Opinion: The Pension Pit
BY MICHAEL P. RICCARDS
Michael P. Riccards is executive director of the Hall Institute of Public Policy in New Jersey. Riccards is a former college president and a presidential scholar who has authored 15 books, including “The Ferocious Engine of Democracy – A History of the American Presidency.”
In May 2009, Fortune magazine decided to give a close look at the question of the “public pension bomb.” Fortune argued that for years the states have shortchanged the retirement programs of public employees. The unfunded liabilities have been compounded by huge investment losses; according to a 2006 Deloitte study: “Everything is coming together to create a crisis.”
Fortune, of course, looked for a case study of one state where matters are “dire” – and up came New Jersey. In June 2008, Fortune reported that New Jersey’s public pension fund, one of the nation’s largest, had $34 billion less than its obligations. Since then, the market value of the plan dropped from $82 billion to $56 billion.
The most recent figure from the Investment Council is that the total pension fund is at $72.6 billion as of Feb. 28, 2011, but the pension liabilities grew in 2010 by $8 billion to nearly $54 billion.
The last two governors have stopped contributing state monies to the fund. Gov. Jon Corzine made that shortfall one of his campaign themes back in 2005, but his plans and initiatives ran into major roadblocks.
The Fortune survey looked for the historical roots of this crisis, and those findings were very similar to our report on public pensions in 2009. In 1992, Gov. James Florio pushed through a reevaluation of the fund’s assets, and thus allowed the state to cut its pension contributions by more than $1.5 billion in 1992. His successor, Christie Todd Whitman, promised major tax cuts and to do that she pushed another “reform” act that allowed the state to reduce state and local contributions to the fund by nearly $1.5 billion in 1994 and about the same in 1995.
Turning to the market
In order to make up for “lost ground” without more revenue, the state leaders went heavily into the market. In 1997, New Jersey sold $2.75 billion of bonds paying 7.6 percent interest, putting the proceeds into the pension funds to be invested. Whitman pledged that the plan would save taxpayers about $45 billion. The fund instead earned less than 6 percent annually.
Then in 2001, Democrat Gov. James McGreevey turned over more control of the fund to professional money managers. The fund put more money into the hands of Wall Street professionals and into diversification in alternative investments such as hedge funds and private equities.
But it took time to implement that strategy, and money began to get into alternatives in 2006, just before the onset of a massive bear market.
The New Jersey pension decline has “more or less traced the broad stock market’s, the real problem is underfunding,” the Fortune authors concluded.
As obligations grew, New Jersey politicians increased public worker benefits. In 1999, the state allowed local police and firefighters to collect pensions equal to 50 percent of their pay after 20 years of service. In 2001, the state increased benefits by 9 percent, which added another $4.2 billion in liabilities.
Recession forces cutbacks
Corzine did put $1 billion in the fund in 2007, and another billion in 2008. But he had to cut back during the major recession, and he allowed a pension holiday, which meant that municipalities could skip their con
tributions for 2009 and maybe beyond.
He raised the retirement age to 62, increased salary requirements for pension eligibility, increased employees’ contributions and capped pension income.
But the gaps between liabilities and assets remain enormous, and makes New Jersey into a basket case study, as Governor Christie once described it.
Corzine criticized, quite rightly, the neglect of the state’s obligations and made a major commitment to fund the full debt. He proposed a courageous policy of massively increasing tolls on some of New Jersey’s major roads to a level that caused a public outrage.
He and the Legislative leaders backed off.
Initially, Corzine included monies for the pension system in his budgets, but not really enough to meet the ongoing deficit.
But then facing the major economic dislocations of 2008-2009, the governor encouraged municipalities and other entities to postpone payments to the pension system and cut state payments as well.
Governor Christie has followed suit.
Reforms have become the new watchword for pension control. First, a public employee should be allowed to contribute to the pension fund, and get credit for only one job based on the average of his or her normal annual salary (not overtime) over the five highest years. Jurisdictions and agencies in this state commonly award favorites with a huge number of overtime days to jack up the final base.
He or she should not be able to accumulate other pension contributions from other state jobs. Some state and local employees hold two or three, or even more, publicly funded jobs. Pensions should be based on one position only.
If a person retires from the state and comes back into public service, there should be no additional pension credit.
Frankly, people should not hold two or more public positions in the first place, even if they are not on pension — that practice was prohibited in 1787 in the national government by the federal Constitution.
Sick days are for sickness, not for a final payout. Vacation days should not be accumulated beyond one week on top of the normal vacation period. The practice of police chiefs and superintendents of schools, for example, retiring with six-figure buyouts of sick and vacation days, in addition to their generous pensions and medical care, is a gross abuse of public service.
In addition the state needs to pay more attention to its very generous medical coverage policy, which covers retired state employees as well as current ones. There is now some $66 billion in unfunded lifetime health benefits that are added to the pension mess. New Jersey is first in line with its irresponsible giveaways, now it must be first in line to fix them.