State Investment Council Runs 2019 Numbers On Public-Worker Pensions

Review reveals a mixed lot: return on investment remains right on the money, but gains missed assumed rate of return for first time since 2016, while overall pension valuation dips.

It’s a good-news, bad-news scenario, the proverbial mixed bag.

In the plus column: New Jersey public-worker pension investments generated a return of more than 6 percent during the past fiscal year. That marks the third year in a row fund managers scored net-positive returns, and they also look stronger over the longer term.

In the minus column: Investment gains realized during the 2019 fiscal year, which ended on June 30, fell short of the state treasurer’s 7.5 percent assumed rate of return — the first time that mark has been missed since 2016.

What’s more, the overall value of the pension system dropped from $78.7 billion at the end of June to $75.6 billion as of the end of August, according to figures reviewed yesterday by the New Jersey State Investment Council at a public meeting in Trenton.

Accounting for the drop

Pension officials chalked up the dip in valuation, in part, to the $2.5 billion in benefit payments issued since the fiscal year ended. They’re also expecting to get a boost from the next quarterly cash infusion, due from the state before the end of the month.

The investment council’s members also picked a new leader during yesterday’s meeting, choosing one of Gov. Phil Murphy’s nominees for the first time since he took office early last year.

New Jersey public-worker pensions are funded primarily through contributions from employees and their employers, along with revenue derived from long-term investment. But governors and lawmakers have a long history of shorting the state’s employer obligation, which has helped make the pension system one of the worst funded  in the country.

That systemic underfunding — the current budget  allocates 70% of the amount called for by the state’s actuaries — has put more pressure on fund managers to generate returns that can beat the pension system’s 7.5% assumed rate of return. They were able to do that during fiscal years 2017 and 2018, generating returns of 13%  and 9%,  respectively.

But returns dipped to 6.27% during fiscal 2019, which also dragged the rate of return for the past five years down to 6.21%, according to the figures reviewed yesterday. The last time the investment returns fell short of the assumed rate of return — a standard which is set by the treasurer — was during fiscal 2016, when returns were slightly in the red.

Top performers

Private-equity and “investment-grade” credit were among the pension system’s top-performing asset classes in fiscal 2019, while emerging-market equities and investments in real assets were among those that did the worst, pension officials said yesterday. Average returns for the past 10 years are above 9% amid the ongoing recovery from the Great Recession, and 8% over the past 25 years.

Falling short of the assumed rate of return in any given year doesn’t mean retirees will be shorted their benefits. By the same token, beating the rate doesn’t mean retirees will get a bonus. But the annual investment returns are a factor in the ongoing assessments of the pension system’s long-term obligations, and thus play a role in the actuarial estimates used to determine the pension contribution that’s included in the annual state budget. (By contrast, employee-contribution rates are generally fixed by law and funded on a regular basis by workers.)

For fiscal year 2020, which began on July 1, Murphy, a Democrat, has budgeted a state pension payment totaling $3.89 billion as his administration has stayed with a pension-funding ramp-up that was established by former Republican Gov. Chris Christie. Murphy has also stuck to a quarterly payment schedule  that was established in a 2016 state law, with the next installment of $675 million due later this month. The pension system is also receiving monthly cash infusions from the state Lottery under a separate funding reform that was enacted during Christie’s tenure with cooperation from the Democratic-controlled state Legislature.

Speaking before the council yesterday, assistant state Treasurer Dini Ajmani pushed back against suggestions that the pension system is heading toward insolvency as she highlighted items like the state pension-contribution ramp-up and the recent string of positive investment returns.

“We’re just pleased to say that, fiscally, things are looking up,” Ajmani said.

Also during yesterday’s meeting, the investment council picked Deepak Raj of Princeton to serve as its next chairman. A veteran financial analyst who was nominated by Murphy last year to serve on the SIC, Raj takes over for acting chairman Adam Liebtag, an AFL-CIO labor representative who will continue on as the panel’s vice chairman.

“It’s a real honor and a privilege to be given this opportunity to serve as the chair of the State Investment Council,” Raj said after he was elected unanimously.

The SIC doesn’t directly administer benefits or manage the pension system’s investments on a day-to-day basis, but instead plays an administrative role, overseeing things like investment strategy and the distribution of stakes in stocks, bonds and other assets. (The pension system itself is made up of a number of different retirement funds for groups of workers that include teachers, judges, police officers and firefighters. The investment council’s policies have an impact on nearly 800,000 current and retired employees.) Council members serve as volunteers, with some representing the Murphy administration, and others the various worker groups.

Also during yesterday’s meeting, SIC members were urged to use their institutional clout to press British American Tobacco (BAT), an international tobacco group that state pension funds are invested in, to improve working conditions and housing accommodations for migrant farmworkers, including those cultivating tobacco leaves for BAT in North Carolina.

“We beg for your assistance,” said Leticia Zavala of the Farm Labor Organizing Committee, a union that represents the farmworkers.

Several council members said they would look into the matter and report back during the SIC’s next meeting, which is scheduled for November.

“Thank you for coming forward and bringing this to us,” Liebtag said.

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