used to speed up the financing of pensions. But they agreed with Mr. North that it gives a misleading picture of whether a plan is healthy or not.

Lost in the Fine Print

In 2003, when the pension funds were under severe financial strain — and their annual reports were still showing perfect health — Mr. North decided to start providing his alternative numbers.

He said he had wanted to publish them prominently, in the front of the plans’ annual reports, but the city’s outside auditors stopped him, because the accounting board had not approved the method he wanted to use. So the numbers ended up in the fine print, where few have noticed them.

Instead of basing his calculations on the investment returns the pension fund might earn in the future, Mr. North used very conservative investment returns — the type of returns now being paid by risk-free investments, such as Treasury bonds. He said he thought this was appropriate because the benefits are themselves risk-free, being guaranteed by the state constitution.

More analysts are beginning to question the rule that allows governments to base their pension values on anticipated investment returns. Doing so risks seriously understating the pensions’ costs, they say.

“This is a really, really serious problem,” said Andrew L. Turner, a former managing director at the Frank Russell Company, a pension consulting concern in Tacoma, Wash. “The taxpayers think they’re paying a lot less than what they’re ultimately going to pay.”

But other specialists say Mr. North’s risk-free method is inappropriate for governments. Ms. Stark, the city’s finance commissioner, said it resembled the way corporations measure their pension plans in special circumstances, like a bankruptcy or during a merger. She said there was no reason to measure the city’s pensions that way, because it was not going to go bankrupt. 

The debate may sound arcane, but officials bring great passion to it because the amounts of money at stake are vast, and no one wants to make a mistake. Mr. Turner resigned from Frank Russell last year because of his growing conviction that the industry was habitually understating pension costs. He is now dean of the business school at Pacific Lutheran University.

“We’re doing this as a public trust,” he said, “and yet the weird way we’re doing it is, we’re going to end up breaching everybody’s trust.”

The new benefits New York City has added since 1999 have been politically popular. But they have also been very expensive. Even though they look modest on an individual basis, their cost adds up quickly because they have to be paid to many people who will be retired for many years.

The cost-of-living adjustment increased individual pensions by no more than $540 in the first year, for example. But it increased the city’s total pension obligations by an estimated $8.4 billion. 

Even though the city’s contributions have risen greatly, New York has not been putting in the full amount necessary to keep up with the cost of the new benefits. 

In 2000, when the cost-of-living adjustment was enacted, the Giuliani administration successfully lobbied Albany for permission to phase in the cost over five years. Then, in 2002, when the city was reeling from the stock market decline and the Sept. 11 attack, the Bloomberg administration won permission to stretch out the payment schedule even more, to 10 years. That saved the city more than $200 million at a time when it was raising taxes, closing firehouses, and laying off workers to balance its budget. 

This year, with its finances improving, New York City has persuaded the State Legislature to pass a bill eliminating the 10-year phase-in. That means the city will once again be keeping up with the contribution schedule that Mr. North has devised. But New York will still have to pay extra to catch up for the contributions it delayed.

Meanwhile, in Albany, representatives of the city’s labor unions are acting as if nothing has happened — and on paper, nothing did. There, the pension funds still look fully funded. Just this year, the Legislature passed dozens of bills to sweeten pensions for subway cashiers, school lunch helpers, crossing guards, locksmiths and others.

Governor Pataki vetoed most of the bills. But last week he signed one into law, over the city’s objection, that the city claims will cost $5 million to $10 million a year.