New Jersey's local police and firefighter leaders have succeeded in pulling apart the state's pension system, which is so underfunded it has dragged down the state's credit rating, only trailing Illinois.

A bad credit rating costs Garden State taxpayers millions of dollars in higher interest payments to Wall Street bond investors every year. Underfunded pensions cost a lot more: The state's obligations now outweigh its expected assets by more than $50 billion. By putting aside more for pension investments, the state can avoid the even worse expense of eventually having to pay pension checks directly from the budget.

Gov. Murphy last week signed off on Senate Bill 5, which takes around $25 billion set aside for local and county police and fire retirees away from the State Investment Council that also invests for teachers, judges, troopers, and other state employees, and puts this money under a new board.

The new board has a majority of working and retired cops and firefighters, who pay up to 10 percent of their paychecks into the fund, plus a minority of local and state officials, who represent employers — taxpayers — who are on the hook for most of the pensions' expense.

Will the police and fire reps do a better job investing the people's billions for future retirees, than former Govs. Christopher Christie's and Jon Corzine's appointments and cronies did on the State Investment Council?

Over the past ten years, the Council pumped billions into high-fee hedge fund, real estate, and private equity managers. Returns were disappointing. After paying fees, plain U.S. stock investments returned triple what hedge funds and real estate funds paid back, and far more than commodities, while also beating private equity fund returns, state investment records show.

Union reps want to ditch the hedge funds. Will they do better in the future, if they put the money in low-fee stock index funds and other familiar securities?

And what happens if they do worse? Will pensioners suffer? Or will taxpayers?

"There will be some complications" separating the funds, Mark Magyar, policy director for the majority Democrats under Sen. Steve Sweeney (D., Gloucester), told me.

You can't just dump hedge funds, real estate funds, or private equity funds. The private investments New Jersey bought under Govs. Christie and Corzine aren't very liquid. You can't sell them on a stock exchange or a bond market. It could take a few years to unravel them, and split profits with their wealthy managers, so the managers can go buy more pro sports teams, private jets, and Connecticut estates.

But the point of splitting the funds isn't really to make radically different investments. The point is that the local police and fire funds have more money  than the state teachers', state workers', and judges' funds, compared to what they owe.

"Police and fire is in such good shape because, unlike the state, the local employers haven't been taking all these pension funding holidays in the last 30 years," said Magyar. "The state required the towns to make required contributions," even when that forced tax increases that made voters howl, even as the last few governors cut back on promised pension payments.

So the police and fire people, with more than 70 cents saved in their pension fund for every dollar they will eventually have to pay, are trying to defend that relative surplus, and ensure they won't have to suffer frozen pensions as the state struggles to bail out the more severely underfunded teachers, who have less than 60 cents for every dollar they need, or state workers, which have closer to 40 cents.

What if the police and fire reps, like previous investment boards, get bamboozled by smooth-talking investment managers and gamble away towns' hard-earned pension contributions? What if they buy plain-vanilla investments that fail to perform in the next ten to twenty years?

The funding formula New Jersey and other pension plans use tend to reward losses: If assets slip relative to liabilities, employers (that's you, taxpayers!) help make up the difference by making a larger "employer contribution" to the pension system. (At least local taxpayers do. The past few governors, as noted above, have a history of cutting contributions. And they set a precedent for changing pension funding practices, if they don't like the way costs go up.)

Magyar says there are powerful incentives not to invest so badly they'll need a bailout, however. Public workers want to regain cost-of-living increases. The longest-serving state employees with 40 years in public service can retire at up to two-thirds of their pay, plus Social Security. But even at public-sector levels, a flat pension, like a flat paycheck, buys less every year, as consumer prices creep up. Cost-of-living increases for New Jersey pensioners have been blocked by a 2011 law, until the funds build their assets to 80 percent of future obligations.

The local police and fire fund isn't there yet, but it's a lot closer than the teachers or the state workers.

When it comes to investing, bigger ought to be better. A single pension system should be able to negotiate volume discounts, consolidate costs, and buy assets smaller plans can't. It's a failure of New Jersey democracy and financial discipline, a sign of the lack of public trust by the uniformed men and women New Jersey depends on, that, after so many years of underfunding, the state retirement system is breaking in two.

One thing's for sure: If results diverge, comparing teacher vs. police returns should give pensioners, their advocates, and taxpayers plenty more to argue about.