Pandemic Could Drive Annual Returns for Public-Worker Pension System into the Red

Investment returns for first 10 months of fiscal year edge into negative territory; value of pension funds in April drops to $74B, down almost $6B
Credit: Jernej Furman from Flickr (CC BY 2.0)
Investments in New Jersey’s public-worker pension funds have been hit hard by fallout from the coronavirus pandemic.

Returns for New Jersey’s already troubled public-worker pension system are in danger of finishing the year in the red as the economic effects of the coronavirus pandemic continue to hit long-term investments.

The total value of the pension funds dropped below $74 billion as of the end of April, after having risen to near $80 billion in the months leading up to the onset of the pandemic, according to new figures reviewed on Wednesday during a meeting of the New Jersey State Investment Council.

In addition, investment returns for the first 10 months of the current fiscal year were in negative territory, at -2.5%.

“The global economy has been shocked to a degree not seen since the Great Depression,” said Corey Amon, the director of the state Division of Investment, during the meeting Wednesday.

Adding to the fiscal turmoil are plummeting state Lottery revenues, which have been a dedicated source of funding for the pension system since 2017. Through the end of April, Lottery revenues were way off target for fiscal 2020 and are now in danger of falling more than $100 million short of projections.

Pension checks still coming

Despite the short-term losses, the pension funds are still able to issue benefit checks to retirees, as overall liquidity remains sound.

While the overall numbers put more pressure on the state budget, Department of Treasury officials say they have no plans to short upcoming state pension payments, as required by a recent law mandating quarterly contributions. At least one payment, however, is scheduled to be deferred.

The pension system covers retirement for some 800,000 current and retired workers across seven funds. It is financed with contributions from workers, from payments made by their respective state and local government employers and from revenue that flows in on a monthly basis from the Lottery.

The pension system operates under a 7.5% annual assumed rate of return. Whenever returns fall short of that benchmark, more of the funding burden falls to government employers since contribution rates paid by workers are fixed in law.

Returns fell below the assumed rate in fiscal 2019, even as the funds generated net-positive gains of over 6%.

Extending the fiscal year

Earlier this year, Gov. Phil Murphy and lawmakers decided to extend the end of fiscal 2020 for state-budgeting purposes in the wake of the pandemic. They also pushed the deadline for paying state income taxes from April 15 to July 15. But that change, which moved the end of the fiscal year from June 30 to September 30, doesn’t impact the accounting for the pension system.

That means unless there’s a huge rally before the end of June, investment returns are on course to fall well short of the 7.5% assumed rate for the 2020 fiscal year. And if returns land in the red for the full fiscal year it will be the first time that’s happened since 2016.

During Wednesday’s meeting, Amon outlined some of the ways the economic fallout from the pandemic has affected long-term investments as the new figures, which are preliminary, reflected negative returns of -7% coming in just between January and April.

Among the underperformers are investments in energy companies and real-estate investment trusts, or REITs. In recent months, groups of retirees and environmentalists have urged the investment council to shed its fossil-fuel investments.

Amon noted stakes in U.S. Treasuries and high-grade securities helped to cushion the blow. He also noted that some investment values are outdated and are likely to be changed in the coming weeks, including returns for private-market investments.

“Absolute returns will likely move lower as valuations and benchmark returns are updated,” Amon said.

On the Lottery side of the pension system’s ledger, total revenues were off by more than 13% year-over-year as of the end of April, according to the latest tax-collection figures from Treasury. The pension system assumes about $1 billion in revenue will be generated from Lottery receipts annually, but assistant state Treasurer Dini Ajmani said during Wednesday’s meeting the target will likely be missed by more than $100 million in fiscal 2020.

“We don’t expect that the sales will improve to a point where we’ll close that gap,” Ajmani said. “So that’s going to be a shortfall into the pension fund.”

New Jersey’s pension system has already been rated as the nation’s worst-funded, and Murphy, a first-term Democrat, has been slowly ramping up state contributions to help address the system’s huge unfunded liability under a payment plan that was started by Republican predecessor Chris Christie. A big cause of the pension-funding hole is a failure by past administrations to make full annual pension contributions, including during economic downturns, when some payments were skipped altogether.

Pension contribution on track — Treasury

But Ajmani said there are no plans to miss a roughly $684 million quarterly state pension contribution that is scheduled to be made at the end of June, even as the state’s own budget is facing tremendous strain during the pandemic.

“We plan on making that (June 30) payment in that timeframe,” Ajmani said.

Still, the next phase of the pension-funding ramp-up is scheduled for late September, and Ajmani said right now a quarterly contribution of nearly $1 billion is scheduled to be deferred into October, coinciding with the beginning of a planned nine-month fiscal “year” 2021.

“We are forced into making very, very tough decisions,” Ajmani said as she detailed the state’s own budget challenges.

However, most local governments have been making their pension contributions even as they’ve begun to deal with their own revenue losses caused by the pandemic, she said.

“The good news there, is almost all local governments have paid their bills,” Ajmani said.