State officials stress that pension checks to retirees are under no threat despite the sagging returns.

 This story was written and produced by NJ Spotlight. It is being republished under a special NJ News Commons content-sharing agreement related to COVID-19 coverage. To read more, visit njspotlight.com.

Investment returns continue to be a source of disappointment for New Jersey’s troubled public-worker pension system even as a new state budget brought another much-needed boost in funding.

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The latest figures reviewed by members of the State Investment Council showed fund returns barely topped 1% during the state’s last fiscal year as the coronavirus pandemic triggered a national economic downturn.

The overall performance in the 2020 fiscal year fell well short of the pension system’s annual assumed rate of return; it also was the worst year for fund investments in the last four years.

Several Department of Treasury officials pointed to the economic impact of the health crisis as a major factor as they reviewed the investment figures in detail during a public meeting Wednesday.

“The pension fund was not immune to the adverse impact that the COVID-19 pandemic has had on the global economy, and on investment returns,” said Corey Amon, director of the state Division of Investment.

No threat to overall liquidity

Despite the sagging returns, the officials stressed the funds’ overall liquidity remains strong, which means pension checks will continue to go out uninterrupted to the thousands of retirees who rely on them.

Investment council members did receive some good news Wednesday as Treasury officials highlighted the record state pension contribution funded in the state budget Gov. Phil Murphy signed into law Tuesday. A $4.7 billion contribution that’s budgeted for the 2021 fiscal year amounts to a year-over-year funding increase of nearly $1 billion, and it will come despite significant tax-revenue losses that Treasury has been projecting due to the health crisis.

“What this contribution shows is a real desire to make sure we do the right thing,” Assistant Treasurer Dini Ajmani said.

The $75.4 billion pension system covers retirement for some 800,000 current and retired workers across seven funds. It is financed with contributions from workers along with payments made by their respective state and local government employers and from revenue that flows in monthly from the New Jersey Lottery.

The pension funds operated under a 7.5% annual assumed rate of return during the 2020 fiscal year, which closed on June 30. But the final investment returns for FY2020 were 1.2%, marking the second straight year they fell short of the assumed rate; returns in fiscal 2019 were just over 6%, according to Treasury records.

Before the downward trend, investment returns had been running well above the assumed rate, averaging 11% over the 2017 and 2018 fiscal years.

Whenever annual returns fall short of the assumed rate, more of the pension-funding burden falls to government employers since contribution rates paid by workers are fixed in law.

State history of underfunding retirement plans

The state has a long history of shorting what actuaries would consider to be a full annual contribution, leaving the pension system as one of the nation’s worst-funded state retirement plans.

Amon stressed the need to maintain a long-term view when discussing the latest returns during Wednesday’s meeting. He also said investment performance over the last 10 years has yielded an average return of 8%, which remains above the fund’s assumed rate. The Division of Investment manages pension-fund assets on a day-to-day basis under general policies set by the investment council.

“Fiscal-year returns were impacted by certain private-market investments which are inherently long-term strategies,” Amon said. “Investments in real estate and certain private-credit strategies, for example, were meaningful detractors to overall returns.”

“While we were not immune to the short-term impact created by one of the worst global economic downturns on record, what’s important to note is that the pension fund has met its long-term performance objectives,” he said.

And despite the disappointing short-term investment performance, Amon said pension-fund managers have been able to “maintain a strong liquidity position.”

Ajmani said that although the pandemic is straining New Jersey’s finances, the record state pension contribution in the new budget demonstrates the state’s ongoing commitment to its public employees and retirees.

“I truly believe the measure of an institution is not the difficulties it faces, but how it surmounts them,” she said.

Murphy increases investment in pension funds

Despite the near-term revenue losses projected by Treasury, the $32.7 billion budget enacted by Murphy on Tuesday increases overall year-over-year state spending. To do so, Murphy approved roughly $700 million in tax increases, and lawmakers also authorized up to $4.5 billion in new borrowing without voter approval. The New Jersey Constitution generally prohibits deficit spending, but it allows for exceptions such as helping the state respond to a war or major emergency.

Murphy, a first-term Democrat, originally proposed making a $4.9 billion pension contribution during the 2021 fiscal year in a budget plan he presented on Aug. 25. He also urged lawmakers to hike taxes and authorize the new borrowing, while Republicans called for less spending on worker pensions. The Democratic-controlled Legislature ultimately reduced the pension contribution to $4.7 billion in a final spending bill they sent to the governor late last week.

Although that $4.7 billion contribution represents 78% of what actuaries would consider a full payment, Ajmani said it keeps the state largely on course to step up to a full contribution within a few years.

The increased pension funding drew immediate praise from Eric Richard, who serves on the investment council as a representative of the AFL-CIO labor organization.

“We just want to thank you for staying on the path, and hopefully at some point, we’ll turn the corner in regard to the pension system,” Richard said.

Earlier during Wednesday’s meeting, investment council members voted unanimously to keep Deepak Raj and Adam Liebtag in the positions of chair and vice chair for another year.

To read the article in the original format, click: NJ pension fund investments almost flat amid pandemic economic slump