COVID-19 Hammers Public-Worker Pension System, Sheds $6B Since First of Year

Returns likely down more than 10% in the current fiscal year, but Treasury says it has no plans to skip upcoming pension contributions
Credit: ussama-azam-via-unsplash
New Jersey pension-fund investment returns that were running in the double digits last year have now plummeted during the first part of 2020.

New Jersey’s public-worker pension system is getting walloped by the financial-market turbulence caused by the coronavirus pandemic, with at least $6 billion in market value lost since the beginning of the year.

But so far, the Department of Treasury says it has no plans to skip any of New Jersey’s upcoming employer pension contributions, even as the state budget is also being ravaged by the economic upheaval.

Members of the New Jersey State Investment Council assessed some of the initial damage done to the pension system during a public meeting on Wednesday that was held entirely by phone. It was the panel’s first meeting since the financial markets took a major tumble in mid-February.

Pension-fund freefall

Overall, pension-fund investment returns that were running in the double digits just last year have now significantly plummeted during the first part of 2020, according to the latest figures from the Division of Investment (DOI).

Returns for fiscal year 2020, which runs through the end of June, fell to below 1% as of the end of February, and they appeared to be down by more than 10% according to the preliminary fiscal-year figures that include the first few weeks of March, said Corey Amon, who serves as the director of DOI.

The value of the pension system has also dropped, from a high of nearly $80 billion at the end of December to $74.1 billion at the end of February, according to documents released ahead of the public meeting. And that two-month period doesn’t capture additional losses that have likely been suffered over the past three weeks.

“Clearly we are in the midst of a near-term public health crisis that is central to market turmoil, and we are focused on navigating through this,” Amon said during the meeting.

Meanwhile, a Treasury official who also addressed council members said the state is still planning to make its next quarterly pension contributions, even as the full damage that’s being done to the state budget is being assessed. Nearly $1 billion in fiscal 2020 discretionary spending was put in reserve late last week due to ongoing upheaval, including funding for things like property-tax relief and opioid initiatives.

In all, the state pension system covers the retirements of an estimated 800,000 current and retired workers across seven different funds. It is financed with contributions from workers; payments made by their respective state and local government employers; and from revenue that flows in on a monthly basis from the state Lottery.

The pension system also benefits from any returns that are gained from the investment of fund assets managed on a day-to-day basis by the DOI, which is a division of Treasury. The pension funds operate under a 7.5% annual assumed rate of return.

More bad news for troubled pension system

Heading into the recent market trouble, New Jersey’s pension system was already ranked as the nation’s worst-funded state retirement plan. That comes after governors and lawmakers from both parties over the past two decades have regularly shorted the state’s annual pension contributions as they’ve prioritized things like tax cuts or new spending initiatives instead.

The practice of shorting full, actuarial-required pension payments has continued during the tenure of Gov. Phil Murphy, a first-term Democrat, who has chosen to follow a gradual funding ramp-up started under Republican Chris Christie. Under that plan, the state is scheduled to make what actuaries would consider a full payment during the 2023 fiscal year.

A bond disclosure issued by the Murphy administration earlier this week alluded to the stress that recent market conditions have put on the pension system, and it also suggested that the state’s payment obligation may grow larger as the market value of the fund drops.

In the past, the state has responded to its own budget problems by delaying or even skipping planned pension contributions. But assistant State Treasurer Dini Ajmani said during Wednesday’s meeting that right now there are no plans to do so. The state’s next quarterly payment totaling $684 million for fiscal 2020 is due to go out on schedule on March 31.

“We are committed to making state contributions into the pension fund,” Ajmani said. “Nothing has changed in that.”

She did, however, raise concerns about the portion of the pension funding that flows directly into the retirement system from the state Lottery. A number of retail outlets statewide that sell lottery tickets have been shuttered by a Murphy executive order aimed at slowing the spread of the disease..

“So far, it hasn’t been catastrophic,” Ajmani said. “We’re keeping a close eye on that.”

Arguing to delay pension contribution

But at least one Republican lawmaker is faulting the Murphy administration for not holding back the March 31 quarterly pension contribution until more is known about how the state budget will endure the economic upheaval. Sen. Declan O’Scanlon (R-Monmouth) said delaying the payment, but not skipping it, would be a more prudent course of action.

“We can’t ignore as a safety valve everything that still has to go out the door the last few months of the (fiscal) year,” O’Scanlon said in an interview Wednesday afternoon.

He also said if any expenditure should still be allowed to go forward amid the current budget uncertainty, it should be $142 million in funding to cover this May’s Homestead property-tax relief. Instead, that funding is among the $920 million in appropriations that were frozen by the Murphy administration late last week.

“If we’re trying to maintain people’s liquidity, that’s something that puts money directly into people’s pockets,” said O’Scanlon, who serves on the Senate’s budget committee. “That money should go out the door before the pension payment.”

Asked for a response, Treasury spokeswoman Jennifer Sciortino said: “The decision to freeze funds in reserve during this unfolding crisis is designed to help us exercise all available options to ensure we can meet our statutory, debt, and health-related obligations during this unprecedented time of great uncertainty.

“We are awaiting more information and closely monitoring the federal stimulus bill and other actions that may impact the state’s revenue position,” she said.

During his presentation to the investment council, Amon, the DOI director, detailed several ways the financial markets have taken a hit in recent weeks. He said anything related to the travel and leisure sector, including hotels and airlines, has really taken a beating.

But Amon also highlighted preparations that have been made by the state heading into the likely economic downturn and preached an overall message of confidence to members of the council. And the pension system should have no problem paying out benefits to retirees in the short term, in part due to a decision made last year to move assets out of hedge funds and into U.S. bonds.

“Despite the challenges of the current market, it’s important for the division to look forward and to determine the best course of action to ensure the pension fund’s portfolio is well-structured into the future,” he said.

During fiscal 2019, which ended on June 30, 2019, pension-system investments returned more than 6% gains. While that marked the third year in a row of net-positive returns, the 2019 fiscal year investment gains still fell short of the assumed rate of return even as the total value of the pension system rose from $78 billion to $80 billion.

When annual investment returns fall below the pension system’s assumed rate, it puts more pressure on the government employers — and ultimately taxpayers — to come up with more cash to cover long-term liabilities, since employee-contribution rates are fixed by law. The pension system’s overall long-term unfunded liabilities are over $100 billion by some recent estimates.

The last time the state pension system failed to generate net-positive returns for an entire fiscal year was in fiscal 2016, when returns came in nearly 1% in the red.