Dec. 8, 2017: The incoming administration of Governor-elect Phil Murphy — to which ex-Mayor Pete Cammarano is becoming chief of staff — will have an immediate crisis on its hands. Just like the last New Jersey governor.
That is figuring out how to fix the state’s $76 billion public pension system. New Jersey, like every other state, has a huge public pension fund that ensures retirement security for around 769,000 active and retired state workers like teachers, cops and firefighters.
The pension system, comprising seven different retirement funds, is one of the most underfunded pensions in the country. A bi-partisan commission tasked by outgoing Governor Christie pegged the system’s unfunded pension liabilities at $90 billion. The state Treasurer’s office says unfunded pension liabilities are $36.5 billion. This means the pension is somewhere between $36.5 billion and $90 billion short of funding all its future obligations.
Metuchen contributes to the state pension fund. The borough for 2017 budgeted a contribution of $1,032,478.16 to two funds in the state system, Public Employees’ Retirement System and the Police and Firemen’s Retirement System of New Jersey, according to the budget.
Unfunded pension liabilities increase for a few different reasons, including and most importantly the state shirking its obligations to put money into the system. New Jersey has been notoriously bad about contributing to the pension, well before the disaster of the Chris Christie regime. This year’s budget shows Christie funding 50 percent of its actuarially determined contribution — which is supposed to ramp up in subsequent years.
Christie also proposed earlier this year using proceeds from New Jersey state lottery ticket sales to fund the state pension.
In the absence of state funding, pensions try to make up shortfalls through investment return. That is a risky strategy dependent on the market — in good years that works but in recessions that strategy goes backward. Public pensions set a long-term target rate of return — in New Jersey’s case its 7.65 percent, recently reduced from 7.9 percent. This past fiscal year, the system beat that target, returning 13.07 percent, driven by strong performance in equities.
In the current low interest rate environment, New Jersey like other public pensions have to pursue riskier strategies to generate enough of a return to meet their obligations. This strategy pushes the pension fund to put money into strategies like private equity and hedge funds.
Since 2005, New Jersey’s pension system has been one of the more innovative investors to private equity. The return has been strong, but with that return comes high fees. In fiscal 2016, New Jersey paid $132.3 million in private equity fees and expenses — its most expensive asset class. For that cost, private equity returned 6.27 percent for fiscal 2016.
Murphy campaigned on a populist platform that included divesting the pension fund from private equity and hedge funds. It’s not clear how the system would accomplish that, being that investors in pension funds can’t simply extricate themselves like public stocks. Exiting private equity would take years and could involve losing money by selling too soon.
It’ll be interesting to see how it shakes out. But unquestionably, stabilizing the retirement system must be a priority for the incoming administration.