UPDATE: New Jersey had the most-underfunded pension
system of any U.S. state this year, with the government in Trenton kicking in
just 28 cents for every dollar needed to balance spending liabilities with
income, Moody's Investor Service says in a report today by a team of analysts
led by John Lombardi. Two-thirds of states put in at least 90 cents for every
dollar of "actuarially determined contributions."
EARLIER: Yesterday's departure of Robert Grady, a
longtime adviser to New Jersey Gov. Chris Christie, as chairman of the State
Investment Council, which oversees the underfunded New Jersey state workers'
and teachers' pension system, provoked an outpouring of praise from Christie
financial managers. (See my colleague Maddie Hanna's article here.)
You'd never know, from the official statements, that the
state's pension deficit has ballooned under Christie-era policies. The assets
set aside to pay current and future retirees trail the liabilities actually
owed to current and future pensioners by $42 billion, according to "Truth
and Consequences," a report prepared by Christie's own Treasury Department
in September. This deficit is twice what it was back in 2007; it's approaching
the high it briefly hit during the financial markets collapse that bottomed in
2009; it has grown worse by $6 billion over the last two years, even as U.S.
stock values jumped 16% in 2012, and 32% in 2013.
On a long-term basis, New Jersey now has just over 50
cents set aside for every dollar it owes pensioners, Treasury reports. Only the
retirement systems of Illinois, Kentucky and Connecticut are more broke.
How did this happen? One, New Jersey politicians of both
parties have voted themselves and other public employees fat pensions (by
private-sector standards) without setting aside money to pay for them --
a tradition Christie has embraced and expanded.
Two, New Jersey has invested heavily in expensive private
buyout, real estate, venture and hedge funds whose profits have trailed
the stock market -- a process that has greatly accelerated under Christie and
Grady.
You could say the second point -- investments -- is the
Investment Council's concern, while annual funding is a political question. But
if Grady is, as we're told, a close Christie friend and his adviser of 40
years, why hasn't he been able to convince the governor to do the fiscally
responsible thing and pay for what he's spending -- as most states are trying
to do?
New Jersey keeps digging a deeper hole -- it wouldn't be
so bad if hedge funds and other private investments were outperforming stocks,
but they've actually been posting lower, not higher, returns.
Still these investments have been lucrative -- for the
hedge fund managers and other wealthy private investors hired under Christie
and Grady, who collected more than $400 million in state fees last year, up
from less than $10 million a year in the mid-2000s -- even as some of these
same contractors donate to political causes that are near and dear to Christie
and other powerful politicians. See David Sirota's reporting for International
Business Times here and links to more
here.
Sirota, a onetime aide to Bernard Sanders, Vermont's
socialist Congressman, has documented similar political donations by Democrats
and Republicans in Chicago, North Carolina and other places. Sure looks like
the same billionaire fund managers who have been making fortunes from the slow
U.S. economy are also funding the politicians whose government pension agencies
help make them rich.
Christie Administration officials have called those
complaints purely political. But
New Jersey ethics examiners are reviewing questions about Grady's role raised
by Sirota's reporting and other accounts.
Grady is leaving under a cloud, state Sen. Shirley K.
Turner, D-Ewing, tells me. "Perhaps the timing is more than coincidental
given the fact the audit we’ve been expecting has yet to be released," she
says. "Hopefully the next person to fill the vacancy on the Commission
will be from New Jersey, and not have any conflicts of interest." A bill
she co-authored that would force the state to disclose all fees paid to
investment contractors, and ban all political donations by them, is pending in
the Assembly's State Government Committee. Says Turner, "We need to get it
enacted quickly to prevent any hint of political influence or conflict of
interest with future investments."
Christie administration officials have been fulsome but
also rather selective in bragging about the pension system's performance.
Treasurer Andrew Sidamon-Eristoff had this statement on Grady's departure:
"The robust performance of the Division of Investment over the last four
years and the professionalism exhibited by the State Investment Council during
Chairman Grady’s tenure are a testament to Bob’s character, dedication and wide
range of skills.
"While having been born and raised in New Jersey,
Bob is a resident of Wyoming and has received no salary for his volunteer
service, and he has not charged the State for any of his Council-related travel
expenses.
"During Bob’s tenure as Chairman of the State
Investment Council, which provides policy and governance oversight for the
Division of Investment, his record speaks for itself: In the last four fiscal
years, the New Jersey Pension Fund has achieved approximately $36 billion in
investment gains and income, increasing the market value of the pension fund by
over $13 billion while paying out over $34 billion to beneficiaries. Further, I
want to acknowledge his wisdom and proactive assistance in recruiting and
retaining outstanding talent at the Division.
"While we are sorry to see Bob’s service come to an
end, I am confident the guidance and example he has set for the Division of
Investment and the Council will continue to benefit the State for years to
come.”
Those are big impressive numbers presented by the
Treasurer -- totally absent the context that billions are flying out of the
pension system faster than they are flying in and that investment profits
didn't nearly cover increased pension checks and growing liabilities.
State Director of Investment Christopher McDonough adds:
"“It has been a pleasure working with Chairman Grady for the last four
years. He is a knowledgeable and astute investor who always made himself
available as a resource to the Division. Under his leadership as Chairman of
the State Investment Council and Investment Policy Committee, there has been a
focus on making decisions based solely on the merits, which has led to the
positive results the fund has achieved under his leadership."
Which begs the question of why government agencies allow
investment contractors to keep funding politicians and national political
committees. Doesn't that raise obvious questions about why donors are really
being hired and paid millions?
As I've reported before, McDonough deserves credit for
pointing out that, if investment managers weren't allowed to fund politicians,
government pension founds wouldn't be able to find enough managers to handle
all their billions.
Treasury also credited the following to Grady's account (to
which I have appended notes supplying context):
- - $36 billion in gains last 4 fiscal years for the State Pension Fund (still not enough to stop the fiscal deficit from growing)
- - Annualized return over last 4 yrs = 12% (trailing far behind the stock market)
- - FY 2014 (June 30) return: 17%, which is right on the large plan median (because those other states are falling behind, too)
- - Market value has grown by $13 billion last four years even though we distributed over $34 billion to beneficiaries (liabilities grew more).
- - Beat the assumed rate of return by over 4% a year for last four years, adding over $13 billion in value above assumed rate of return. (The "assumed" target rate of return is so low it would drive the system to insolvency within a few years, unless the state cuts benefits deeply, or start paying in the billions the law says Christie and other governors should have paid, and failed to, to keep pace with pension liabilities.)
The resolution passed by Grady's board goes on in a
similar vein:
"The members of the state investment council wish to thank Bob Grady for four years of outstanding leadership, during which time and under his leadership:
- "More money was earned for beneficiaries than in any similar time frame in history (too bad a lot more was spent);
- "We achieved investment returns that were 50% higher than what was expected by experts, thus adding $13 billion of unanticipated value to the funds and raising their value to $80 billion even while distributing $34 billion to beneficiaries (like saying, 'We lost the game, but at least we beat the point spread!');
- "Asset allocation decisions to increase the fund’s diversification, allowing it to perform well in a variety of market conditions, including moving funds out of low interest fixed income securities and into a variety of other asset classes, enhancing overall returns for beneficiaries while keeping New Jersey’s risk profile low (too bad those asset classes, such as hedge funds, tied the state's money up for years while underperforming the surging U.S. stock market);
- "The council maintained strict and disciplined adherence its mission “to achieve the best possible return at an acceptable level of risk using the highest fiduciary standards” (In fairness, they could have beaten every other state pension fund in America and still not become more solvent without adequate new state funding).
- "Communication with beneficiaries and others in public meetings and otherwise was open and cordial; We operated with a high degree of comity, and believe that our reputation for professionalism was enhanced. (We may be falling billions of dollars behind, but at leat we're nice about it.)
- "The members of the council acknowledge and appreciate Chairman Grady’s unique blend of outstanding investment and communication skills, which will be deeply missed. We are grateful for his leadership, will miss his warmth and wisdom and good humor, and thank him for his selfless and exemplary service."
All the focus is on internal targets, not the larger
problems that threaten the pension system's long-term solvency, future
taxpayers and retirees.
This is the kind of inward-focused mind-set that allows a
doctor to announce, "The operation was a success, even though the patient
died." It doesn't solve the problems the people need fixed.
Source: Philly.com
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