Thursday, June 11, 2015

New Jersey's Pension War?

Megan Davies and Jonathan Stempel of Reuters report, New Jersey Governor Christie wins court victory over pension cuts:
New Jersey's highest court on Tuesday ruled that Gov. Chris Christie can cut $1.6 billion from state pension funding, removing a hurdle for the Republican presidential hopeful's national ambitions and giving some temporary financial relief to the state.

The stakes were high for Christie, who has trailed in polls behind rivals such as Wisconsin Governor Scott Walker, a fellow Republican. Christie came under fire for his handling of the state’s sluggish recovery as well as a scandal around the 2013 George Washington Bridge closure, which saw a former ally plead guilty to federal charges.

"This will be a much-celebrated victory after a year and a half of bad headlines," said Tim Albrecht, a Des Moines, Iowa, Republican strategist. "The question is, will a lone victory be enough or will Chris Christie be able to parlay this into something bigger."

Christie, who has not announced his candidacy for the Republican nomination to run for president in November 2016 but has started a political action committee, said in a statement the decision was an "important victory" for taxpayers.

Bill Kilberg, a labor lawyer in Washington and a Christie supporter said the decision would give donors "renewed confidence that he's the serious candidate we all knew that he was."

The state Supreme Court, in reversing a lower court ruling, said while it lamented the "staggering" loss of public trust resulting from broken promises, the pension payment was not a contractual obligation entitled to constitutional protection.

Christie cut a state contribution to the public pension system last year because of a revenue shortfall. The state's pension system has about $83 billion of unfunded liabilities and was funded at only about 44 percent in fiscal 2014.

Public-sector unions sued the administration, and in February Superior Court Judge Mary Jacobson sided with them, finding that a 2011 pension reform law, signed by Christie, created a contractual right that the state make its contribution. The state appealed to New Jersey's highest court, which heard arguments in May.

“That the State must get its financial house in order is plain," wrote Justice Jaynee LaVecchia in the opinion. "The need is compelling in respect of the State’s ability to honor its compensation commitment to retired employees. But this Court cannot resolve that need in place of the political branches.”

New Jersey has seen its credit rating downgraded nine times since Christie took office in 2010. Standard & Poor's said the state could be vulnerable to further downgrade if it does not solve its pension problem. Moody's said long term, the ruling "reinforces the state’s ongoing reliance on onetime budget solutions."

Philip Fischer, municipal research strategist at Bank of America Merrill Lynch, said the court essentially ruled that the contribution was so large it violated the state constitution's debt limitation clause.

"It takes the heat off the pension issue at least for a little while and allows the legislature and the unions to ... figure out a way to fund pensions consistent with the debt limitation in the constitution," he said.

All parties are now expected to negotiate a "comprehensive solution," said State Senate Republican Leader Tom Kean.

The Supreme Court voted to reverse the lower court ruling by five votes to two. Justice Barry Albin, one of the dissenters, said the decision "unfairly requires public workers to uphold their end of the law’s bargain."

Hetty Rosenstein, New Jersey director of the Communication Workers of America, the largest union representing state workers, said they would have to try to change the constitution.

“It is devastating to all public employees, retirees, taxpayers, and families," said Wendell Steinhauer, president of the New Jersey Education Association, a teachers' union.
Heather Haddon of the Wall Street Journal also reports, New Jersey Court Backs Chris Christie Administration on Pension Payments:
New Jersey’s highest court ruled Tuesday that Gov. Chris Christie’s administration didn’t overstep its authority in cutting funding for benefits for state workers, a victory for the Republican governor as he nears an announcement on whether he is running for president.

The New Jersey Supreme Court ruling clears a major hurdle for the administration to negotiate a new budget by June 30 and it means the state won’t have to resort to mass layoffs or other emergency measures to put $1.6 billion into the pension system during the remaining weeks of the current fiscal year.

In the long-term, however, credit-ratings firms predicted the state’s underfunded pension system would fall further into debt.

The decision could give new momentum to a Christie-backed commission that is seeking concessions from workers in exchange for a state constitutional amendment that would guarantee future pension payments.

For Mr. Christie, the favorable ruling removes what could have been a high-profile political setback as he contemplates entering the race for the White House, political analysts said. Mr. Christie has said he would hold off on making an announcement until the budget and other important state work is resolved.

“It’s the best-case scenario for moving forward with his presidential campaign. It removes this issue as a distraction during this crucial time,” said Brigid Harrison, a professor of political science and law at Montclair State University.

Public-sector unions and state Democrats voiced disappointment, but vowed to keep fighting.

Labor leaders and state Democrats said they would explore putting a ballot question before voters guaranteeing that future pension payments be made. They also didn’t rule out taking the matter to the U.S. Supreme Court, though some said there were concerns about how long that could take.

“I support anything that it takes to get it done,” said Senate President Stephen Sweeney, a Democrat, when asked about taking the case to the Supreme Court.

The nation’s highest court has considered state contractual issues in the past, but it currently takes far fewer cases of this kind and typically only those with broad scope, said Robert Williams, a professor of constitutional law at Rutgers University-Camden.

Two credit-rating firms wrote Tuesday that the ruling was good for New Jersey’s budget in the short-term, but it would likely further strain the state’s weakened fiscal standing in the future. The state’s credit rating has been downgraded nine times under Mr. Christie’s watch, in part, due to New Jersey’s underfunded pension system.

The decision “is not a reason for celebration from a credit standpoint,” Standard & Poor’s wrote.

New Jersey’s pension system, which serves some 773,000 current and retired state workers, faces a funding shortfall of more than $37 billion. New Jersey makes its annual pension contributions at one of the lowest levels among the 50 states.

In the closely watched case, the New Jersey Supreme Court found the Christie administration didn’t neglect its contractual obligations in cutting $1.6 billion that would have gone into the pension system from the state’s $33 billion budget for the fiscal year that ends June 30.

The court’s majority, writing in a 5-2 decision, found the state needed to honor its obligations to retirees, but that a pension law signed by the administration wasn’t an enforceable contract.

Deciphering how to fund the pension system under the current law was a matter left for the political branches of government, the justices wrote.

Still, the majority took the administration to task for failing to provide the obligated pension funding, writing the move resulted in a loss of public trust that was “staggering.”

“That the state must get its financial house in order is plain,” they wrote in the 68-page opinion.

In their minority opinion, the dissenting justices wrote that the decision not to enforce the law would have “far-reaching, negative consequences.” They pointed to instances when Mr. Christie referred to the law as a contract, signaling its binding nature.

Mr. Christie was out of New Jersey on Tuesday for a series of political events in New Hampshire, home of the first-in-the-nation presidential primary. In a statement, he called the ruling a victory for taxpayers and for “limited, constitutional government.”

Mr. Christie said it was time to rekindle negotiations over further benefit cuts to make the system sustainable.

Mr. Christie’s proposed $34 billion budget for the fiscal year beginning July 1 included a $1.3 billion pension payment. The administration had been expected to contribute about $3 billion for pensions.

Democrats have pledged to make the full pension payment by imposing a tax increase on wealthy residents. Mr. Christie has said he wouldn’t raise taxes.

Mr. Sweeney said he expected to introduce a budget proposal supported by Democrats shortly.

Earlier this year, Mr. Christie endorsed the recommendations of a commission he established that urged additional cuts to the benefit system for workers. In exchange, Mr. Christie would push for a constitutional amendment requiring the state make annual benefit contributions.

State Republicans said the court ruling should give the commission new latitude. Mr. Sweeney said he didn’t support the panel’s changes, and getting an amendment on the ballot this year appeared unlikely, according to Tom Healy, chairman of the commission.

“I think we have run out of time,” Mr. Healy said.
Lastly, Samantha Marcus of NJ.com reports, Will court ruling cause more harm to ailing N.J. pension system?:
While a clear victory for Gov. Chris Christie's administration, the state Supreme Court's ruling striking down workers' rights to pension funding may push an already vulnerable public worker retirement system deeper into debt, some warned.

Christie's landmark pension reform, signed into law in 2011, was a key move in battling growing pension liabilities that were putting state budgets into turmoil.

The package was expected to save the state $120 billion over three decades through its combination of suspended cost-of-living increases for retirees and increased contributions from the state and employees.

Christie and more than a dozen labor unions have been in and out of court over the past year in a tug-of-war over billions of dollars in pension funding. The high court ruled Tuesday that Christie cannot be forced to follow the terms of the 2011 law.

The court's ruling means billions of fewer state dollars are going into the pension system, state Senate President Stephen Sweeney (D-Gloucester) said Tuesday. And in addition to the lost contributions, the state will lose interest on that money, he noted.

"It will cost billions, billions more in a few years," he said. "The governor won't be the governor. I might not be the senate president. But someone is going to be standing here holding the bag. ... where it won't be 7 percent of 10 percent of your budget, it'll be 30 percent of your budget."

In additional to employer and employee contributions, the third leg of pension funding is generated from investment returns. New Jersey's system is built on a 7.9 percent assumed rate of of return.

The state's portion of the pension liability — the gap between the money the state has on hand versus what it would cost to fully fund benefits for future and current retirees — grew in 2014 to $40 billion. The ratio of assets to liabilities slid from 55.6 percent to 51.5 percent.

Christie's $2.4 billion in pension funding cuts last spring tacked on $4.2 billion to the state's unfunded liabilities over the course of five years.

Each year the state puts off payments sets it back another $250 million to $500 million in pension debt, said Wendell Steinhauer, president of the New Jersey Education Association, New Jersey's largest public union.

"There is only one way to fix the pension system," he said, "and that's put more money into it."

Wall Street rating agencies reacted to the court ruling Tuesday, calling it a boon to the state in the short-term, relieving the pressure to find cash fast, but the freedom from the law's payment schedule is a potentially dangerous long-term outcome.

"It will most likely weaken the state's liability profile, which is not a reason for celebration from a credit standpoint," Standard & Poor's said in a statement.

Moody's Investors Service adds that the ruling "perpetuates severe pension underfunding and rapid growth of state liabilities."

New Jersey's credit rating has been downgraded a record nine times under Christie, and its A2 credit rating by Moody's Investors Service is the second lowest of any state. Agencies consistently single out the state's pension crisis for the downward spiral.

A spokesman for the treasurer's office did not immediately respond to a request for comment.

Tom Healey, the head of Christie's special pension commission that recommended far-reaching reforms to the system, disagreed, saying the ruling will mean "zero" for the pension fund.

"There isn't any more money to put in the fund this year anyway," he said. "It has no economic force."
In February, I covered overhauling New Jersey's pensions, stating the following:
[...] New Jersey isn't Wisconsin in any way, shape or form. State of Wisconsin Investment Board is one of the best state pensions in the United States because they got the governance right and are following Canadian funds in managing more of their assets in-house.

By contrast, New Jersey's Division of Investment outsources most of their pension assets and doles out huge fees to private equity funds and hedge funds, one of which employs Gov. Christie's wife. Also, just like elsewhere, there's way too much political interference in their state pension, which virtually ensures mediocre performance over a long period (don't look at the last four years, a monkey could have outperformed in this environment just over-weighting equities).

More worrisome, I'm against these so-called "hybrid" plans because they are nothing more than defined-contribution (DC) plans in disguise placing the onus of risk entirely on members of these plans. And the brutal truth on DC plans is they're far less secure and much worse than DB plans.

Also, while I believe in shared-risk plans if they're done right, the sad truth is converting more public sector workers from DB into DC or hybrid plans is bad economic policy which will only ensure more Americans will retire in poverty.

Importantly, this isn't a conservative or liberal issue. Good pension policy that bolsters defined-benefit plans is good economic policy. The benefits of DB plans are grossly under-appreciated, especially well-governed ones which operate at arms-length from the government.

This is why I'm happy to see New York City is contemplating setting up a pension plan for private workers. As Bloomberg's Megan McArdle notes, details are still sketchy as to whether it will be a DC or DB plan but it will mean people will have to save more now to enjoy a safe retirement later (I disagree with her facile dismissal that "each type has its benefits and drawbacks,' because she doesn't understand the the brutal truth on DC plans).

All around the United States, we're witnessing major problems in public pensions. Last week, I discussed why Chicago and Tampa are the next Detroit. On Tuesday, I read a Bloomberg article on how Kansas and Kentucky may borrow billions to invest in cash-strapped pension funds, undeterred by warnings the practice risks driving up taxpayers’ bills to retirees. Keep in mind, Kentucky is in an even bigger pension mess than Illinois, which speaks volumes on just how dire their situation is.

And how are politicians responding to their pension mess? They're basically ignoring the problem or coming up with dumb solutions which will exacerbate pension poverty down the road and weaken the economy of the United States. This is certainly the case in New Jersey, Illinois,  Kentucky, Kansas and other states struggling to slay their pension demon.
New Jersey is a pension hellhole. With barely half the assets needed to cover liabilities, the state pension is effectively insolvent and running on fumes. By failing to properly top it up over the years, successive governments have created this mess and Gov. Christie's proposals and Pyrrhic victory will only make matters worse, which is why credit rating agencies are warning of further pain ahead and why investors are dumping New Jersey's debt.

Having said this, I'm not in favor of the unions and Democrats' proposal to "tax the rich" to make these pension contributions. Liberals love taxing people but when it comes to public pensions, there is no appetite for taxes because it will not address the structural problems plaguing them.

There is only one solution to this pension mess, introduce a shared risk plan and improve the governance of the state pension fund, which has far-reaching implications. Unfortunately, New Jersey is just one of many delusional U.S. pension funds that thinks it will invest its way out of this mess.

It can't, especially if deflation creeps into the economy, decimating pensions. Even if reflation comes back with a vengeance, which I highly doubt,  it won't be enough to make a big difference for New Jersey's state pension and many other underfunded state pensions. These pensions are in such dire straights that only tough political decisions and shared sacrifice will help save them from disaster.

By the way, take the time to read Frances Denmark's latest in Institutional Investor, Chris Christie takes heat For Hedge Fund Donations. Christie's relationship with hedge fund managers is a topic of great interest, especially since New Jersey's Division of Investment outsources most of their pension assets and doles out huge fees to private equity funds and hedge funds, one of which employs Gov. Christie's wife.

And in case you're wondering, among the richest residents of New Jersey are hedge fund gurus David Tepper of Appaloosa Management, Leon Cooperman of Omega Advisors and Larry Robbins of Glenview Capital Management. They're all multi-billionaires and Cooperman along with Paul Singer and Dan Loeb (two other hedge fund titans) have all donated to the Republican National Committee. I'm not sure if Tepper and Robbins have donated to the RNC but I'd be curious to know if the state's pension fund invests in the funds of all these hedge fund gurus.

So what? Who cares about political contributions? Hedge fund managers have a right to contribute to Republicans or Democrats just like everyone else. Unfortunately, it's not that simple, and when you mix politics with hedge funds and private equity funds, you perpetuate the worst possible governance for state pensions.

Below, State Senate President Stephen Sweeney joined a group of union leaders Tuesday to bash the state Supreme Court's ruling that Gov. Chris Christie has the legal right to slash billions in public worker pension payments, calling it an "outrageous" decision that hurts hundreds of thousands of government employees.

If you think things are bad now, wait, New Jersey's pension war is just beginning, and my fear is that just like Detroit and Greece, the beneficiaries of the state's pension will bear the brunt of savage cuts.

No comments:

Post a Comment