On February 11 Governor Chris Christie made his first major address on the New Jersey budget, barely three weeks into his term in office. The news, as expected, was dour. Corruption and mismanagement has crippled us, he said, and since there was no way to make more money, he would have to cut it.

“Let’s tell our citizens the truth-today-right now-about what failing to do strong reforms costs them.

“One state retiree, 49 years old, paid, over the course of his entire career, a total of $124,000 towards his retirement pension and health benefits. What will we pay him? $3.3 million in pension payments over his life and nearly $500,000 for health care benefits — a total of $3.8m on a $120,000 investment. Is that fair?

“A retired teacher paid $62,000 towards her pension and nothing, yes nothing, for full family medical, dental and vision coverage over her entire career. What will we pay her? $1.4 million in pension benefits and another $215,000 in health care benefit premiums over her lifetime. Is it "fair" for all of us and our children to have to pay for this excess?”

But how much of the governor’s speech was fact and how much was hyperbole? Here, Michael Riccards, executive director of the non-partisan Hall Institute for Public Policy in Trenton and author of the institute’s 2008 report ‘History and Future of New Jersey Pensions,’ discusses how pension form might be achieved, and whether the governor’s examples are fact or fancy.

The problems confronting New Jersey’s public pension and benefit system are not new. What has been lacking has been the courage and willingness to tackle a problem with solutions that are so politically untenable.

Since our inception in 2005, the Hall Institute of Public Policy has followed the pension issue closely. As state lawmakers begin the difficult task of reforming the system, we offer a few observations and suggestions based on our research on this topic.

At the start of the 2010 fiscal year, the full liability of the state pension fund was unfunded at $46 billion. In order to make up such a large gap, either higher contributions from state employees and/or government levels, or very significant investment returns are needed.

Based on our review and research, we believe that the management structures that once served the system need to be seriously re-examined. The extreme volatility of the market, the difficulties being faced by non-American markets, the loss of major players in the financial industry, and the much more intrusive role of the government in the market all have led to an environment we have not seen before.

It is our view that the investment process undertaken by the fund management must be made more transparent. Conflicts need to be avoided. It appears that there has been a serious alienation between the State Investment Council and some senior staff members. The responsibilities of the director of the Division of Investments, the staff, consultants, and the council need to be more clearly defined. There should be a general agreement among council members and the director on investment strategy, the role of public and employee contributions, and the overall goals of the fund. New members should have to go through an orientation process focusing on goals and strategies.

The state needs to invest more in upgrading the investment resources available to the director while creating a new tier of trained and experienced asset managers. We believe that there should be an allocation of assets to investment managers who have skills or niches outside what state government employees can demonstrate. And for assets that are managed internally, they should be indexed or managed by capable managers with the requisite expertise and resources. We also believe that there must be a genuine recognition of what various levels of investment risk can achieve over the long run, and how that influences levels of benefits and contributions. Finally, we believe that there needs to be a clear recognition that the long-run perspective for investment returns is far longer than that of any gubernatorial administration, and that adjustments to contributions based on swings in markets, positive or negative, must be avoided.

The major unions that have so much at stake in the process and in the general solvency of the state government should be more willing to support the prudent and flexible use of outside asset managers by the State Investment Council and the staff. The selection of managers should be given great care, free of conflict and very transparent. It should also fit into a well-defined and coordinated asset allocation process. There may be certain higher costs in managing this portfolio than in the past – but in the end these investments are critical to the state’s future. Furthermore, money can be saved through indexing portions of the portfolio rather than random in house management.

From a structural standpoint, a more focused and unified approach on the part of the State Investment Council is in order. It is proposed that the Legislature reconstitute a council made up of nine members, with seven public members chosen by the Governor and ratified by the state Senate. The seven public members will include the state Treasurer (not a designee) and six members chosen for a five-year term, staggered as the Governor sees fit. The other two members of the Council will be chosen from employee unions in a manner the membership chooses. Further, the Council should be given clear objectives for the Fund. Such objectives should possibly be created based upon a task force that could be convened to study the Fund and create reasonable risk reward objectives.

In terms of investment policy, the Investment Council has oversight responsibility for the investments, and the consultants are advisors in the investment process. There should be in the council staff a special office of foreign investments to follow the markets in different time zones. Any funds that are divided up among outside consultants should be allocated on criteria in terms of investment areas. The council should conduct yearly assessments of the performance of each fund manager, and drop the poorest performing investment group. The council will should set aside up to 10 percent of the assets for prudent mortgages and capital for investment in small and/or developing companies. If New Jersey will not invest in its own people, we cannot expect out-of-state sources to invest in us.

The tremendous changes in investment strategies, the volatile market, the speed at which allocations are made, and the increased demands on the fund all require a clear and coordinated strategy for the state. These structural and policy changes will position the state to respond more effectively in the future.

Some observers have wondered if Governor Chris Christie has engaged in hyperbole when he expressed outrage at some of the very high pensions that will be granted in New Jersey. But that is an old and true tale. Unlike many states and the federal government, New Jersey has allowed until recently multiple office holding. In some cases those multiple jobs have given employees $130,000 in annual pension payouts.

One lawyer in southern New Jersey earned $186,000 a year and pension credit from 11 towns where he served as a municipal court judge. A lawyer from Secaucus earned $227,000 as general counsel for both North Bergen and the Union City School districts. He will qualify after 25 years of service for a pension of $103,000 per year. When questioned about it he responded, “I didn’t create the system. It’s a part of the deal when you take this position.”

Many of the top fifty earners, compiled in a study done by the Star Ledger, are judges, lawyers, tax assessors, and even a plumber. The average has about 22 years in the system, and their pensions will range from $40,000 to over $135,000. As the counsel from North Bergen and Union City concluded, “A deal is a deal.I’m hoping to enjoy it.”

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