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Thursday, February 25, 2010

Fudging Pension Deficit Numbers to $teal More Money

The Newark Star-Ledger reports today that the state pension fund has an unfunded liability for the fiscal year ending June 30, 2009 of approximately $46 billion, or about 30% higher than the unfunded liability as of June 30, 2008.
The numbers require a closer analysis.   Especially when there is a movement afoot among members of both parties to get the State Government to make up for the unfunded amount -- the deficit -- which is a different way of saying it will come out of the pockets of everyone living, working or travelling through New Jersey.   And more especially, when you consider that this proposal is supported by leaders of both houses of New Jersey's legislature and has, according to other reports, met with the approval of New Jersey's new Governor, Chris Christie.   The same Governor Christie who claims to be taxpayer-friendly and fiscally-responsible. 

Remember when Christie said he became a lawyer because he couldn't do math?   Maybe he needs an abacus.  Let's look at some simple numbers.
From my math, using only the figures provided in the article, pension fund liabilities have actually decreased by $5.5 billion from 6/30/08 to 6/30/09.  I arrive at this number by adding assets to unfunded liabilities (the equivalent of negative shareholders' equity).  Since the unfunded portion grew from $34 to $45.8 billion, and the overall value (the assets) of the pension fund decreased from $83 to $66 billion, this suggests that pension fund payments to current retirees are accelerating, while overall liabilities have actually shrunk from $117.4 to $111.8 billion.

If current inflows continue to be outpaced by outflows and especially if there is another market downturn, the unfunded liabilities will actually grow at a faster pace. But note that these are June 30, 2009 numbers. If the pension funds are getting a rate of return close to the major market indeces (up about 20-25% since then), then present assets may be $13-15 billion higher. That would actually produce a small DECLINE in the unfunded liabilities.
Not properly accounting for the numbers allows people to cry that the sky is falling in order to push through a state constitutional amendment requiring the state to fund any shortfall. Such an amendment should be opposed in all instances. State funding would act as a form of loss insurance for investments, which by definition carry a risk of loss. The private sector taxpayers do not enjoy these benefits and should never be asked to fund loss insurance for public employees. Such a plan would present another moral hazard, encouraging the pension funds to take even more investment risk because it would be "risk-free"; public workers get all the upside if it works, and taxpayers make up for all losses if the investments go bad.  

Nothing can be more fundamentally unfair than a system where private sector residents, in some cases lacking a safety net, can be saddled with an accelerating death spiral of increased tax levies to support the entitlements (er, obligations, that's the snooty word the Grey Poupon set uses with the proles) of the public employee vassals.

Private citizens who put their money in a mutual fund whose manager makes bad investments -- or who simply invests when the entire market unravels -- don't get a bailout. No one deserves loss insurance for failed investments. No one is entitled to a certain rate of return. These are investments, not guarantees.  
Should Governor Christie back this plan, he would do tremendous damage to his credibility as a "fiscal conservative" or "reformer," and would invite -- if not ensure -- a serious intraparty challenger should he run for re-election.   In short, he would reveal himself as a faux reformer. 

If the new Governor approves the equivalent of a taxpayer-funded government bailout of the pension funds -- from your money and from the pockets of our children and grandchildren, born and unborn -- he will show himself to be another believer in a two-tier New Jersey society.   Where all of us are equal, but those of us who govern are more equal than others.   
Eric Dixon is an attorney in New York and New Jersey who handles legal and investigative matters.  Mr. Dixon has substantial experience in the capital markets and offers strategic analysis and commentary on legal, economic and political affairs.  Mr. Dixon welcomes your comments, criticisms and inquiries at 917-696-2442 and at

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