State Budget Contains First Appropriation for State Pension Funds in Many Years
Summer 2006
By: Mort Reinhart, Pension Consultant
Finally!
A State administration that recognizes that it has an obligation to fund the public retirement systems, rather than use them for balancing the State budget, has passed a budget that contains a contribution forthose retirement systems.
In the balanced budget that eventually emerged after a shutdown of State functions for almost a week, a contribution of $1.1 billion dollars was earmarked for the retirement systems. At the time this article was written, the estimated amount of that $1.1 billion to be contributed to the Teachers’ Pension and Annuity Fund was $665 million. The amount to be contributed to the Public Employees’Retirement System was not yet available.
When those contributions are made, they will mark the first time in many years that the State has actually contributed real money to the systems. It should mark the end of the gimmicks used by the past two administrations tobalance the budget by not contributing to the systems and using the money that should have been contributed to thesystems for other budget items.
Although the contribution in the budget is a considerable amount of money, it does not, by itself, make up for the shortfalls in contributions over the past nine years. It,does, however, signal that the Corzine administration is establishing a business–like approach to the funding of the retirement systems, and it provides both active and retired members of the retirement systems with the expectation that the retirement systems will no longer be a political football for balancing budgets.
In May, 2006, this column was devoted to the pension funding shortfall. It spoke of the methods used by the past two administrations to sidestep contributing to the retirement systems and how they and the press blamed everyone else (teachers and public employees, the Division of Investment, to name a few) for the shortfall "problem," while ignoring the fact that the State was not contributing its share. The column also pointed out that teachers and other public employees continued to contribute billions of dollars to the systems in all the years that the State failed to contribute to the systems.
Since it appears that the current State administration is determined to reverse the pension funding policies of the past two administrations, it is worth reviewing parts of the 2006 column and how we reached the point at which we find ourselves. That column stated the following about the attitudes and actions of the past two administrations:
"It is easier to blame the employees in the Division of Investment for poor investment results during the early years of this century, claiming that their investment philosophy of basically buying stocks and bonds of large American corporations (a small portion of the funds were invested in mortgages) and holding them was the wrong way to invest. They should have diversified into other, riskier, investments to improve the yields of the system, according to the current State Treasurer, who seems to forget that the pension system is supposed to provide retirement income to retirees and not be run as a mutual fund or a hedge fund for investors seeking to enhance their personal assets.
It is easier to blame the public employees for lobbying for increased benefits, while turning a blind eye when many political officials take advantage of their positions to increase their own pensions by doubling up on pensionable positions or by accepting high paying commission appointments (and therefore vastly improved pensions) after their political careers have ended.
It is easier to ignore the fact that between 1994 and 2000 the assets of the system grew from $36 billion to $85 billion. That was during the years that the stock market was soaring and the philosophy of the Division of Investment was paying huge dividends. Highlighting the loss of billions of dollars from 2000 to 2003 ignores the fact that the markets dropped precipitously during that period, wiping out billions of dollars of assets for every investor in America, including those managed by professionals.
"While some of these could be viewed as contributing to the retirement systems’ need for a significant infusion of money over the next few years, what really happened to exacerbate the situation is a tale of two administrations that saw the pension systems as a way to balance State budgets.
"First, the Whitman administration found a convenient way to reduce contributing new money to the systems by floating bonds in 1997 to meet its pension obligations. This eliminated a multi–million dollar liability from that year’s budget, but it created the need to contribute much larger sums in the future. (That future happens to be now.)
The idea in floating the bonds was that the investment returns of the retirement systems would be greater than the interest that would be necessary to pay bondholders. If that held true, the State would not have to contribute as much to the systems in future years because the increased investment return meant smaller State contributions. Unfortunately, it did not happen. The market began to drop and the returns of the retirement funds fell below the interest payments of the bonds. Then the Whitman folks pushed through legislation that permits the State to skip payments of new money to the retirement system if the available excess assets of the system exceed the required employer contributions. (They did for a number of years,which is why virtually no new money has been contributed during the last eight years).
Then the McGreevey administration convinced the legislature to pass a law that permits the State (and local employers) to pay only a portion of each year’s obligations over a five–year period. This law, much like credit card payments, started out with the obligations being 20% funded in the first year, 40% in the second year, etc. Under this scenario, the obligations will pile up in the fourth and fifth year and require much larger payments than if payments had been made on a level basis. But, since the available excess assets of the system exceeded the required employer contributions (see Whitman administration above), no new contributions were made to the system in the early years of this five year plan.
As a result of this political maneuvering, the State virtually stopped contributing new money to the systems after 1997, the year in which bonds were used to meet pension contributions.
During that same eight year period, the members of the TPAF (the educators of the State), contributed over $2.2 billion to the fund through their required payroll deductions.
Somehow, the writing press, the television anchors and the radio talk folks missed this point. That is probably because it is easier to bash the educators and other public employees by highlighting what the politicos disseminate rather than digging for the facts.
Hopefully, the philosophy of the new administration will correct the errors of the past two administrations and result in a sounder and less volatile retirement picture.