The pension fund covering the retirements of many New Jersey public workers was enjoying higher-than-expected investment returns earlier this year on the eve of President Donald Trump’s war in Iran.
Market volatility triggered by the overseas war is now threatening to dampen those gains, according to preliminary performance estimates released by state pension fund managers on Wednesday.
The data, reviewed during a New Jersey State Investment Council public meeting, indicated pension fund returns for the current fiscal year were running slightly above 6% through the end of March.
The fiscal year-to-date returns, though, had topped 10% as recently as the end of February, according to the preliminary estimates, which are still subject to final auditing.
Time remains to reverse the downward trend through the current fiscal year, which ends June 30. The market has made improvements in recent weeks, Shoaib Khan, director of the Division of Investment, told council members.
Still, the investment return estimates highlight the risk that war is posing to a pension fund bid to record at least 10% gains in two consecutive fiscal years.
“Given the events around the world, and more specifically, the Middle East, we thought it made sense to at least touch on the market environment, as it was, pre-conflict,” Khan said. “We can see the adverse reaction to the Middle East conflict and, obviously, the impact (on) the supply of oil is a major concern.”
Economic uncertainty stemming from the overseas conflict is as a key concern for Gov. Mikie Sherrill and lawmakers as they prepare to craft a budget for the fiscal year that begins July 1. Economists have warned that a prolonged conflict could exacerbate inflation and even increase the likelihood of U.S. recession, a scenario that could have a major impact on the next state budget.
Under a proposed budget put forward last month by Sherrill, a first-term Democrat, state government would earmark more than $7 billion to cover its employer pension obligations. That sum includes monthly Lottery revenue that flows directly into the pension fund.
The pension fund assets managed by the Department of the Treasury’s Division of Investment help cover the retirement benefits owed to thousands of retired teachers, judges and many other public workers. Benefits for police officers and firefighters are managed in a separate fund by a different panel.
In addition to the regular contributions made by workers and New Jersey taxpayers via state and local government, the pension fund overseen by the investment council assumes 7% annual investment gains. It receives a boost any time investment returns outpace the assumed rate, while gains that fall short of that hurdle can put more pressure on the system itself.
During the last fiscal year, which ended June 30, the pension fund scored annual investment returns of nearly 11%, helping boost the fund’s estimated market value to $76.5 billion. That value had soared above $81 billion through February. But at the end of March, the market value had dipped to $80.3 billion, according to the preliminary estimates reviewed Wednesday.
The pension fund, though, was slightly besting its assumed rate of return over the last five years, with 7.19% net returns, the preliminary estimates show.
Despite those gains, many government retirees in New Jersey have not seen the size of their pension benefits grow due to a long-running suspension of annual COLAs, or cost-of-living adjustments. The hold is required under a 2011 state law that made several major changes to pension and health benefits for New Jersey government workers and retirees.
Years of underfunding by New Jersey governors from both parties had eroded the pension system’s fiscal health, creating an unfunded liability that will take decades to fully repair, according to Treasury’s latest long-range estimates.
In more recent years, though, retired workers have pressed lawmakers to lift the COLAs freeze, noting a significant uptick in annual inflation. This year, they’ve also pointed out that lawmakers have granted themselves a pay raise, even as the hold on COLAs remains ongoing.
This story is made possible in part by the Corporation for Public Broadcasting, a private corporation funded by the American people.
