New York Pensions Face AI Valuation Risk

New York’s public pension systems have grown rapidly alongside the surge in artificial intelligence investments, creating a financial structure that is now exposed to a potential market correction.

The city’s five pension funds, which serve approximately 160,000 retirees, increased by 23% over the last two fiscal years. The state’s funds, covering more than 500,000 workers outside New York City, grew by 17% in the same period. City Comptroller Mark Levine stated that these gains allow the city to anticipate an $8 billion reduction in contributions over the next five years while still meeting its obligations.

However, the stability of these funds is linked to the performance of tech stocks, which fell sharply last week. The S&P 500 dropped nearly 3% for the week. The Nasdaq composite index fell 10% from its peak on Thursday, a decline classified as a correction, before recovering slightly to finish the week down 6%. This drop followed the midterm elections, where winning Democratic candidates pledged to slow the construction of data centers, a move that could limit growth for major AI companies.

Levine noted that AI is a major component of the S&P 500 and Nasdaq indices. The city’s private equity investments are heavily weighted toward AI-related companies, and private credit lending is also directed toward these firms. About a third of the funds are invested in U.S. stocks, primarily through index funds. International stocks, which have risen due to gains by South Korean chipmakers, bring total equity investments to 40%.

The city’s funds, valued at $326 billion, and the state’s funds, valued at $310 billion, rank as the third and fourth largest public pension funds in the country. Their strategies include bonds, which account for about a quarter of assets. AI companies have issued billions in corporate bonds this year, adding to the exposure. Real estate and private credit stakes also include AI-related assets, meaning the funds have wide exposure to a potential bubble burst.

The Wall Street Journal reported that Anthropic, expected to launch an initial public offering before Thanksgiving, was told by potential investors to reduce its valuation by at least 25%. The city’s pension funds will not immediately buy Anthropic shares if it goes public. However, the funds will own shares once Anthropic is added to the Russell 3000 index, which is expected to happen quickly. If Anthropic is added to the S&P 500 about a year after its listing, the city’s holdings will increase further.

Levine said the office does not want to be overconcentrated in AI. He recently declined to invest in a private equity deal involving an AI company, even though it met the fund’s standards. Levine’s office is beginning a major reevaluation of the pension funds’ investments, a process conducted every three to five years. Exposure to AI will be a top priority, with results expected within five months.

State Comptroller Tom DiNapoli, who won his fourth term last week, was not available to comment. He serves as the sole trustee for the state pension funds and makes all investment decisions. While the funds rely on AI for growth, Levine noted that AI tools will also help the office assess risk in the near term.