The Dow Jones Industrial Average had a good day yesterday, moving up almost 489 points and posting its second-largest one-day point gain ever — the biggest having come in March of 2000, at the height of the bull market. While the news was good on Wall Street, leaders in Albany and New York City may need more than a one-day rally to rescue their year, and for more reasons than one. As average New Yorkers sweat, and nurse the wounds to their IRAs and 401(k)s, state and local government employees can rest at least relatively easy with their pension benefits, which, under the terms of the state constitution, can’t be “diminished or impaired.” That, however, creates a problem that will need to be addressed. The immense hit the stock market has taken in the past two years has had a significant impact on the funds that maintain state and city workers’ retirement benefits.

The New York State and Local Retirement Systems, managed by state comptroller and Democratic gubernatorial candidate H. Carl McCall, plunged to $112 billion as of March 31 from the $127 billion at which they stood at the end of the 2000 fiscal year. Since then, the Russell 3000 Index — which the comptroller says should roughly track the domestic equities investments of the fund, almost 45% of its holdings — has declined by about 30%. Such a decline could drag the fund under the $100 billion mark, and we already know it lost $300 million on World-Com and $58 million on Enron. The $95 billion New York City pension fund lost $100 million on WorldCom and $109 million on Enron.

This is a fiscal headache when the city and state budgeteers need one least, for the state and the city will have to kick in more for employee pensions than they have had to in recent years. During the boom of the late 1990s, increases in the values of equities held by the pension funds mostly covered increased outlays to retired workers. Now, not only is the decline in equity values making it harder to meet the obligations that existed before 2000, but an increase in benefits implemented that year, while New York politicians were riding high on the bull, is wreaking even more havoc. City and state retirees were granted a sizeable cost-of-living increase. Those with more than 10 years of employment were allowed to forgo their already meager 3% contributions to their own retirement.

According to E.J. McMahon, a fiscal analyst of the Manhattan Institute, pension contributions for the City of New York will increase by a staggering 24% or so because of the funds’ loss of value, the benefit increases, and a generous new contract with the United Federation of Teachers. City pension costs are then expected to rise as much as $600 million a year in each of the next three years. The state is also facing rapidly increasing costs, though how much the state will ultimately have to kick in is less certain since the state hasn’t figured this number into its budget projections. Eventually, state and local politicians will have to deal with this crisis by either trimming their workforces, trimming benefits, or demanding that employees do more to contribute to their own retirement nest eggs. Since many of the benefit gains New York government employees have made are secured by the state constitution, meaning that significant short-term savings won’t be coming, the urgency of the problem is only so much the greater.