State legislators worried about New Jersey's deep pension debt are contemplating turning over administration of one of the largest retirement funds to workers and retirees. The idea behind the move sounds simple: Workers and retirees, who are beneficiaries of the system, can be relied on to run it well.
The only problem is that this has already been tried around the country and has helped create some of the nation's biggest pension fiascos, as workers and unions have managed pensions for their benefit, leaving taxpayers on the hook for huge losses. This is not the kind of reform that Jersey residents facing tens of billions of dollars in pension debt need.
The Legislature has already passed a bill, now awaiting Gov. Christie's signature, that turns over management of the Police and Firemen's Retirement System (PFRS), run by the Treasury Department, to a 12-member board of trustees dominated by beneficiaries. One justification for the bill is anger that the State Investment Council, which directs pension fund investing, has been paying Wall Street firms big fees, but returns haven't lived up to expectations.
"Giving management to the pension beneficiaries removes political interest from the investments and places greater responsibility with the employees who will benefit from the pensions," the bill's sponsor, Senate President Stephen Sweeney (D., Gloucester), says.
But the new 12-member board would also have powers beyond managing investments, including the ability to decrease members' contributions into the fund, to reinstate annual cost-of-living adjustments that the state suspended, or even change the formula the system uses to calculate final pensions.
Although the board would also include five officials appointed by the governor, presumably to look after the interests of taxpayers, if merely one of these appointees sided with employees on crucial votes, the trustees could make sweeping, costly changes to the system. That leaves taxpayers vulnerable thanks to legislative language like this: "Nothing in the bill relieves the State or local government employers of any past, present, or future obligations to the PFRS or its members."
The notion that beneficiaries are good watchdogs is enshrined in private pension management. The difference there, however, is that key decisions on benefits remain in the hands of the plan sponsor - typically the company that created the pension system. It has an interest in controlling those costs and making sure they are sustainable.
In the public sector, by contrast, some pension boards have been given extraordinary powers, with sometimes catastrophic outcomes. Dallas is one of America's most economically vibrant metropolises, and yet city leaders there have actually contemplated bankruptcy in recent months thanks to the steep debt in its retirement fund for police and firefighters.
Texas state legislators gave workers, not the city, the right to run the system decades ago. And workers acquired benefits, including annual cost-of-living adjustments, that have consistently exceeded the rate of inflation, and the pension system had to figure out how to finance. One result: the board began investing in riskier and riskier assets, hoping to boost returns. Instead it suffered massive losses and now has just 36 percent of the money that's needed to pay retirees. Now Texas is looking to move in the opposite direction from Jersey, decreasing representation of beneficiaries on the board.
In Detroit, the general government pension fund - controlled by a majority coalition of workers and retirees - continued for more than a decade enhancing annual payouts to retirees even as Detroit's finances deteriorated. An audit found that their policies had robbed the system of some $2 billion in assets through retiree-friendly policies. The system's debt was a key factor in the decision of the Detroit emergency manager to place the city in receivership.
Worker-dominated boards have even undercut savings enacted by legislators. In 2012 California Gov. Jerry Brown signed legislation to close loopholes that allowed workers to inflate pensions. But the board of the California Public Employees' Retirement System (Calpers), later diluted the impact of the legislation by allowing employees to count temporary pay increases toward their pensions. An enraged Brown, who has fought for legislation to change the board, said the trustees' vote, "undermines the pension reforms enacted just two years ago."
Significantly, Calpers' beneficiaries have fewer seats on their board than the Jersey bill would grant to the police and fire fund, but beneficiaries voting as a bloc have still been able to dominate Calpers.
If Jersey legislators wanted to cut high investment fees and reduce political meddling in investment strategies, the state could simply move pension fund assets into low-cost index funds, as many states are doing.
If workers want to manage assets, the state could revisit the plan put forward by the bipartisan pension commission, which recommended freezing existing state pensions and giving their resources to unions to manage. Those plans would no longer accumulate new debt, and employees would be put into new, more financially viable pension systems going forward.
New Jersey's pension mess is the result of several generations of state leaders promising increasingly richer benefits that politicians couldn't pay for. Putting workers in charge of their pensions does nothing to fix the problems the state faces.