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
The St. Louis Post-Dispatch recently reported upon the vote of the Board of the Missouri State Employees Retirement System (“MOSERS”) concerning state funding for the upcoming fiscal year. The Post’s heading “Missouri to increase funding of employee pension fund” was simultaneously accurate and misleading.
The $276 million was $20 million greater than the State had hoped to pay. However, pension funds such as MOSERS are operated on an actuarial basis, and Gabriel Roeder Smith & Company, the system’s actuary (and a nationally recognized firm in the public pension area) said that the proper contribution amount was $303 million. Even this number would have been much higher, except MOSERS uses a smoothing system that spreads out market gains and losses over a five year period.
One can understand why Governor Nixon and Missouri taxpayers may favor the approach taken by the MOSERS Board. If the actuarial amount had been contributed, the state budget would have had less money available for other state spending, or consideration would have had to have been given to a possible tax increase.
The strong objections from State Senator Jason Crowell, R-Cape Girardeau, are well taken, however. The retirement system is disregarding or minimizing actuarial calculations to reduce the contribution rate, but in the process of doing this, is creating uncertainty and possibly severe future problems.
Senator Crowell, a MOSERS Board Member, stated “We’ve put in jeopardy the actuarial soundness of the plan.”
Senator Crowell has special expertise in this area, since he is the chair of the Joint Commission of Public Employee Retirement Systems, and is a very knowledgeable legislator on the subject of public pensions. Though it is not made clear from the Post-Dispatch article, the MOSERS contribution level is also lowered by its expectation of investment returns at 8.5%. (Most public pension plans are currently forecasting investment returns between 7.25 and 7.75%.)
The wisdom of this year’s decision concerning funding of MOSERS can be meaningfully argued by both sides. However, my fear is that MOSERS and its Board may be getting on a slippery slope.
Once the Board decides not to follow actuarial funding guidelines in any given year, it is certainly subject to more political pressure to continue to do that in future years. If MOSERS Board had a publicly articulated a one-year only variance , due to extraordinary market and economic conditions, the actions of the MOSERS Board would be easier to justify.
With “5 year smoothing,” last year’s negative investment returns will impact contribution levels for years to come, so the funding issues are not likely to disappear in the next several years. When will MOSERS Board return to following the actuarial advice necessary to keep MOSERS sound?
The Missouri Constitution mandates that most public pension plans in Missouri, those having COLA benefits, must maintain actuarial soundness. If Senator Crowell’s predictions about future actuarial soundness problems do occur, the State of Missouri and the MOSERS Board will both regret this decision to fund at less than the actuarially recommended amounts.
Regulations under Section 401(a)(9) have been finalized effective September 8, 2009 for governmental plans. Under these final regulations, a governmental plan will be treated as having complied with the minimum mandatory distribution rules if the plan applies a reasonable and good-faith interpretation of the rules.
Whether or not the plan’s actions constitute a reasonable and good-faith interpretation of the distribution requirements is a question of fact.
If plan administrators and/or trustees are not sure whether their plan’s distribution policies either meet the literal requirements of Section 401(a)(9) or the reasonable and good-faith interpretation of the same, they should consult their legal and tax advisors. Failure to meet the 401(a)(9) requirements may result in penalties to the plan’s participants or adverse consequences to the plan itself.
On another note relating to plan distributions, the IRS recently issued Notice 2009-68 that contain two separate safe harbor explanations that may be provided to plan recipients of eligible rollover distributions. Plan administrators should review the new safe harbor notice explanations to determine whether or not the use of the same would be appropriate under the terms of their plan.
The new safe harbor explanations have been updated to take into account changes in the law. Prior to Notice 2009-68, the most recent safe harbor language was published in Notice 2002-3.
