Fortune Looks at New Jersey's Public Pension Fund

Monday, 14 September 2009 12:30

Fortune Magazine (May 12, 2009) has decided to look at the whole question of the “public pension bomb.”  The Magazine argues that for years the states have shortchanged the retirement programs of public employees.  The unfunded liabilities have been compounded by huge investment losses, according to a 2006 Deleiotte study-- “everything is coming together to create a crisis.”

Fortune of course looked for a case study of one state where matters are “dire”—and up comes New Jersey.  In June 2008, the Magazine reported that one of the nation’s largest pension plans has $34 billion less than its obligations.  Since then the market value of the plan has dropped from $82 billion to $56 billion.

Governor Jon Corzine made that problem one of his campaign themes back in 2005, but his plans and initiatives have run into major roadblocks.  The Fortune survey looks for the historical roots of this crisis, and those findings are very similar to the Hall Institute report on public pensions.  In 1992, Governor James Florio pushed through a re-evaluation of the fund’s assets and thus allowed the state to cut its pension contributions by more than $1.5 billion in 1992.  His successor, Christine Todd Whitman, promised major tax cuts and to do that she pushed another “reform “ act which allowed the state to reduce state and local contributions to the fund by nearly $1.5 billion in 1994 and about the same in 1995.

In order to make up for “lost ground” without more revenue, the state leaders went heavily into the market.  In 1997, New Jersey sold $2.75 billion of bonds paying 7.6% interest , putting the proceeds  into the pension funds to be invested.  Whitman pledged that the plan would save taxpayers about $45 billion.  The fund instead earned less than 6% annually.

Then in 2001, Democrat Governor James McGreevy turned over  control of the fund to professional money mangers.  Led by his former campaign finance chairman in 1997, Orin Kramer, the fund put more money into the hands of Wall Street professionals and into diversification in alternative investments such as hedge funds and private equities.  But it took time to implement that strategy, and money began to go into alternatives in 2006, just before the beginnings of a massive bear market.

The New Jersey pension decline has “more or less traced the broad stock market’s, the real problem is underfunding, “ the Fortune authors concluded.

As obligations grew, the New Jersey politicians increased benefits.  In 2001, they increased benefits by 9%, which is added another $4.2 billion in liabilities.  In 1999, the state allowed local police and firefights to collect pensions equal to 50% of their pay after 20 years of service.  Since 1999, benefits have increase liabilities by more than $6.8 billion. 

Corzine did put $1 billion in the fund in 2007 and another billion in 2008.  But he had to cut back the state efforts during the major recession, and he allowed a pension holiday which meant that municipalities could skip their contributions for 2009 and maybe beyond.  He did raise the retirement age to 62, increased salary requirements for pension eligibility, increased employees contributions and capped pension income.  But the gaps between liabilities and assets remain enormous, and makes New Jersey into a basket case study.