Taming New Jersey's 'Insatiable Beast'?

Samantha Marcus of NJ Advance Media reports, How did N.J. get into this pension mess?:

Some 800,000 people, working and retired, are beneficiaries of New Jersey’s pension system, a collection of funds going deeper into the red.

It’s a system that Gov. Chris Christie, in his State of the State address last week, called “an insatiable beast.”

In boom years, New Jersey leaders shortchanged the pension system, and those “sins of the past,” Christie said, “have made the system unaffordable.”

Fully funding the pension system this fiscal year would cost $3.9 billion, but Christie cut the pension payment to just $700 million to balance the budget — a move that landed him in court, battling an attempt by unions to force him to pay more.

Union leaders accuse the governor of going back on his word to have the state make full payments in exchange for higher contributions from workers. It’s a hot issue in Trenton made even bigger with Christie considering a White House run.

The governor has called for more changes to the system to bring down costs, and over the summer assembled a bipartisan commission to issue recommendations.

That commission, which has yet to release its final report, echoed Christie’s call for additional reforms.

Here’s a recap of what’s happening with New Jersey’s pension mess.

What went wrong?

New Jersey’s pension funds were flush at the turn of the 21st century. But since 1996, governors from both parties have been underfunding the system, making payments far below what actuaries recommend.

The state skipped payments altogether from 2001 to 2004, when the annual required contribution called for $2.8 billion. And while the state was taking a pension holiday, it increased benefits for employees.

Every time the state doesn’t make a full payment, it’s like paying only the minimum on your credit card bill while continuing to charge stuff. So while the ultimate cost of pensions grows, partial payments by the state in one year makes the next payment even bigger — and harder for the state to make. It’s multiplied like crazy for the last decade.

The stock market had a hand in it, too. New Jersey lost $20 billion in the dot-com bust between 2000 and 2003, according to the Hall Institute of Public Policy, and was knocked around again by the Great Recession.

Is it true that Christie has contributed more than any other governor?

After skipping a $3.1 billion payment in fiscal year 2011, Christie contributed $484 million in 2012, $1 billion in 2013 and $696 million in 2014 — more than any of his five predecessors. He’s expected to make a $681 million payment this year.

Former Gov. Christie Whitman’s payments totaled roughly $1 billion, while the state contributed $100 million under James E. McGreevey and $2.1 billion under Jon Corzine.

But Christie’s payments are still a fraction of what is needed to keep the pension system from piling up even more debt.

What did the 2011 pension law do?

The Legislature adopted and Christie signed into law a pension reform package to gradually increase the state’s pension contribution over seven years until it reached the full annual required contribution.

Employees had to make concessions too: the law raised the retirement age, suspended cost-of-living increases for retirees, and required workers to contribute more toward their pensions and health benefits.

The contribution rate for workers enrolled in the Public Employees’ Retirement System and Teachers’ Pension and Annuity Fund increased will increase from 5.5 percent to 7.5 percent over seven years.

Police and firemen’s rates increased from 8.5 percent to 10 percent of pay, and state police’s contribution jumped from 7.5 percent to 9 percent. Judicial employees will phase in an additional 9 percent of their salary.

I thought those changes were going to save the system. What happened?

The state got bad news last spring, when tax collections came in much lower than the Christie administration expected, blowing holes in the previous and current fiscal years’ budgets.

Christie reduced the pension payment for the fiscal year that ended June 30 from $1.6 billion to $696 million and the payment for the current fiscal year from $2.25 billion to $681 million.

The remaining payments are enough to cover employees currently receiving benefits, but it doesn’t leave anything for the unfunded liability.

But even before the revenue emergency, Christie was warning that pensions and benefits needed to be revised again because their costs would swallow up a bigger chunk of the state budget each year.

The unions have taken Christie to court over both pension cuts, and lost the first round in June. Superior Court Judge Mary Jacobson said the fiscal emergency backed the governor into corner, and making the full pension payment would produce “severe and immediate impacts on vulnerable populations.”

The unions have taken Christie to court over both pension cuts, and lost the first round in June. Superior Court Judge Mary Jacobson said the fiscal emergency backed the governor into corner, and making the full pension payment would produce “severe and immediate impacts on vulnerable populations.”

Christie’s administration challenged the legality of the 2011 pension law during a hearing Thursday, with lawyers calling it unconstitutional and saying Christie doesn’t have to pay. Jacobson has not issued a ruling.

How bad is it?

New Jersey faces $37 billion in unfunded pension liabilities, according to a report from Christie’s pension commission. Each household would have to write a check for $12,000 to close the gap, the commission said.

An actuarial rule change that assumes less optimistic investment returns doubled the unfunded liability figure to $83 billion, and pushed the dates that two of the largest pension funds will go broke to 2024 and 2027.

The state has $40 billion in assets, covering 32.6 percent of its $122.8 billion in liabilities.

How does that compare to the rest of the country?

New Jersey’s pension shortfall ranks fourth worst in the country, behind Illinois, Connecticut and Kentucky.

Two-thirds of states contributed at least 90 percent of full funding in fiscal year 2013, according to Moody’s. New Jersey contributed 28 percent.

What about unfunded health care benefit liabilities?

Retiree health benefits add another $53 billion in unfunded liabilities.

Those costs consume 8 percent of the state budget, and according to Christie’s commission, could grow to 14 percent of the budget within 10 years.

Part of the problem, the commission says, is that 80 percent of public workers are enrolled in what would be considered a “platinum” plan under the Affordable Care Act.

“The state health programs provide generous benefits with little pricing incentive for employees to select anything but plans with the most comprehensive coverage and highest cost to the state,” the report says.

“In addition, the commission noted that beginning in 2018, the federal government will impose a 40 percent excise tax on such plans that would cost the state another $58 million that year and $284 million by 2022.

What about the municipalities?

Local government portions of the pension plans are much better funded than the state’s. Moody’s Investors Service said late last year that these local governments “currently are not affected by the state’s severe pension underfunding problem.”

Local funding for the Public Employees’ Retirement System is 73.9 percent, and it’s 77 percent for the Police and Firemen’s Retirement System — the two state and local government shared plans. The state government portions are funded at 46 percent and 48.6 percent, respectively.

“Cities and counties have historically contributed to PERS and PFRS at much higher rates than the state,” Moody’s said. “These local governments’ annual rates determined contributions., determined by state statute, have ranged from 84 percent to 92 percent of (annual required contribution) in recent years, versus the state’s very low 4 percent to 28 percent.

What’s next?

Trenton waits for Christie’s commission to make its recommendations, and Jacobson’s ruling on whether or not Christie had the right to knock out $1.5 billion from the current budget. With his eyes on the White House, Christie has been taking aim at public employee pension and health benefits. Democrats have said they won’t discuss making workers pay more without guarantees that the state will make full payments, perhaps by changing the state constitution.

I commend Samantha Marcus for writing this excellent article which discusses the historical developments that have led to New Jersey's pension mess.

Importantly, the biggest driver of New Jersey's pension deficit is successive state governments that failed to contribute the required amount.

In an other article, David Sirota commented on how New Jersey paid fees to a well-known hedge fund, Angelo Gordon, which hired Mary Pat Christie, the wife of Gov. Chris Christie back in 2012 as a managing director. She now earns $475,000 annually, according to the governor's most recent tax return.

As Sirota notes:

The disclosure that New Jersey taxpayers have been paying substantial fees to a firm that employs the governor's spouse -- years after state officials said the investment was terminated -- emerged in documents released by the Christie administration to International Business Times through a public records request.

A spokesman for the New Jersey Treasury Department, Christopher Santarelli, said via email that while New Jersey “ended its investment” with Angelo Gordon in 2011, the payments were legitimate because the state continues to hold an “illiquid” investment in the firm. Christie officials declined to disclose details of what exactly that illiquid investment is and the justification for continuing to pay fees to Angelo Gordon. The governor, Mary Pat Christie and executives at Angelo Gordon all declined to comment.

Pension overseers and financial experts characterized the appearance of the arrangement as deeply troubling. They saw it as symptomatic of a lack of transparency plaguing the management of public pension funds at a time when states and municipalities are entrusting increasingly hefty sums (and paying substantial fees) to Wall Street managers.

“This is extremely problematic,” Tom Bruno, the chairman of the board of trustees of one of New Jersey's three major pension funds, said. “This governor talks about what he is supposedly doing to help the pension system, but the possibility of him and his family deriving any kind of personal benefit from a deal like this raises some truly serious ethical red flags.”

I discussed these and other factors impacting state pension deficits in my last comment on New Jersey's pension GASBing for air:

The biggest factor explaining the pension deficit in New Jersey and other states is how successive state governments failed to make their pension contributions, using the money to fund other things (no doubt in an effort to buy votes).

But there are plenty of other factors that didn't help, like lack of sensible pension reforms, lousy investment performance and poor governance.

On this last point, Michael B. Marois of Bloomberg reports, California Pension Fund Bonus Payouts Climb 14% From Prior Year:

The $300 billion California Public Employees’ Retirement System, the largest U.S. public pension, paid $9 million in bonuses last fiscal year, up 14 percent from a year earlier as earnings exceeded benchmarks.

The fund, known as Calpers, paid $8.7 million in bonuses to investment staff in the year ended June 30, and almost $300,000 to four non-investment executives, according to data provided by the system. The rewards are based on three-year performance verses a benchmark, as well as the earnings of each asset class and individual portfolios, said spokesman Brad Pacheco.

“These awards are part of the overall compensation we provide to recruit and retain skilled investment professionals needed to ensure success of the fund,” Pacheco said.

Public-pension funds are recouping investment losses suffered during the 18-month recession that ended in June 2009, which wiped out a third of Calpers’ value. Still, the crisis left U.S. pensions short more than an estimated $915 billion needed to cover benefits promised to government workers. Taxpayers have been asked to make up the shortfall.

The biggest bonus earner was Ted Eliopoulos, the chief investment officer who recorded a $305,810 bonus last year in addition to his $412,039 base pay.

Top Job

That bonus was paid when Eliopoulos was acting chief investment officer after his predecessor Joe Dear died in February from cancer. Prior to that, Eliopoulos headed the fund’s real estate portfolio. He now earns $475,000 in base pay after he was tapped for the top investment job in September.

Eliopoulos announced in September that the fund was divesting all $4 billion it had in hedge funds, saying they were too expensive and too complicated and not worth the returns.

The pension fund earned 18.4 percent last fiscal year, 12.5 percent a year earlier and 1 percent in 2012. It estimates it need 7.5 percent annually to meet its long-term obligation to pay benefits promised to state and local government workers.

Calpers is still short $103.6 billion needed to cover those promises based on market value as of June 30, 2012, the latest figure that was available. That shortfall is up 19 percent from a year earlier.

The California fund says it must grant bonuses to help compete with the pay that employees could make if they went to work on Wall Street. Pacheco said spending money on in-house investment management saves about $100 million a year that otherwise would be paid to Wall Street in fees.

Wall Street bonuses, which rose 15 percent on average last year to $164,530 -- the highest since 2007 -- may climb again as a result of payments deferred from previous years, New York Comptroller Thomas DiNapoli said last month.

Four executives outside the Calpers investment office were paid a total of $295,930 in bonuses last year, the fund said. Anne Stausboll, chief executive officer, got $113,679; Chief Actuary Alan Milligan earned $75,748 and Chief Financial Officer Cheryl Eason was paid $89,703, almost double a year earlier.

Calpers paid a total of $7.9 million in bonuses in the prior fiscal year.

Compensation is part of pension governance and if you ask my expert opinion, CalPERS' compensation is fair and accurately reflects the market, their performance and their ability to attract and retain professionals to manage billions. The only thing I would change is base it on four-year rolling returns, like they do at Canadian public pension funds.

All this hoopla on compensation at U.S. public pension funds is totally misdirected. I happen to think most U.S. public pension fund managers are grossly underpaid, just like I think some Canadian public pension fund managers are grossly overpaid (read my comment on PSP's hefty payouts and the subsequent ones on its tricky balancing act and its FY 2014 results which were likely padded by skirting foreign taxes).

Getting compensation right is critical to the long-term health of any public pension fund but supervisors of these funds should make sure they're paying their senior investment staff properly based on benchmarks that truly reflect the risks they're taking. I believe in paying people for performance, not for taking dumb risks to trounce their silly benchmark.

I stand by every word in that comment and think too many people are losing focus when it comes to the coming war on pensions. We need to introduce proper reforms on public pensions and bolster them, not spread myths and misinformation to destroy them, replacing them with terrible defined-contribution plans which will expose millions more Americans to pension poverty.

Below, Gov. Chris Christie delivered the 2015 State of the State Address to 216th Session of the N.J. State Legislature, Tuesday January 13, 2015 in Trenton. In his speech Christie highlighted his administration’s work in pension reform and called the sate pension an "insatiable beast."

It's ironic how Gov. Christie portrays New Jersey's pension given the conflicts of interest with his wife's employer expose their insatiable greed to profit off this so-called beast. He should be much kinder to his state's pension, it's been very generous to his family.