New York Legislature OKs Governor Cuomo's Pension Reform; DiNapoli Expresses Skepticism

The New York Legislature has approved much of Governor Andrew Cuomo's pension overhaul, while New York Comptroller Thomas DiNapoli has voiced concern.

(March 16, 2012) — New York’s legislature has approved Governor Andrew Cuomo’s pension overhaul while the state’s Comptroller Thomas DiNapoli has voiced that the approval will not significantly lower pension costs for local governments in the short-term.

The legislature’s approval involves raising the retirement age for most new workers and offering a 401(k)-type option to nonunion employees for the first time.

“For years, local governments have struggled to cope with soaring retirement costs, driving up taxes on New York families and small businesses,” Governor Cuomo said. “This bold and transformational pension reform plan is a historic win for New York taxpayers and municipalities that will save more than $80 billion over the next 30 years, while preserving retirement security for public workers. Without this critical reform, New Yorkers would have seen significant tax increases, as well as layoffs to teachers, firefighters and police.”

Meanwhile, Thomas DiNapoli, New York’s Comptroller, noted in a statement that while the agreement reached between the Governor and the Legislature on Tier VI — which the governor said would save billions of dollars over the next three decades for new employees — the new tier will not significantly lower costs for local governments in the short run. “There is no quick fix to addressing rising pension contribution rates driven by the financial market meltdown in 2008-09,” he said. “Despite strong investment returns and two new pension tiers in less than three years, these rates will likely continue to increase in the near future.”

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The state’s rapidly growing pensions costs are one of the most expensive mandates for local governments, the governor explained in a release. In 2002, pension payment from local governments were $1.4 billion and have grown to $12.2 billion in 2012, and increase of over 650%. “The pension reform plan passed by the Senate and Assembly today recognizes the unsustainability of the current system and takes unprecedented steps to control growth, saving local governments,” the release asserted.

The legislation puts in place a new Tier VI pension plan that includes:

1) New employee contribution rates.

2) An increase in the retirement age from 62 to 63, including provisions allowing early retirement with penalties.

3) Vesting: Under Tier VI, employees will vest after 10 years of service.

Earlier this week, Assembly Democrats rejected the governor’s proposal to raise the retirement age and offer a 401(k)-type option to future workers. Last month, Cuomo stated that he would be willing to take the risk of a government shutdown to create a cheaper pension system. “It is one of the seminal clashes of this budget and of my administration,” Cuomo told reporters, as initially reported by the Wall Street Journal. “The question is, does this body, does this government, does this Legislature perpetuate a pension system that is on the verge of bankrupting the state … or does the Legislature respond to the needs of the people?”

(March 16, 2012) — Rumours of a ‘great rotation’ abounded in global markets this week as investors put the largest amounts of capital to work in equity funds in almost a year.

Some $9.6 billion flooded into equity funds, according to Bank of America Merrill Lynch, the highest amount since April 2011, and signalled a renewed risk appetite among investors.

Improvements in equity markets, spurred by renewed confidence in economic solutions in the Eurozone, have eased investors back into risk-taking. The inflows this week make up more than a third of all inflows this year – some $24.2 billion in total.

The bank said in its weekly report: “[The] potential for a ‘Great Rotation’ from bonds to equities is huge (since 2008 bonds inflows = $480 billion versus equity outflows of $48 billion).”

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The largest beneficiaries of these inflows were exchange-traded funds, the most liquid and easily tradable tools – which also cost relatively little to hold – and long-only funds actually saw small outflows.

Japanese equities saw the biggest inflows since August last year, albeit with a modest $600 million, while the United States also saw record inflows this year, and the largest since September, with $9.1 billion entering its funds.

Robert Farago, Head of Asset Allocation at Schroders Private Banking, said investors needed courage to allocate to Japan, but there were a number of factors that pointed to the current stock market rally would continue.

He said: “The Bank of Japan is under increasing political pressure to become part of the solution to the country’s economic woes and a change in central bank governor next year increases the odds on a further shift to easy money.

“We see profits rising rapidly over the next twelve months as the economy rebounds from the devastation of tsunami. An easing of monetary policy that brings a weakening currency will provide an additional boost to a corporate sector that has proved adept at cutting costs after two decades of deflation.”

Despite confidence being bolstered with Greek debt issues seemingly solved, investors still pulled $900 million from the region’s equity funds.

Last week some $4.5 billion was withdrawn from money market funds, the bank said, bringing the total outflow for the year to almost $42 billion.

Investors were still keen on fixed income, however, with $7.8 billion moving into the asset class – making the 15^th straight week of inflows and taking the total taken in this year to over $66.6 billion.

This may change though, as returns have fallen to record lows. Thomson Reuters said this morning that the average coupon for Euro denominated corporate debt issued in 2012 was just 4.53%, the lowest annual average coupon the sector has ever seen.