New Jersey has the nation’s worst-funded public-employee pension system, and in a bid to help put it on a firmer footing, state lawmakers last week overwhelmingly approved a bipartisan bill that calls on the state to begin making pension contributions on a quarterly basis. But the leaders of the board that oversees investment policy for the pension system are divided on whether lawmakers should be going even further to address the state’s pension-funding problem.
Tom Byrne, chairman of the New Jersey State Investment Council, said yesterday that he supports the legislative proposal advanced by lawmakers that would see the state shift to a schedule that would break the pension contribution up into quarterly installments instead of just a single year-end deposit.
But labor representatives who serve on the panel say, while they’re also in favor of the change to quarterly payments, they want to see more aggressive action to bring the pension system back to better health. They’re calling for the quarterly payment schedule to be written into the state constitution, which carries more force than a simple state law, and they want the payments themselves to be based off actuarial assessments instead of what the state budgets for the pension system on an annual basis, which typically falls far short of what the actuaries calculate.
Their comments came yesterday following a public meeting of the investment council in Trenton, the first to be held since lawmakers overwhelmingly passed the quarterly payment legislation last week in the wake of the state’s latest credit-rating downgrade. That downgrade, issued by S&P Global Ratings, was largely attributed to the pension system’s huge unfunded liability, which the state measures at $44 billion but others estimate to be much larger.
Under the state’s current practice, the budgeted pension contribution is held back in its entirety until the very end of the state fiscal year, which runs on a July 1-June 30 schedule. That often makes the funds earmarked for the pension payment an easy target for midyear budget cuts. And since the pension system is professionally managed, making quarterly payments should mean more money is deposited into the investment accounts sooner, which in turn should help to boost returns throughout the full fiscal year.
Byrne, who is also managing director of Byrne Asset Management, said he supports the proposal to require quarterly payments as a matter of law because it makes the pension contribution “a more concrete part of the appropriation process.”
“I think this will make legislators take the pension appropriation more seriously in the budget process, so I think that’s good,” Byrne told reporters following the investment council’s meeting.
He cautioned against putting too much stock in projections that have been put forward by bill sponsors in recent weeks, but also said making deposits earlier in the fiscal year should lead to better overall returns.
But Adam Liebtag, the investment council’s vice chairman, said he would like to see the quarterly payment schedule established through the state constitution, which is something lawmakers proposed doing earlier this year before pulling the proposal back at the last minute amid fears that it would be rejected by voters. Putting it in the constitution would prevent future governors and lawmakers from shorting the pension payments even in years when the budget is tight, which has helped to create the funding problem in the first place.
Liebtag, a leader of the Communications Workers of America labor union, said he would also like to see the payments themselves calculated using the actuarial assessments and not just the amounts set aside each year in the annual state budget. For example, the current state budget calls for a $1.9 billion state pension contribution, which is well below the close to $5 billion payment that actuaries have called for.
“It’s a step in the right direction, but it’s not the be-all and end-all solution,” Liebtag said when asked about the quarterly payment legislation.
Lawmakers right now are waiting to see what Gov. Chris Christie is going to do with that legislation, which, if approved, would go into effect for the 2018 fiscal year (July 1, 2017-June 30, 2018). The governor has vetoed similar measures in the past, but legislative leaders say they expect him to sign this version due to several changes that they made.
The new wrinkles include allowing the payments to be made at the end of each quarter of the fiscal year. That is intended to give the state more time to generate revenue to cover the payments, especially in the first two quarters when tax collections typically come in more slowly than they do at the end of the fiscal year. Another change would allow the pension system itself to cover any short-term borrowing costs that would be required if the state doesn’t have enough cash on hand to make any of the quarterly payments.
The pension-system assumes a 7.9 percent rate of return each year, but the investment returns for the current fiscal year have so far come in at just over 2 percent. Still, Byrne said any short-term borrowing costs that the pension system may have to take on to make a quarterly payment should be minimal.
“Our returns should be positive and should certainly in general be well ahead of the short-term money market rates,” he said.
Also during the meeting yesterday, Ruchir Sharma, Morgan Stanley’s chief global strategist and head of emerging markets, told the council members they should expect only slow economic growth of about 2 percent over the next three to five years.
“De-globalization is the new reality,” Sharma said. “We’re seeing the world is turning a bit more inward.”
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