New Jersey Gains While Illinois Sells Bonds

Terrence Dopp of Bloomberg reports, New Jersey Pension Fund Gains as Christie Seeks Fixes:

New Jersey’s pension fund has gained 8.7 percent so far this fiscal year, as Governor Chris Christie calls on lawmakers to overhaul the system to whittle down a $53.9 billion deficit.

The fund for retired teachers and government workers had $70.03 billion in assets as of November, as performance since the July 1 start of the fiscal year beat a gain of 8.53 percent for its benchmark, according to a report presented to the State Investment Council today in Trenton. Robert Grady, chairman of the panel, said the fund returned 13.4 percent in the prior fiscal year, which ended June 30.

Christie, 48, a Republican, has proposed rolling back a 9 percent pension-benefits increase enacted in 2001, raising the retirement age and suspending cost-of-living adjustments to narrow the funding gap. The governor said he intends to restart payments into the system this year with a partial contribution of $512 million if lawmakers act on his plan.

“Unless there are unprecedented returns over many years, there will certainly not be a significant dent made in that unfunded liability,” said Andy Pratt, a spokesman for treasurer Andrew Sidamon-Eristoff. “Investment skills alone aren’t going to dig us out of this hole.”

‘Sustainable’ Pensions

New Jersey’s fund had assets to cover 62 percent of its obligations as of June 30, down from 66 percent a year earlier, according to Treasury Department data. The value of the fund was $71 billion as of Oct. 31.

The state’s pension deficit increased 18 percent to $53.9 billion as of June 30 as the state failed to make contributions for most of the past decade. The state also faces an unfunded liability of $66.8 billion for retiree health-care costs, the treasury department said last month in a statement.

Christie has argued with public employee unions and Democrats who control the Legislature over his pension proposals. Senate President Stephen Sweeney and Assembly Speaker Sheila Oliver have released a competing set of measures. Sweeney said his plan would create new labor-management oversight boards modeled after the private sector and force employees to pay more to preserve the 9 percent increase.

“If we cannot make the promises of our pension system more realistic, there will be no pensions for those who have earned them,” Christie said yesterday in his State of the State speech.

Underfunded Pensions

Twenty U.S. states including California and Illinois skipped or underfunded their pensions from 2007 to 2009, Chicago-based Loop Capital Markets said in an October report. Reduced funding and investment losses left 91 of 145 systems studied by Loop with less than the recommended 80 percent a partial payment of $1 billion.

The state Treasury’s Investment Division manages money for New Jersey’s seven pension plans, which provide benefits to 728,000 working and retired teachers, police officers and government employees.

The division this month invested another $40 million in Centerbridge Credit Partners, according to a memo to the council from investment director Timothy Walsh. Its initial $100 million investment in the hedge fund in November 2007 has returned 47 percent, according to the memo.

Readers who would like to know more can visit the New Jersey Division of Investment website. I also recommend reading the investment plan for fiscal years 2010-2011. The returns were all about beta, which is why the fund's performance basically matched its benchmark (private assets might help them boost returns in year-end).

But the reality is that investment performance alone cannot get New Jersey and other states out of their unfunded liability hole. Timothy Inklebarger of Pensions & Investments reports, Illinois governor expected to OK $4.1 billion pension bond sale:

Illinois Gov. Pat Quinn was expected to sign a bill approved by the Illinois Senate early Wednesday to sell up to $4.1 billion in pension obligation bonds to help the state pay for required contributions to its statewide pension plans.

The legislation passed by a 42-16 vote. The bill had been approved by the state House on May 25.

John Patterson, a spokesman for state Sen. John Cullerton, who sponsored the Senate bill, said in a telephone interview that actuaries for the pension plans — the $33.2 billion Illinois Teachers’ Retirement System, $12.9 billion Illinois State Universities Retirement System and $10.2 billion Illinois State Board of Investment — will have to recertify the amounts needed to cover their 2010 contribution before a final number is determined.

Early estimates put the contributions at $2.358 billion for the teachers’ plan, $960 million to ISBI and $777 million to ISURS.

“The Senate president acknowledges that borrowing to make the pension contributions is not an ideal move. But it was the best of the difficult choices,” Mr. Patterson said in an e-mailed response to questions. “That, combined with the revenue moves that were approved, will put the state back on track to restoring sound financial footing for our pension systems, our budget and all those who do business with Illinois.”

Kelly Kraft, Mr. Quinn’s budget spokeswoman, said: “The governor proposed pension borrowing (as) the least costly option for taxpayers to make their required pension payments. We are pleased with the action of the legislators on this bill. The governor is committed to paying the pensions. We continue to look at the pension systems to see what can be done to make them work better.”

A lot can be done to make Illinois' pension systems work better. Most of the problems in Illinois stem from poor governance. Risks were taken with pension monies that should have never been approved if there was proper oversight and people were held accountable for their decisions. The financial crisis exposed serious governance flaws. It's not just about poor markets. Some funds were able to adjust more quickly than others and some were better prepared to manage downside risk. That's the key -- managing downside risk.

Unfortunately, the 2008 financial crisis ravaged most global pension plans. The effects were more pronounced on mature pension plans that were already in a precarious situation. And now Illinois is responding with pension obligation bonds. It might be the "least costly option for taxpayers", but it's not enough. Sooner or later, New Jersey, Illinois and other states suffering from serious unfunded pension liabilities will need to take more drastic measures to shore up their public pension plans. It's foolish and irresponsible to think that markets and investment decisions will generate the required rate of return to get them out of this mess.