New York City should invest more of its pension funds in international equities and other assets because improving returns would help the city with its soaring contributions, Deputy Mayor Robert Steel said on Thursday.

States, counties, cities, and schools around the country are grappling with the same problem -- huge shortfalls in their pension funds. Steel is one of the first and most prominent experts to tackle the issue of lagging returns.

Addressing a Citizens Budget Commission breakfast, Steel estimated that the current mix of investments was about 70 percent U.S. equities and 30 percent fixed income.

U.S. equities only is not the right way to think about it, Steel told reporters later. The balance here is to get to the point that provides less volatility with better returns.

A spokesman for Comptroller John Liu, whose office oversees pension investments, could not confirm Steel's estimate.

Like many states and municipalities, Mayor Michael Bloomberg has focused on limiting pension benefits for new hires because the current benefits are legally protected.

And like many public pension funds, New York City's are run by boards, a structure that requires consensus-building.

Bloomberg, Liu and the unions all appoint members to the boards that run the five funds, which were valued at $119 billion on June 30, having risen over 20 percent in a year.

Bloomberg, a political independent, has clashed with the Democratic comptroller over several issues, including an automated timekeeping system for workers whose soaring cost led to a federal probe. The mayor also has rocky relations with unions, having threatened them with layoffs.

With tax revenue still below pre-recession levels, many levels of U.S. government are focusing on whether the unionized public sector's pay and benefit packages should be shrunk to the private sector's equivalents.

Steel stressed that it could take two to three decades to return pension contributions to affordable levels, saying: It really is analogous to entitlements. Entitlements are taxpayer-funded benefits -- Medicare, Medicaid and Social Security -- which Congress now is struggling to cut.

(Reporting by Joan Gralla; Editing by Andrew Hay)

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