The $735 million figure is an estimate that was calculated with the aid of Noor Rajah, who runs the actuarial science program at Columbia University's School of Continuing Education in New York.
The low rate is more about giving municipalities the ability to borrow cheaply than ensuring the integrity of the pension fund, McGee said. It also means the fund is taking on greater risk because it's allowing low or unrated municipalities to defer their pension payments, he said.
The state says it's justified in charging 3.7 percent interest because it considers the outstanding balances as a part of its fixed-income portfolio, which has a lower expected rate of return than the fund's equity portfolio.
However, the fund's annual report accounts for the deferred payments and the interest on them as a receivable and doesn't include the money in the fixed-income part of its portfolio. That matters because of the fund's asset allocation mix, which as of March 31 devoted 54.5 percent to equities and 27.2 percent to fixed-income securities, with the rest divided between real estate, private equity and other investments.
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If the deferred payments were included with fixed-income, the fund would have to adjust its equities holdings higher so as to maintain its targeted allocation mix.
Elizabeth Wiley, an actuary at consulting firm Cheiron in McLean, Virginia, said the deferred balances won't hinder the fund's performance "if they are actually considering the deferred balances when they set the asset allocations."
State comptroller Thomas P. DiNapoli's office, which administers the pension plan, counters that not including the deferred balance in the overall asset allocation isn't a drag on the fund.
The program "is fiscally sound, transparent and adequately funds the Retirement System," a spokeswoman for DiNapoli said. "It provides an option for state and local employers to manage the budgetary impact of rising contribution rates in the aftermath of the global financial crisis."