the staff of the Ridgewood blog
Ridgewood NJ, , the New Jersey teacher pension system is paying out about $4.5 billion a year in retirement benefits and other kinds of payments to 104,000 beneficiaries. Yet contributions by active teachers and state government amount about $2.8 billion annually, leaving a $1.7 billion deficit. When the market is good, investment returns help make up the difference. For the fiscal year ended June 30, 2018, for instance, a nearly 10 percent market gain generated $2 billion, which the fund largely used to pay retirees. This year, however, market gains have largely evaporated for everyone.
Standard & Poor’s identified eight seriously underfunded state and local pension systems that could soon face a crisis—including the New Jersey state teachers’ fund, which has just 25 percent of the money it needs on hand to finance its future obligations. https://www.city-journal.org/stock-market-downturn-govt-pension-funds
In its last financial report, the New Jersey teachers’ pension fund had just $530 million in cash. Like most underfunded systems, it placed most of its assets in the market, eager for high returns. Now, its investments have almost certainly declined, and it will likely have to sell these shares at a low price just to raise cash. This kind of liquidity problem had a major effect on many pension systems after the 2008 market crash; CalPERS sold some 2.3 million shares of Apple to raise $370 million in cash that year. Five years later, those shares were worth $1.5 billion.
That kind of math illustrates why it becomes so hard for underfunded pensions to fix themselves, even when the market rallies. The New Jersey teachers’ fund has only about $20 billion invested in the market, so even when the state’s investment managers generate a nearly double-digit market return—as they did in fiscal 2018—the gains are barely enough to pay pensions. If it were fully funded, by contrast, the fund would earn enough in a good year to cover pensions and save billions of dollars more for a rainy day. https://www.city-journal.org/stock-market-downturn-govt-pension-funds