Government Spending

How Could the Country's Richest State* Have One of the Most Insolvent Public Pension Systems?

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Aside from perhaps the question answering itself, Fortune/CNN drills into the case of New Jersey, a state that makes California seem well-governed:

In June 2008 the state estimated that the plan—one of the nation's largest, covering teachers, state employees, firefighters, and police—had $34 billion less than it needed to meet its obligations. Since then the market value of the plan has dropped from $82 billion to $56 billion (a new estimate of underfunding is due in July).

Wha happen? The pension fund gambled on dot-com stocks, hedge funds, and other equity plays. The state cut contributions based on formulae that assumed such nonsense as an 8.75 percent annual return. Then, against that backdrop, this:

Look for the union label

Meanwhile, the obligations keep mounting: Even while they were neglecting pension contributions, New Jersey politicians were sweetening the pot. In 2001 benefits for the state's two largest groups of workers, government employees and teachers, were increased by 9%, creating an additional $4.2 billion in liabilities. In 1999 the state approved a "20 and out" measure that allowed firefighters and local police to collect pensions equal to 50% of their pay after 20 years of service—a perk previously available only to the state police. Benefits added since 1999 have increased liabilities by more than $6.8 billion, according to official estimates.

Today New Jersey seems locked in a downward spiral. "New Jersey and many other systems have negative cash flows, meaning that contributions are less than the benefits we pay out," says William Clark, director of the New Jersey Division of Investment, which manages the pension fund. "You can't make your money back when it's flowing out of the system."

What do the public sector unions have to say for themselves?

"We believe reopening contracts should be a last resort as we seek to find other ways to free up money," says Anthony Miskowski, secretary of CWA Local 1033. "If we budge on the contracts, the unions are dead."

But if the unions don't budge, something even more important might die:

Don't say we didn't warn you

If New Jersey reaches the point where one or more of the funds in its system runs out of money, the state will have to pay retirees out of annual revenue, adding another burden to the budget. That's how the state covers retiree health-care costs, expected to hit $1.1 billion this year. […]

It would then have to slash services or boost taxes to balance the budget, a pair of ugly options. The Tax Foundation says New Jersey charges the highest state and local taxes in the country, the highest residential and commercial property taxes, and some of the highest sin taxes in the nation on cigarettes and alcohol.

If union concessions, cost cutting, and higher taxes are not enough, then what? Inevitably, New Jersey and other states would turn to Uncle Sam for help.

You read all about this nightmare in our terrific February cover story, "The Next Catastrophe" (pictured).

[Link via Instapundit.]

* As measured by average personal income, according to the linked article.

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  1. …unions are dead.”

    This.

  2. Paging Mister Ponzi…

  3. 50% pension? What pikers. Today’s syndicated Bruce Williams’ Smart Money column has this outrage: “I am 56, a school teacher and can retire with 80% benefits next year.” Private sector pensions are much less generous: my pension, for instance, will be a one-time lump sum for twenty years service, and the lump will be about 65% of my annual salary. Should’ve gone into teaching!

  4. I have an uncle who works in Madison WI that wants to open up the State of Wisconsin Investment Board (SWIB) to the rest of the general public. Seeing how some state pension plans are politicized and also just as much subject to losses in economic downturns, it’s a terrible idea. If that were to happen I can easily see the state turning towards our taxes in order to recover future losses like what’s being mulled around in NJ right now. Just what we need, another policy where we all pay for somebody else’s mistakes! TARP certainly wasn’t enough.

  5. Uh, Connecticut is the richest state, bitches. Regardless, Jersey is fucked, because I guarantee that the extent of the rot is obscured by the insane level of corruption in the state. Unless you have lived in Jersey, you just cannot fathom how pervasively corrupt the place is.

  6. It would then have to slash services or boost taxes to balance the budget, a pair of ugly options. The Tax Foundation says New Jersey charges the highest state and local taxes in the country, the highest residential and commercial property taxes, and some of the highest sin taxes in the nation on cigarettes and alcohol.

    If union concessions, cost cutting, and higher taxes are not enough, then what?

    I doubt the unions give a shit and if challenged I’d bet union bosses would walk silently into that fuckin’ legislator that opened his big fuckin’ mout’ and just give him the “I fuckin’ DARE you” stare. Then walk out.

  7. How Could the Country’s Richest State* Have One of the Most Insolvent Public Pension Systems?

    Ooh, ooh, I know the answer Mr. Welch! I know! Fecklessness, fiduciary malfeasance, and general stupidity! What do I win?

  8. Episiarch has it right. There are just so many ways NJ is dysfunctional – public pension management just the least of it. Public schools, crime, corruption, taxes, etc. are at or near the highest/worst in the country. (And don’t get me started on car insurance rates!) So glad I moved here…

  9. Duh. Why don’t they just pass a law that says the money is there? Wouldn’t that be easier?

  10. Whoever came up with the idea of a defined benefit pension plan is one of the greatest villians of history. Could we please put the final nails in the coffin of this horrible idea?

  11. New Jersey is stupid as is a good chunk of its inhabitants.

  12. but, but, I pay for pencils and paper for the kids out of my own pocket . . .

  13. Lynn–You silly girl, “big *BOOBS*” is spelled ( + )( + )

  14. Lynn,

    Boobs, Schmoobs. Tell us about the fat, throbbing cocks.

  15. [====Incest.Cum====] which is the biggest club in world for those who want to hook up with others whom they share genetic materials. You would like to screw that cute second cousin who lives in Spokane, Washington, but you were never sure of just the right tact to approach her? We can make it happen! Sign up for free, and check it out….

  16. Sorry, Banjo Bob, I didn’t see your name up there. I had this gag ready for about a week, just waiting for Lynn to show up.

  17. Ooops,

    Pretty funny. I got a second cousin like that.

  18. Episiarch,

    That’s crap. Florida could buy and sell Connecticut with its Disney revenues alone.

    Besides, you’re a Washingtonian now. Learn to defend coffee, salmon, Microsoft, and socialism. Oh, and don’t forget, Spokane does not rhyme with cocaine.

  19. What am I, chopped liver? Only yesterday everybody was bagging on CA because of its budget problems. Now, it seems, CA is yesterday’s news and all you guys want to talk about is Jersey.

  20. “If we budge on the contracts, the unions are dead.”

    Uh huh… aaaannnnddd?

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