By Matthew Cunningham-Cook, who has written for the International Business Times, The New Republic, Jacobin, Aljazeera, and The Nation and has been a labor activist
Chris Christie’s atrocious management of New Jersey’s pension fund has been reported on, including by David Sirota and myself (our reporting revealed the massive uptick in fees paid out in fiscal year 2014). But the impact of his management on the lives of New Jersey workers–who have gone 4 years now without a cost of living adjustment–has yet to see the light of day.
In 2011 Christie oversaw a grand bargain with New Jersey Senate President Steve Sweeney, a Democrat. The bargain mandated that no cost of living adjustments would be paid out by the state pension fund until it reached a 75% level of funding. In return, the unions won a commitment that the legislature would fund the pension so that it would reach that level of funding.
Of course, Christie had no intention of meeting that obligation. Christie continued to deliberately underfund the pension, winning a court case in June 2015 that allowed him to refuse to fund the pension, instead using that money to prevent any tax increase to his wealthy donors.
The pension for state workers is so underfunded that even had it been fully funded by Christie it’s unlikely that state workers would have seen their COLA. But for local government workers–whose pension funding comes from the local governments themselves–their portion of the pension fund is nowhere near as underfunded, reaching 74.39% in fiscal year 2014–a number quite close to the magic 75% that would trigger a reconsideration of the decision to deny COLAs.
The assets of state workers and local government workers in New Jersey are pooled, meaning that all are managed by the State Investment Council, which is dominated by Christie allies. (There are some important voices of dissent, most notably public worker union–CWA Local 1036–president Adam Liebtag.)
The average local government pension is $16,000, as opposed to $25,000 for state workers. As a result, those local government retirees are desperately in need of COLAs to be able to maintain their bare-bones standard of living.
Christie’s appointees to manage the state’s investments cheated the 2014 COLA out of local government workers by trailing the market, costing the pension fund hundreds of millions of dollars.
Had Christie’s money managers performed in conjunction with a generic 70% stock/30% bond index fund–an extremely generous interpretation, as I believe that the NJ Division of Investment has taken on far more risk than a 70/30 index fund–the local government accounts would have nearly $1.4 billion more in their coffers.
The local government fund had about $20.1 billion in assets as of the end of fiscal year 2014, meaning that this additional $1.4 billion would bring the funding level of the pension from 74.39% to over 81% funded–immediately triggering a review of the decision to deny local government workers their COLA.
New Jersey’s COLA calculation was quite stingy even when they were given out. A worker who retired in 2009 was given a COLA of just under 1% in 2011. But still, when you’re making just $16,000 a year on average, an extra $200 could be the difference between whether or not you have Thanksgiving dinner or can see a movie once in awhile.
But thanks to Christie’s appointees, not even a stingy COLA awaits local government workers in New Jersey.
So where did the money go? Christie’s massive foray into alternative investments–private equity, real estate, hedge funds, commodities–have all helped drag down returns, and pump up fees. On the whole, though, the issue is active management–the idea that a huge $80 billion pot of money can somehow outperform the market. Thanks to the Nobel-prize winning work of Eugene Fama on efficient markets–and to basic common sense–we know that that’s impossible.
Christie and his ilk want to go for active management and alternative investments because it’s a lucrative way to enrich friends and allies. PE firms can easily kick back credit to favored companies, and donations to favored charities. Active managers have private jets and fun cocktail parties, things that the 1-basis-point fee index fund managers just can’t afford or justify for such low profit margins.
While no one thus far has made the connection between the poor, conflict-ridden investment management of the Christie administration and the denial of COLAs to the already-meager pensions of local government workers in New Jersey, unions have begun speaking out about the poor investment management–in a manner that’s quite rare in America today.
The New Jersey AFL-CIO hired former banker Jeffrey Hooke to examine the fees paid out by the fund, which led to him saying that “The fund’s commitment to alternatives hasn’t worked out well.” A clear understatement. Union president Liebtag added “The only people getting rich off the New Jersey pension system are hedge fund managers reaping lucrative management fees and performance bonuses totaling more than $600 million in last fiscal year alone.”
As Yves has shown with CalPERS–the “industry standard”–pension fund governance nationwide is really quite poor. And with the death of local investigative reporting–expounded upon most recently by Margaret Sullivan in Sunday’s New York Times, it leaves precious few areas for revelation–basically just blogs like Naked Capitalism, and unions with ethical leadership committed to stopping their members from getting hosed.
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This article brings back fond memories of former NJ gov Christine Whitman, whose investment banker husband John Whitman may have given her the brilliant idea of borrowing $2.75 billion in 1997 for leveraged stock investments in the state pension fund.
As the NYT recalled,
Now it’s deja vu all over again, as the heavily-taxed but fiscally-strapped state dodges pension contributions. Whitman’s patently idiotic plan to leverage up during an equity bubble ushered in the long-term crisis of New Jersey’s state pension fund, culminating in nine (9) credit rating cuts since Christie took office.
In June, Whitman mysteriously announced that her husband had died of a ‘catastrophic brain injury,’ without further elaboration. Hopefully New Jersey, ever-vigilant against weapons of all kinds, confiscated her rolling pins.
That’s like Social Security next year.
No inflation, simple math (though maybe difficult for you, that’s because your education).
Nothing stolen. Just your health care purchasing power.
We’re the highest taxed State in the nation, and they never seem to be able to balance the budget. It begs the question; Where is the money going?
There was a guy (forget his name) that back ten years ago was going over NJ’s CAFR. He claimed that after reviewing it he found that the State was flush with money, it was there for anyone to see if they knew where to look. Most people only look at the annual budget and not the detailed report. The detailed report is far more confusing and filled with numbers that may not even be real, or are accounting tricks that would get most of us in front of the tax court if we did them (at least that’s the claim). After he went public with this his life suddenly became a nightmare, lost custody of his children, was declared mentally unstable and had to leave the State completely. I never heard about him again. I tried to do a search on it to see if I could find something that would jog my memory on the guy’s name, came up empty (although I did find a few articles making the same claims).
I just looked over NJ’s 2014 CAFR and damned if I can figure out what it’s saying. Is there anyone who is good at accounting to look at it to see if there’s any truth to what was claimed?
http://www.state.nj.us/treasury/omb/publications/14cafr/pdf/fullcafr2014.pdf
The Basic Financial Statements are all screwed up. Pages 32 and 33 are a mess.
Informative link; thanks. These bits from the summary are plain enough:
Shrinking revenues; pension debt twice annual income. Translation: broke.
Step back and take a long-term perspective: in 1976, New Jersey had no income tax and a triple-A bond rating. In 2015, it has the highest property taxes in the nation, an income tax that tops out at a crushing 8.97%, and an A2 bond rating.
Clearly, giving spendthrift New Jersey more money is like sending an alcoholic a case of vodka for Christmas.
Since New Jersey hasn’t the slightest interest in fiscal sobriety, the best thing its beleaguered residents can do is run like hell, while it’s still possible to escape without total confiscation of one’s assets. (NJ actually withholds part of your sales proceeds, if you sell your house and move out of state.) This God-forsaken tax hell has entered the “death spiral” stage … or the “dry heaves” stage, in drinking man’s terms.
Important to remember that so much of this is due to lack of single-payer (rising health care costs are a huge part of the story here), increasing Medicaid rolls due to the decline of unions and rise of low-wage employers, deindustrialization due to trade policies, and of course, shitty investment management… So much of it is a national story.
From New Jersey’s CAFR:
Page 97 of the CAFR shows that the state funded OPEB (Other Post Employment Benefits) at an average of only 30.6% of full cost during 2012-2014.
If benefits aren’t funded, of course they are going to balloon out of control. This isn’t happening in other states, so blaming it on ‘lack of single payer’ is about as convincing as pinning the fault on ‘inclement weather’ or ‘bad juju.’
Sorry folks, but the public unions are destroying middle class America. I don’t think that people realize what calamity the pension system will befall American taxpayers. The public unions are no different than Wall Street, they’re the new ‘rentier class’ in cahoots with Wall Street and everyone is just a target for their looting. Although Michael Hudson will not call Public Union as parasites, they’re just as parasitic as finacialized corporations.
If one takes an honest look at what the police unions did to ‘policing’: police officers were your neighbors and NOT paramilitary forces used to keep the public in line through murder and intimidation. In the recent atrocity perpetraided by Chicago police, Mayor Emmanuel Rahm stated that he was prevented from firing the police officer charged with murder due to union bargaining rules. Another words, the police public union acts like SEC or FINRA in what is really member-only protection racket.
But that does not even compare to what the teachers’ unions did to public education in US–again, even Wall Street could be envious of the track record. Thirty years ago who could’ve guessed that teachers in Illinois would retire with $170,000 pensions after a lifetime of mediocrity. Parasites?
Unfortunately just like the neo-liberal Democrats won’t talk about economic justice and the parasitic financialized economy, they won’t talk about parasitic unions.
Linrom, fuck you and your opinion. Public employees are the only ones who pay into their pensions every single pay period. Public employees provide a tangible service every working day and create great wealth for their communities. If you can travel your roadways, drink from the tap, read a book, or expect someone to show up and put a hose to your burning house, or reduce the likelihood of rabid animals menacing you, or haul away your trash – you’re welcome asshole. If you’d like to criticize a particular union local, you may have a defensible point. But complaining about a public worker’s deferred compensation is unsupported unless you, too are OK with the race to the bottom.
You mean I should be grateful that when I go to McDonald’s that an employee takes my order too? And yes, I do support minimum wage for fast food workers of $15/hr. They earn it and their wages do not come from some ‘taxing body.’
I guess you are saying that we should be grateful because public employees do the work they get paid for? Should I be grateful to Warren Buffet because the utility that he owns provides power to my home?
In my town, the police union was intimidating city commissioners because they were not getting raises during 2008-2010, that while the ‘official’ unemployment rate was at 14%.
Public pension liabilities will be the number one issue in just a few years.
http://wegoted.com/videos/mcconnell-not-planning-to-take-up-tpp-before-2016-election/ any thoughts?
Tri state govt workers and govt workers in general have been making off like bandits all these years.
They can afford it.