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NJ Public Pension Fund Returns Over 13 Percent, Outpacing Expectations

State expects to put $2.5 billion into pension system in 2018 fiscal year, still far short of what’s needed to restore it to good health

T. Byrne, State Investment Council
Tom Byrne, right, was re-elected chairman of the New Jersey State Investment Council in Trenton yesterday.

New Jersey’s public-employee pension-fund investments generated returns of more than 13 percent during the state’s last fiscal year, far outpacing the assumed rate of return for what is one of the nation’s worst-funded state retirement systems.

Adding to the good news for retired public workers from yesterday’s New Jersey State Investment Council meeting was word that the state was also able to make an initial $377 million pension contribution before the end of September, meaning it passed the first big test of a new law that calls for state pension payments to be made on a quarterly basis.

But that quarterly payment was still only a fraction of the amount actuaries say the state should be contributing to help restore the $75 billion pension system’s overall health. And by not making more robust contributions prior to the last fiscal year, the state’s investment-managers also missed out on a chance to take full advantage of booming market conditions in the face of an unfunded liability that last measured at least $50 billion.

Pension officials indicated earlier this year that they were expecting investment returns for the 2017 fiscal year to exceed 10 percent, a welcome improvement following the prior fiscal year, when returns came in nearly 1 percent in the red.

Avoiding overly risky investments

During yesterday’s meeting, they confirmed that the FY2017 investment returns topped out at just over 13 percent, which was slightly below the benchmark that is used to measure the fund’s performance, but well ahead of its 7.65 percent assumed rate of return. The five-year returns also totaled 8.75 percent, besting both the fund’s benchmark and the assumed rate of return.

Investment council chairman Tom Byrne, who was re-elected to lead the panel during yesterday’s meeting, said the investment performance is more impressive when viewed in the context of the council’s decision to avoid overly risky investments in favor of protecting the pension system’s overall health.

“We maintain that risk-adjusted posture because a bear market in stocks can do irreparable damage to the funds, and we do the best we can to balance that concern with reaping the benefits of current conditions in the markets, particularly the stock market,” Byrne said at the start of the meeting. “Our staff continues to do some of the most innovative and profitable things in the pension world,” he said.

As the meeting progressed, Christopher McDonough, director of the Division of Investment, the state agency that manages pension-system investments on a day-to-day basis, confirmed the state deposited its initial quarterly payment of $377 million on September 27.

Change in payment practices

Traditionally, the state has made its pension contributions at the end of each fiscal year in one lump sum, which it did this year in late June as the 2017 fiscal year came to a close. But that payment practice allowed the state to use the annual pension contribution as a de facto rainy-day account, such as in 2014, when a sizable state budget shortfall was filled in part with funds that were diverted from that year’s planned contribution into the pension system.

Last year, Gov. Chris Christie, a Republican, worked with Democratic legislative leaders to enact a measure that now requires the payments to made before the end of each quarter of the fiscal year. The change should ensure more funds make it into the pension system before the state confronts any budget problems if they emerge later in the fiscal year, and it will also enable the funds to start generating investment returns right away, especially during strong years like in FY2017.

McDonough also said yesterday that another recent bipartisan policy change — that has resulted in state Lottery revenues flowing directly into the pension system — generated a total of $181 million in revenue for the funds during July and August.

In all, the state is expecting to contribute $2.5 billion into the pension system during the 2018 fiscal year, counting both the quarterly payments from the state budget and the revenue that’s now expected to come from the Lottery. If the state sticks to its full commitment for FY2018, it would be a record amount of contributions for one fiscal year.

Fueling investor confidence

Officials from the Department of Treasury also pointed to another benefit of the change involving the Lottery, suggesting it helped fuel investor confidence and interest in a recent $350 million state Economic Development Authority bond sale that raised funds for school facilities. The improved fiscal outlook for the pension system that the state attributed in part to the shifting of the Lottery revenues generated an estimated $32 million in gross savings, Treasury officials said.

But the state pension contributions for FY2018 are still projected to fall about 50 percent short of the amount that actuaries say the state should be putting into the system on an annual basis to help restore the fund to good health. And, if investment returns remain as healthy as they have been in recent months, the state could also miss out on the more robust returns that would be enjoyed if the full payments were being made.

Byrne referred during yesterday’s meeting to the challenges posed by the state’s longstanding record of pension underfunding. Afterward, he also spoke about his own tenure as the unpaid leader of the panel, which could come to an end early next year when a new governor is sworn in to replace the term-limited Christie. Byrne, a Christie appointee, said he’s yet to discuss the issue with either gubernatorial candidate Democrat Phil Murphy or Republican Kim Guadagno.

“They’re busy campaigning, as they should be, and they’ll be plenty of time for those discussions (after the election),” Byrne said.

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