back

Pension Funds in New Jersey Face Shortfall

By: Laura Mansnerus
New York Times, July 26, 2002

RENTON, July 25 Just as New Jersey has patched up its worst fiscal mess ever, the state is staring at another: next year an enormous payment for its shrinking pension funds will come due.

The total will approach $1 billion, by the estimates of some state officials and consultants, most of it in new spending. John E. McCormac, the state treasurer, said the shortfall would be "much worse" than he expected just a few months ago, although he said he would not know what new contributions would be needed until the most recent investment returns were analyzed.

Soon, Mr. McCormac said, the state will be able to calculate the damage done so far by a bold plan in the 1990's that borrowed money to finance the funds with stock market profits.

The dismay and blame surrounding the pension funds are directed mostly at former Gov. Christie Whitman, who now more than ever is accused of mortgaging the state's future to pay for the tax cuts that propelled her to national prominence.

"You think what's going on in the business world is bad?" said Judith C. Cambria, a fiscal policy specialist who wrote a report on the state's fiscal trends over the last decade. "The last administration used every trick in the book."

While criticisms of her administration have mounted with New Jersey's escalating budget problems, Mrs. Whitman has continued to defend her fiscal management.

"So much of it has gotten personal," she said in a recent interview with The New York Times.

More recently, as the stock market has stagnated, pension funds all over the nation have lost money. But in New Jersey, said Tom Vincz, a spokesman for the Treasury Department, "a perfect storm is coming up now."

The market plunge has cost New Jersey's funds $22 billion over the last two years. The state will have to resume regular contributions, to the tune of hundreds of millions of dollars, after skipping payments for several years. And pension costs were bumped up after the State Legislature granted 9 percent increases to teachers and retired state workers before last year's elections.

What's more, the state must pay $160 million in the current fiscal year, which began July 1, on the $2.75 billion in bonds that the state issued to replenish the funds in 1997. The payment schedule was set up to start with small amounts and balloon later.

The idea five years ago was to wipe out a pension-fund deficit by floating bonds, invest the assets in a galloping stock market and make more on the investments than it cost to pay off the bonds. The plan was purposely overfunded so that the state could skip payments for several years.

The returns, however, have not covered the 7.64 percent annual interest on the bonds although they might over the life of the bonds.

"I believe it was in essence arbitrage, and I don't think the government should engage in arbitrage," said State Senator Leonard Lance, who as a member of the General Assembly was one of the few Republicans to oppose Governor Whitman's proposal. "Unfortunately, I believe I've been proved right on this."

Even before Gov. James E. McGreevey took office in January, he blamed his Republican predecessors for the growing budget gap. But the pension funds were not even a factor for the 2003 fiscal year, because by law no contribution was scheduled until 2004.

While the pension funds have lost value, there was no way to anticipate the market losses of the spring and summer.

When Moody's Investors Service downgraded New Jersey's bonds in March, it predicted that in 2004 the state would have to start making pension payments of "several hundred million dollars per year." Tim Blake, the author of the report, said he had since heard estimates of $1 billion.

Over the last two years, the state's investment portfolio, most of which is pension funds, declined from $94 billion to $72 billion. About 60 percent of the portfolio is invested in stocks.

Ms. Cambria, the fiscal policy specialist, said that while the recent losses were alarming, "It's absolutely essential that we realize we are seeing the consequences of irresponsible action over a long period of years."

In the 1990's, the state's long-term debt rose to $15.7 billion from $4 billion. Of that, $2.75 billion came from the 1997 pension bond sale, the state's largest debt offering ever.

The bond issue allowed Mrs. Whitman to balance her election-year budget by drastically cutting the state's required contribution to the pension funds. The problem was "unfunded liabilities" that is, money that was supposed to be in the pension funds and was not dating to 1994, when the state started deferring its payments.

When the governor proposed borrowing to raise the funds and investing the money, the idea was wildly unpopular. No state had ever issued bonds to cover pension costs, and even the Republican chairman of the Senate Appropriations Committee, Robert E. Littell, pronounced it a "wacko idea."

But Mrs. Whitman prevailed, and critics were shushed when the bonds sold in an eager market at an average interest rate of 7.64 percent, instead of the 7.78 percent that the state had expected.

Over the next two years, the pension system's returns averaged 19.3 percent. But by Jan. 1, 2002, the total return had dropped to 7 percent, and losses since then have depressed returns further.

McGreevey administration officials acknowledge that the funds have performed worse than most public pension plans in recent months. Mr. McCormac, the state treasurer, said New Jersey was one of just two states that use in-house employees to manage all investments. But he dismissed reports that some administration officials were considering hiring private brokerage firms to manage the funds.

FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Action on Aging distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.