State Pension Funds Defy Scandal, Stock Crashes
By Greg McDonald, Senior Writer
At least that's what most state pension experts say, thanks in part to diversified portfolios, much larger gains in the market than expected over the past 10 years, and state laws that guarantee most retired workers a defined benefit payment every month.
That's not to say that some adjustments won't be necessary in annual cost of living increases. Minnesota's retired public employees, for example, have been told to expect no more than a one percent increase this year, the smallest in a decade. But annual cost-of-living adjustments normally float up and down anyway, depending on a variety of factors, not just the economy or how retirement funds are doing.
The bottom line is that most state and other institutional pension funds are designed to weather downturns in the market, no matter how severe, says Ron Snell, who tracks pension issues for the National Conference of State Legislatures.
"These recent declines (in pension investment returns) have been sharper from a higher peak. But I don't think anything is likely to put retirees' benefits into question, nor do I think the benefits promised to people who expect to retire in the next few years are going to be in question either," says Snell.
Gary Findlay, executive director of the Missouri State Employees' Retirement System, agrees. He estimates that state employee pension funds, now worth about $1.5 trillion, have lost on average about 10 percent of their value in the stock market decline that began in March of 2000.
Less than one percent of that, he says, can be attributed to the Enron, WorldCom and other corporate debacles. Those losses, he points out, have been more than offset by the investment bonanzas that most states reaped during the stock market boom of the nineties, when many funds were averaging more than a 20 percent gain in their portfolios. Not bad for investments projected to make only 7-to-8 percent during that period.
"This is nowhere near as bad as the seventies because not only did we have markets that were going down, we had double-digit inflation at the same time. Basically, we're at almost a zero level of inflation now," says Findlay, who is also the current president of the National Association of State Retirement Administrators.
Still, there are some pension funds that are hurting, not only because of the recent stock market losses but because state contributions to them decreased in the nineties as fund investments produced higher returns. Some states are beginning to increase contributions again to help insure benefit stability for future retirees. But others, such as California, Kentucky, New Jersey, North Carolina and Tennessee, are struggling to meet the obligation at a time when their budgets are already constrained by serious revenue shortfalls.
California has lost about $30 billion of its $180 billion employees pension fund value. As a result the state has tightened its investment strategies to prohibit any purchases of stock in U.S. companies that use foreign tax havens to hide their assets. Tennessee has just pumped more than $241 million into its employee retirement system, which has decreased in value from about $25 billion a year ago to around $22 billion now. The contribution has put a strain on state government, which was forced into a partial shutdown earlier this year because of budget problems.
Kentucky, meanwhile, is now contributing less to its employee retirement system than usual because of its budget problems, and North Carolina is considering a halt in pension fund contributions in the midst of its budget crisis.
No state, however, has been hit harder by the market downturn and corporate scandals than New Jersey, which may have to raise taxes, cut spending further and take other drastic steps at some point to help make up for a $22 billion loss in its pension fund, which had ballooned to nearly $96 billion by mid-2000.
Gov. Jim McGreevey has said it may take an infusion of several hundred million dollars this year to help offset some of the losses. But some pension experts, say the state may have to pump as much as $1 billion back into to the fund to get its earnings growth back on track for future retirees.
Attorney General David Samson has threatened lawsuits against brokerage houses and corporations that may have engaged in fraud to attract New Jersey investments. But in the meantime, former Gov. Christie Todd Whitman, now head of the U.S. Environmental Protection Agency, is being blamed for some of the losses because her administration stopped making contributions to the pension fund in 1997 and gambled on selling pension obligation bonds to make up for the lost contributions.
The fund continued to do well overall on most of its investments while the stock market stayed up, but the bond sale turned out to be a bad investment strategy that generated a lot less than expected.
"New Jersey is in a crunch because the interest on the bonds they floated is now due and the market is down...at a time when the state is facing serious (revenue) shortfalls," says Fred Nesbitt, executive director of the National Conference of Employee Retirement Systems. "(The Whitman administration) sold bonds with the promise to pay it back tomorrow. Well, tomorrow is here and...they have to start making those contributions again."