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Stress Testing Pension System to Help Determine — and Maintain — Fiscal Health

Public-employee pension system comprises numerous funds whose health needs to be ascertained and made public on state website

stress test

As his tenure comes to an end, Gov. Chris Christie’s legacy on the pension issue is widely considered to be a mix of failures and success. He’s dug the pension hole deeper by never fully funding the state’s annual payments, but he has also worked with lawmakers on several major reforms, including dedicating state Lottery revenues to the pension system and forcing public workers to contribute more to their own retirements.

State lawmakers are now hoping Christie is willing to approve one more policy change before he leaves office next month to further address the long-term health of a public-employee pension system that covers the retirements of roughly 785,000 current and retired workers.

A bill that cleared the Senate Budget and Appropriations Committee earlier this week would require state pension officials to conduct as a matter of law regular “stress tests” to assess the fiscal condition and potential risks borne by the various funds that make up the $76 billion pension system.

The measure, which has broad, bipartisan support, would also require the results of the stress tests for each individual retirement fund to be posted on the state Division of Pension and Benefits’ website. The legislation would also legally compel the state to disclose online all of the fees that are paid each year to the outside fund managers.

Stress in the Senate

The stress-test legislation has already been passed by the Assembly, and Democratic leaders in the Senate are now working to get it to the Republican governor’s desk in the remaining weeks before he is due to leave office January 16. Without Christie’s approval, the latest reform effort would have to be restarted from scratch after Gov.-elect Phil Murphy is sworn in.

"Making sure that the pension systems are strong and financially healthy is important to pension members, the taxpayers, and the fiscal stability of state finances,” said Senate President Steve Sweeney, a primary sponsor of the bill.

New Jersey’s public-employee pension system has been ranked the worst-funded state retirement plan in the country, running an unfunded obligation that totals $50 billion by the state’s calculations, and much larger by other financial assessments. But within the overall pension system there are actually several different retirement funds, and some are in better fiscal health than others. For example, the pension fund for police officers and firefighters is projected to last far longer right now than the fund for judges.

Under the legislation that was passed unanimously by the Senate panel earlier this week, the boards of trustees of each of five major state pension funds would be required to conduct comprehensive stress tests of their respective retirement accounts on a regular basis. They are the Teachers Pension and Annuity Fund; Judicial Retirement System; Public Employees Retirement System; Police and Firemen's Retirement System; and State Police Retirement System.

Codifying risk management

Though state pension funds already undergo regular risk-management evaluations, the legislation would codify the practice, and also require the stress-test results to be posted online. The measure is based on a set of recommendations that were put forward recently by Virginia’s Commission on Employee Retirement and Security and Pension Reform, according to sponsors.

“The ‘stress tests’ will help detect any problems so they can be corrected before they become serious and have a negative impact on our economy,” said Sweeney (D-Gloucester).

The analysis must be a “forward-looking projection” that factors in the effects of “long-term conditions and patterns of behavior of the investment market,” according to the bill. The stress-test reports will also have to include an evaluation of each state-administered retirement system that goes back at least 25 years, covering “investment returns, both gross and net of fees, and returns by asset class,” the bill says.

In addition to requiring the stress tests, the legislation would also codify a policy related to the disclosure of outside investment-management fees that the New Jersey State Investment Council has been following in recent years. That’s come in the wake of concerns that have been raised by public-worker union officials about the practice of using the outside fund managers to oversee so-called alternative investments like hedge funds and private equity. Murphy, a Democrat, has criticized the hedge-fund investments, and he is pledging to get rid of them.

Still, the fees — which cover basic management duties and also reward good investment performance — totaled nearly $620 million during the 2016 fiscal year, according to the SIC’s most recent annual report.

“Full disclosure of management fees paid to outside investors is a responsible way of monitoring the costs and the value of the services they provide,” said Senate Budget and Appropriations Committee Chair Paul Sarlo (D-Bergen).

Getting what’s paid for

“We want to see the investments perform well and that we are getting the best services that we pay for,” said Sarlo, another primary sponsor of the bill.

The stress-test measure received widespread support as it moved through the Assembly earlier this year, including clearing the full Assembly in June by a 75-0 margin. But it took until the current lame-duck session, which began last month, for a Senate version to be introduced.

The bill went before the Senate Budget and Appropriations Committee on Monday, passing with support from Democrats and Republicans in a 13-0 vote. It could get final approval from the full Senate as early as December 18. From there it would go to Christie’s desk, giving the governor one last chance to add to his own legacy on the pension issue.

And just as the measure has brought together both Democrats and Republicans in the Legislature, it’s also picked up an endorsement from the New Jersey Education Association, the state’s largest teachers union — and a bitter enemy of Sweeney, the primary sponsor of the bill.

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