Tuesday, March 16, 2010

NJ Seeks to Skip $3 Billion Pension Payment


Terrence Dopp of Bloomberg reports in BusinessWeek that Christie Seeks to Suspend N.J. Tax Rebate, Skip Pension Payment:
New Jersey Governor Chris Christie proposed a $29.3 billion budget that would suspend property-tax rebates, skip the state’s $3 billion pension contribution and fire 1,300 workers next year.

The plan would reduce aid to schools by $820 million, towns by $446 million and higher education by $173 million. Christie, a Republican who took office Jan. 19, also called for a constitutional amendment that would limit annual growth in the state’s highest-in-the-nation property taxes to 2.5 percent.

“Today, we stop sweeping problems under the rug,” Christie, 47, said during his first budget address to a joint session of the Democrat-led Legislature in Trenton. “We will not hide our problems until another day. And we are certainly not increasing the tax burden we place upon our people.”

Christie pledged not to raise income, sales or corporate taxes to close a record $10.7 billion deficit in the budget for the fiscal year that begins July 1. His plan, which includes $28.3 billion in state spending and $1 billion in federal aid, is 9 percent lower than the budget for the current fiscal year, which ends June 30.

New Jersey will get $1.3 billion less from the U.S. government in fiscal 2011, according to Christie’s administration. The budget contains a total of $10 billion in reductions and would have swelled to as much as $38 billion without any action, Treasurer Andrew Eristoff said.

Revenue Projections

The plan counts on projected revenue rising 2.2 percent to $28.3 billion, which would be the first increase in three years. Christie also expects to receive $490 million in federal funding for a six-month extension of the Medicaid health-care program for the poor which is still being debated in Congress.

The new governor didn’t renew a business-tax increase or an income-tax surcharge on residents earning $400,000 or more, both of which make the state less competitive, his Chief of Staff Richard Bagger told reporters yesterday.

Eristoff said the budget will seek $8.8 million in “employee actions” including firings of as many as 1,300 workers after Jan. 1. Christie said last week he can’t lay off or furlough any of the 70,000 state workers before then because of a 2009 agreement his predecessor Governor Jon Corzine negotiated with unions as part of a $450 million wage freeze.

Spending Cap

Christie said he will ask lawmakers to institute an immediate 2.5 percent spending cap on state and local governments. The legislation would be used until a permanent, constitutional amendment can be approved, Bagger said.

Real-estate levies, the main source of funding for schools and local governments, averaged $7,281 last year, up from $7,045 in 2008, state data show. The levy has climbed 72 percent since 1999, when the average was $4,239.

Christie last month withheld $475 million in school aid to help close a $2.2 billion mid-year deficit. The education funding cuts in fiscal 2011’s plan would amount to as much as 5 percent of district budgets.

“All this is doing is pushing the state’s budget problems down to the local property taxpayers,” Assembly Budget Committee chair Louis Greenwald, a Cherry Hill Democrat, said in an interview yesterday. “I get the argument that the wealthiest New Jerseyans have options, but I wish they would get the message that many middle-class taxpayers don’t.”

Rebates

Bagger said the state would save $848 million by suspending the property tax rebate program this year and then giving homeowners direct credits on their bills beginning in May 2011.

Another $50 million would come from an unspecified plan to have some government functions run by private companies. Christie last week said he may privatize some state jobs in 2011 amid rising costs for employee salaries and benefits.

New Jersey would skip its full $3 billion pension payment, under Christie’s plan. The system was underfunded by $46 billion as of 2009 because of investment declines and a failure to make full contributions, according to annual financial reports.

“Our pension system must be reformed before we can or should fund a broken, out-of-control system,” Christie said.

New Jersey’s Senate last month passed bills aimed at closing the pension deficit by excluding part-time workers from the system, reducing benefits and forcing teachers to pay more for health care. The measures await Assembly approval. Christie urged lawmakers to act on the bills and said he would sign them “the moment they hit my desk.”

Christie’s budget includes $2.5 billion in payments on the state’s record debt, which grew to $33.9 billion last year from $3.9 billion in 1989. The state has the third-largest net tax- supported debt among U.S. states, according to a 2009 report by Moody’s Investors Service. Its general obligation bonds are rated Aa3 by Moody’s, its fourth-highest ranking, and AA by Standard & Poor’s, its third-highest.

And you thought Greece was the only government in dire fiscal straights. Governor Christie's budget is being heavily criticized but state costs have mushroomed out of control. You can read the budget speech to the legislature here.

On the same day the budget was being delivered, Bloomberg's Dunstan McNichol reports that N.J. May Boost Hedge Fund Deals to Guard Against Equity Losses:

New Jersey’s $67 billion pension fund may increase its hedge fund investments to protect against losses in the stock market, according to a memo prepared for a meeting later this week of the State Investment Council.

The worst economic crisis since the 1930s helped push down the fund’s annual returns to 2.47 percent over the past 10 years, from a target of 8.25 percent, according to the Investment Division’s latest monthly report.

“The objective of this plan is to continue to improve the fund’s overall diversification and to allow the division to achieve its long-term return objectives during today’s low-yield environment with less reliance on traditional public equities,” Joseph wrote in the memo. The investment council will vote on the proposal at a March 18 meeting in New Brunswick, New Jersey.

Andrew Pratt, a Treasury Department spokesman, declined to immediately comment on the memo. Orin Kramer, general partner of the New York-based hedge fund Boston Provident Partners LP and chairman of the Investment Council since 2002, declined to comment.

Beyond the proposal, the Investment Division supports an increase in the 28 percent limit on so-called alternative investments such as hedge funds, private equity and real estate, according to the memo.

‘Investment Opportunities’

“We believe the markets will present compelling investment opportunities in many sectors of the alternative investment environment and would like greater flexibility to pursue these opportunities over the long term,” Joseph wrote.

Holdings in domestic and international stocks, which now account for 47 percent of the state’s portfolio, would be reduced under the plan.

The Investment Division manages funds for the state’s seven pension funds, which provide benefits to about 800,000 working and retired teachers, police officers and government employees.

Through June 30, 2009, the pension system was underfunded by $46 billion, with the assets on hand worth less than half the cost of the benefits already promised to members, actuary reports released earlier this month show.

So Governor Christie is slashing everything in sight, even seeking to skip pension payments but the state pension fund is looking to increase its allocation to alternative investments, paying out millions in fees to the very same funds that exacerbated the financial crisis. Oh what an ironic twist!

The pension herd hasn't learned its lesson. According to Deutsche Bank, investors around the world may put as much as $222 billion into hedge funds this year. More hedge funds, more private equity, more real estate, more of anything that gives them the leverage they need to attain that unrealistic 8% long-term target return.

If investment authorities think that alternative investments are going to lead New Jersey or any other state pension fund out of their pension woes, they are deluding themselves.

Mark my words, the situation is only going to go from bad to worse. Leverage in the hands of fools is like giving an arsonist gasoline to light out a fire. Once again, the pension herd will get burned, and pensioners and taxpayers will bear the costs.

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