Underfunded Public Pension Plan Linked to NJ Vote

I came across an interesting take on contributing factors in the New Jersy governor's race in November. The blog discusses the role of the public pension plan shortfall and how it was proposed to be fixed. Read on...

If a Prior Chairman and co-CEO of Goldman Sachs Cannot Fix an Underfunded Public Pension, What Chance Do the Rest of Us Have?
Daniel G. Tobben

By Daniel G. Tobben



This past Tuesday, Jon Corzine lost the New Jersey gubernatorial election to Chris Christie by a margin of 5%.On that night, Christie had accomplished quite a feat: he was the first Republican in a dozen years to win a statewide contest in the heavily Democratic State of New Jersey.

Although many individuals blame the general state of the economy for his loss, Corzine’s failure to improve the state’s public pension system underfunding issue, or the state’s budget in general, was a significant contribution to his loss this Tuesday.

In the prior election, Corzine came into office as the financial guru who was going to fix all of the State’s problems involving the budget deficit and the underfunded public pension. Jon Corzine had an extensive background in the financial industry. He graduated from the University of Chicago’s MBA program while working in the Bond Department at Continental-Illinois National Bank in Chicago. He began his career with Goldman Sachs in 1975 as a bond trader and worked his way up to become the Chairman and co-CEO of Goldman Sachs in 1994. During his tenure, he converted the investment firm from a private partnership to a publicly traded corporation and made a reported $400 million. Thus, when Corzine was elected, the voters of New Jersey were expecting Corzine to fix the public pension underfunding issue or at least to make significant strides in the right direction.

During his time as governor, Corzine provided little improvement to the public pension system and the system may have become even more unstable.

New Jersey contributed more than $3.2 billion into the public pension system during Corzine’s first term, but this amount paled in comparison to the long term liabilities of the public pensions system. The pension system had an unfunded accrued liability of $34.4 billion as of June 30, 2008 and held only 72.6% of the assets needed to be fully funded.

As of 2009, the state-employee pension plan will pay out an estimated $5.6 billion this year, a rise of $370 million, or 7%, from the year before. Therefore, even though Corzine made some contributions to the public pension system, the unfunded accrued liabilities continued to increase and further weaken the public pension system.

Besides the lack of contributions by the State, the pension system was severely underfunded for other reasons as well including bad investments. The New Jersey Division of Investment purchased $182 million of common and preferred stock within six months of Lehman Brothers’ collapse even after there were reports that the investment bank might stumble.

Faced with a severe general budget deficit and an unfunded accrued liability of $34.4 billion, Corzine was restricted in the actions he could take with respect of the underfunding issue. In order to fix the problems with the state’s budget deficit and the underfunding of the public pension systems, Corzine resorted to a radical idea that resulted in significant opposition in New Jersey and the eventual collapse of the proposal.

Under his plan, the State would lease the Garden State Parkway, the New Jersey Turnpike, and other toll roads for at least 75 years to a new public benefit corporation that could sell bonds secured by future tolls. To pay that money back, the tolls would increase 50% in 2010, 2014, 2018 and 2022. Those increases would include inflation adjustments and, after 2022, tolls would increase every four years until 2085 to reflect inflation. When citizens were faced with transportation costs rising by thousands of dollars over the next several years, they fiercely opposed Corzine’s proposal.

Faced with opposition from the majority of voters and the legislature, Corzine abandoned the toll road proposal long before the election date. However, he may have shot himself in the foot in October when he stated in a New York Times article that he may revisit his proposal to lease the New Jersey Turnpike to raise cash. Thus, Corzine’s only proposal that could have put the public pension system in the right direction was too radical and quickly defeated by voters.

Without some unforeseeable improvement in the future, the pension system was doomed from the State’s lack of contributions or a plan on how to raise the needed money to fund the unfunded accrued liability of the public pension system.

Despite his issues, many of the unions supported and endorsed Corzine for governor.

Stating “I believe you have put our pension system back on track,” the President of the New Jersey state Policeman’s Benevolent Association endorsed Corzine back on October 1, 2009. Furthermore, Corzine’s website for reelection even noted that Corzine had secured the support of every major law enforcement and firefighter union in New Jersey, which is surprising given the fact that he proposed to reduce the annual State contribution made to the pension system if he was reelected. However, all of these endorsements may have been a decision by the unions to go with the lesser of two evils for public employees.

In Chris Christie’s plan to balance the budget, he made several cuts to the public pension system.

Chris Christie would defer pension contributions by the State while the system remains seriously underfunded. Christie would also direct future state employees into a 401k-type plan, which would be disastrous for such a severely underfunded pension system.

Steve Wollmer, the communications director of the New Jersey Education explained it best when stating “The people working now are helping pay for the benefits for those already collecting. As a result, they’re going to weaken the existing pension system.” Although Corzine was promising to further weaken the pension system by lowering State contributions, Christie’s actions would cause even further damage by reducing the number of current employees whose contributions would help fund current benefits that are being paid.

In this election, the voters and the public employees had a very difficult decision.

On one side, they had Corzine. He was the financial guru who was supposed to fix the underfunding issue. During his time as governor, he had made no progress in solving the issue and his plans to balance the budget would further weaken the pension system’s viability.

However, on the other side, they had Christie. Christie was proposing the same lowered State contribution and was intending on shifting new hires out of the current pension system.

In voting for Corzine, I believe the people of New Jersey thought they had given Corzine his opportunity to fix the public pension underfunding issue. When he did not make adequate State contributions and proposed the radical toll program, the people of New Jersey decided that even this financial guru could not solve the State’s problems. They were ready for another governor with new ideas to fix these ongoing, worsening problems.

In the end, the Chairman and co-CEO of Goldman Sachs had lost the confidence of the people of New Jersey.

The difficulties of these pension funding problems are great. However, in the City of St. Louis pension disputes, Danna McKitrick attorneys won a case before the Missouri Supreme Court that required full funding. Also on the same night Governor Corzine lost, the City of Springfield, Mo. passed a sales tax, which had failed nine months before. Many things contributed to that changed outcome, but a significant part of it was due to our efforts. We’re not sure we could have helped Governor Corzine, because of the magnitude of the problems he faced, but obviously he wasn’t able to do it himself, though no doubt, he was “the smartest guy in the room.”

Co-authored by Daniel G. Tobben & David J. Binder
11/5/09 10:00 AM