Public Pension Funds Beat Expectations for 2018, Might Be Hard to Repeat

New Jersey has one of the worst-funded public retirement systems in the country. But it got good news yesterday, with better than expected investment returns

New Jersey’s public-employee pension-fund investments generated returns of just over 9 percent during the last fiscal year, besting the assumed rate of return for what is one of the nation’s worst-funded state retirement systems.

The good news about the fiscal-year 2018 returns was revealed yesterday during a public meeting of the State Investment Council in Trenton. Several different types of investments were credited with boosting the fund’s overall performance, including U.S. equities and real-estate holdings.

“This is certainly positive news and we are encouraged by the overall returns for the past fiscal year,” said Corey Amon, acting director of the state Division of Investment.

Still, there are fears that this year’s returns will be difficult to repeat. Many analysts expect the hot stock market to slow down sometime soon — and indeed, returns for fiscal year 2019 are already at less than 2.5 percent. Also, the council has delayed adjusting the portfolio as the state Senate has held up confirmations of Gov. Phil Murphy’s nominees.

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And even as the strong returns helped to push the pension system’s overall market value above $78 billion, the retirement plan remains grossly underfunded thanks to years of skipped or insufficient contributions from the state. Murphy’s first budget increased the state payment in the 2019 fiscal-year budget to $3.2 billion — a record-high contribution — but that remains far below the total actuaries calculated is required to restore the system to good health.

800,000 current and retired public workers

Meanwhile, concerns are growing that the market conditions that have helped to fuel the pension system’s recent hot streak could soon slow down, putting even more pressure on the state to continue ramping up its contributions.

The pension system covers the retirements of nearly 800,000 current and retired public workers in New Jersey. It uses an assumed rate of return of 7.5 percent under a policy change enacted by the Murphy administration earlier this year. Over the past 10 and 20 years, returns have averaged 6.75 percent and 6.17 percent, respectively. Murphy has also proposed to slowly reduce the assumed rate of return to 7 percent to bring it closer to historical performance.

The pension system’s fiscal 2018 investment returns totaled 9.06 percent, thanks in part to a surging stock market. In addition to U.S. equities and real estate, other top-performing assets were private equities, real assets and global diversified credit.

“I want to commend our team at the Division of Investment for their due diligence and their commitment to upholding their fiduciary responsibility,” said Treasurer Elizabeth Maher Muoio in a statement issued after the investment council meeting.

The strong investment performance followed the investment council’s 2016 decision to scale back stakes in hedge funds over concerns about the fees that are charged by some of those funds in relation to their performance. The healthy returns also helped the state take better advantage of the cash infusions it’s now receiving out of the state budget on a quarterly basis, a policy change that was also enacted in 2016.

State contribution for 2019 60 percent of what’s needed

At $3.2 billion, the state’s planned pension contribution for fiscal 2019 is only 60 percent of the full amount called for by the actuaries. It will be years before Murphy brings the state up to the full payment as he’s following a ramp-up plan established by former Gov. Chris Christie that calls for 10 percent increases each year over a 10-year period.

The slow pace of contributions is putting more pressure on investment performance, and there are fears that the pace of the ongoing recovery from the Great Recession will eventually slow down. During the first two months of fiscal 2019, pension-system returns have slowed to less than 2.5 percent, according to figures reviewed during yesterday’s meeting.

“We’re concerned going forward about a climate where every indicator seems to say we should expect lower returns,” said Adam Liebtag, the council’s acting chairman.

Typically, the council uses the spring and summer months to work with the Division of Investment to recalibrate the fund’s asset allocation, with adjustments made to stakes in different investment categories based on expected changes in market conditions to maximize returns.

Senate has delayed confirmation of nominees

But this year, the 16-member council has been operating without a full complement of members because Senate confirmation of Murphy’s nominees for the panel has dragged on for months for no apparent reason.

Yesterday two of the governor’s council nominees, Vaughn Crowe of Randolph and Samir Pandiri of Chatham, won confirmation by the full Senate. But another six have yet to be considered by the Judiciary Committee. They are: Theodore R. Aronson of Philadelphia, Pa.; Danielle Beyer, Roselle Park; Wasseem Boraie, East Brunswick; Leonard J. Carr, West Orange; Deepak Raj, Princeton; and Susan Soh, Short Hills.

Liebtag said the council is hoping to soon get all the gubernatorial nominees seated and will eventually turn its attention to resetting the mix of investments. “Going forward, we’re really focused on asset allocation in the next few months,” he said.

Toys “R” Us workers ask council to tackle hedge fund

Former Toys“R”Us employees address the council about the hedge fund involved in the company's liquidation.
The council yesterday also heard from former employees of the retail chain Toys “R” Us who urged the state to break financial ties with a hedge fund, Solus Alternative Asset Management, that is involved in the chain’s ongoing liquidation. So far, former employees are not being provided with severance compensation they were once promised, they said.

“I worked there during (superstorm) Sandy, with no electricity in the building,” said Louann Crawford, a Freehold resident. “I put my blood, sweat and tears in that job since 1992.”

“Somebody should step up for us,” she said.

In response, Liebtag said state officials have already sought more information from the hedge fund.

Our engagement with them will be ongoing,” he said.