Pensions Frying in New Jersey Too

‘Kentucky Fried Pensions: A Culture of Cover-up and Corruption‘ by Chris Tobe primarily focuses on the killings nefarious elements in the exotic-investment industry made by selling snake oil to severely underfunded public pension plans desperate to find ways to pay those promised pensions by any means except the obvious one – making contributions.

The focus is on Kentucky and Illinois but with New Jersey moving towards having 38% of their remaining trust assets in alternative investments the lessons of Arrowhawk and Record Currency Management will likely be visited upon us (assuming they haven’t already been and no one with any sense of public duty has found out as yet).

Among the thought-provoking excerpts from the book:

Many people don’t know that the FBI got the tape of Illinois governor Rob Blagojevich selling Barack Obama’s vacated Senate seat as a result of the investigation of placement agents who were deeply involved in public pensions.  (page 23)

It appeared to me that [Kentucky Retirement System CIO Adam] Tosh had cut a deal with KRS management to keep the existence of placement agents secret until he had secured a job in the private sector. (page 59)

There are state laws primarily under KRS 61.645(19)(i) to prevent these violations, but they have been totally ignored by KRS – enabled by an auditor and attorney general who refuse to enforce them (page 93)

Illinois and Kentucky are most likely the first states that would or should ask for a Federal bailout. (page 106)

In my opinion, additional blame lies with the SEC (Security and Exchange Commission) and the ratings agencies primarily Standard & Poors and Moody’s for not uncovering the truth about pension underfunding in many states – especially the Illinois and Kentucky systems that I have found to be so corrupt that they cannot help themselves.  In 2012, I suggested shifting the blame in a white paper titled “Did the SEC and S&P Let 14 States Destroy Their Pensions?” (page 108-9)

I have concluded that the most serious and pressing reason for the move toward insolvency is the purposeful underfunding of pensions, which is nothing but a backdoor method of borrowing.  Legislators have implemented this and governors of all political persuasions, as the SEC and ratings agencies have been asleep at the wheel.    (page 112)

If states had paid half their municipal coupons, the rating agencies would have downgraded them, but, with pensions, they have mostly looked the other way.  The SEC caught New Jersey red-handed in 2010 but only gave the state a slap on the wrist. (page 113)

You cannot invest your way out of this.  Double-digit returns when you have less than thirty percent of the assets are equivalent to three percent returns with a fully funded plan.  In most months, this diluted return cannot keep up with retiree checks going out – compounding the liability.  Moving to riskier assets does little in this situation except create liquidity issues.  The debate on whether to accept eight percent expected investment returns or go to a four percent number is meaningless in this distressed situation. (page 114-5)

The SEC finally got to this issue in 2010.  I heard (and it is confirmed in The New York Times) that New Jersey  pension trustee Orin Kramer shares my outrage with the SEC for letting New Jersey get by with half ARC payments. While the SEC wrote a scathing report on New Jersey for not disclosing the partial ARC payments and other pension issues to municipal bond holders, the fact that SEC made New Jersey pay absolutely nothing in fines sent the wrong message.  The SEC was mistaken if they think they sent a message to other states because we know that thirteen other states’ underfunding is as bad as or worse than New Jersey’s. (page 116-7)

With this no fine policy the SEC has basically stripped municipal bond holders from any protection from the whistleblower program, since it depends on a percentage of fines. (page 117)

The Kentucky pension crisis was caused by too much bi-partisanship and too little transparency. (page 120)

Window dressing in the form of switching future employees to DC plans is the flavor of the year, but does little to solve the real issues. (page 122)

Neither independent nor qualified in my opinion, the pension expert for the Arnold foundation was a former Romney education advisor when he served as Governor. (page 124)

Republicans oppose any substantial tax hike and Democrats oppose any large cuts in spending, which would have to include primary and secondary education.  The pensions and retiree health plans were the secret borrowing source, and they are all tapped out, there is nowhere else to go. (page 129)

There is one common budget trick used to mask the true underfunding of a pension system.  It’s called a pension obligation bond (POB).  the largest subsidy from the federal government to states is the exemption of legitimate state bonds from taxation which decreases their rates significantly.  The IRS because these are debt to cover debt will have no part in POB’s since they are inconsistent with most states balanced budget laws.  Since the IRS will not allow POBs to have a tax exemption they must be issued as taxable bonds increasing the borrowing costs by millions to the State. (page 139-40)

Contrary to what is implied by the “public” in public pension plans; it is a common practice for non-government employees to participate in plans designed for government employees.  While most of the national press has been focused on a handful of union-related officials and government association lobbyists enrolled in public plans, the practice in Kentucky is much deeper and pervasive. Nearly a third of the state’s assets are in non-government plans. (page 145)

There is no dispute that almost all non-profits are under financial stress, but these mental health agencies are in a no-win situation.  They are saddled with a huge state liability, and receive most of their funding from the federal government, which, for most practical purposes, is not allowed to fund the payment of this prior liability. (page 150)

Underfunding the pensions “off budget” may have allowed inflated compensations, which could lead to even higher pensions. (page 152)

Seven Counties Services, the non-profit trying to get out KERS, has asked the bankruptcy court to declare that KERS is not a government plan, but a multi-employer plan and subject to the federal rules of the U.S. Department of labor, which are referred to as falling under the ERISA.  This creates an entirely new set of questions.  Would this mean the assets would fall under the PBGC and would be insured by the federal government, and be an indirect bailout by the Feds? A ruling like this could change the nature of public pension plans nationally.  (page 153)

It seems that the corrupt practice of allowing lobbyists in the plan is most prevalent in some of the states that have deliberately underfunded their pensions like Illinois, New Jersey, and Kentucky. (page 154)

I have heard informally that the IRS is surveying public plans to discover the extent of non-profits in government plans. (page 155)

People ask me for simple solutions and I tell them there are none for KERS and even KTRS.  They are puzzled until I ask the following question: “Can our political system in Kentucky simultaneously in 2014 or 2015 give both the largest tax increase in history and the largest education cut in history in order to fill a $1 billion budget gap?”   My questioners answer, “No way,” and ask, “Why can’t we just not pay pensions?”  My answer, after speaking at and attending and asking questions to legal experts at a public pension legal seminar at Ohio State in early 2013 was that there is no legal way not to. States, unlike cities, cannot declare bankruptcy.  Earned pension benefits have high legal standing, and my understanding is that the state would have to default on every municipal bond, and sell of the state parks, before they could default on a penny of earned benefits. (page 165)

One idea would be to move all public pensions who have broken ARC funding under the PBGC until they reach an 80% funding level…..Since states and local governments are net recipients of federal funds, the FEDS could force plans to pay their full ARC by netting out other proceeds from total federal programs. (page 166-7)

If you put a bipartisan group of politicians in a locked room and give them three choices: raise taxes, fire teachers or screw the pensions – they will pick screw the pensions every time.  In Kentucky, we have continued doing it until the math caught up with us, and we cannot do it anymore. (page 169)

31 responses to this post.

  1. Posted by Anonymous on July 20, 2014 at 7:58 pm

    In NJ you get a loan 2+ billion dollar loan from JPMorganChase, the custodian bank for the NJ Alternate Benefits Program TIAA CREF mutual funds because the plan monies can’t be borrowed since they are for the exclusive benefit of participants and beneficiaries, you might also change the default carrier if denied access to custodial monies. Very busy!


  2. Posted by Tough Love on July 20, 2014 at 9:27 pm

    Well, I hope Mr. Tobe is wrong, and (when push comes to shove) PAST ()as well as FUTURE) service pension accruals CAN be cut … because, due to the collusive way these grossly excessive pensions were granted (i.e., the horse-trading between the Unions and our elected officials), they DESERVE to be cut.


    • Posted by Anonymous on July 20, 2014 at 10:08 pm

      bwahahahahahahahhahaahahahahahahahahahhahahahahahahahhahhaha! keep on talking cause nothing is coming out that is worthwhile or even remotely close to the truth. All your solutions may float in the toilet but they wont float in court. get ready for a sleazy rebuttal which you all have heard about 1 billion times.


      • Posted by Tough Love on July 20, 2014 at 10:39 pm

        It’s a MATH problem. and math ALWAYS trumps politics.


        • Posted by truthnolie on July 21, 2014 at 12:21 pm

          HAHAHA F’ing HAH!

          Math ALWAYS trumps politics, huh??? Heard about the US fed deficit??:

          The Outstanding Public Debt as of 21 Jul 2014 at 03:20:29 PM GMT is:

          $ 1 7 , 6 0 9 , 2 2 3 , 3 0 1 , 3 3 2 . 6 3

          What a pretentious, dimwitted dingbat you are.


          • Posted by Tough Love on July 21, 2014 at 12:46 pm

            The difference …….. the Feds have a money printing press, NJ doesn’t.

          • Posted by Endalimony4ever on July 21, 2014 at 4:45 pm

            Truthnolie, it shows how ignorant you are that your only rebuttal to TL’s well researched truths is to throw insults and bric bats. If you are a gubmint worker I can only hope you wakeup to the truth before it is too late. The pensions are going to fail as TL eloquently points out. Courts can order anything they want but if the isn’t there it is not there. And that’s all I have to say about that! Prepare accordingly.

  3. Posted by TLbrokendowninsurancehag on July 20, 2014 at 10:27 pm

    Blah blah blah far too generous blah blah blah compared to the private sector blah greedy public blah blah… Now you can take the night off


    • Posted by Tough Love on July 20, 2014 at 10:42 pm

      I see that Dumb and Dumber are back. Now all we need is truthnolie to make it a “dumbfecta”.


      • Posted by Anonymous on July 20, 2014 at 11:55 pm

        She spits her venom everywhere but have no fear, her bottle of alcohol is here, to calm her and sooth the savage beast.


        • Posted by Tough Love on July 21, 2014 at 8:34 am

          I’ll forgive your anger …… you’re angry because you know.that your on the deck of a sinking ship and all of the lifeboats are already gone..


          • Posted by truthnolie on July 21, 2014 at 12:26 pm

            That’s ok…..he’ll just have to survive on the floating corpses of private sector workers….They won’t even have had to been on the sinking ship….when they see their tax bills in coming years they’ll willingly be jumping into the sea like lemmings.

          • Posted by Endalimony4ever on July 21, 2014 at 4:50 pm

            Truthnolie, you are wrong! The deal is done! you can see it by the way the dems are responding or in this case not responding to the fact that Christie just went back on a commitment that he made regarding the pensions. There was very little blowback by the dems because they know the truth. The pensions are going to fail. When the next dem governor is in, it is very likely they will have to “defund” the pensions too. It is a done deal. Ain’t no stopping it now!

    • Posted by Jeanne on November 26, 2017 at 7:10 am

      I resent your emphasis on TL’s gender, implying her comments are less relevant than a man’s.


  4. “I have concluded that the most serious and pressing reason for the move toward insolvency is the purposeful underfunding of pensions.”

    In NYC retroactive pension increases are a larger factor, particularly for teachers. My guess is the distribution of the blame varies from place to place.


  5. So does this answer my question “Why not just fund the pensions” Why would the politicians choose to “screw the pensions” every single time?


    • Posted by Tough Love on July 21, 2014 at 9:47 am

      Those with even modest smarts (and not in denial) know the answer ….. the promises made (besides being unnecessary to attract and retain a qualified workforce, and grossly excessive by any reasonable metric), are simply WAY too generous and THEREFORE, to costly to fund.

      Confronting problems head-on is a VERY rare political trait


  6. Posted by truthnolie on July 21, 2014 at 12:45 pm

    “the purposeful underfunding of pensions.”

    And that is the crux of the whole argument.

    If there was a PURPOSEFUL underfunding knowing full well that it would lead to insolvency then that is Official Misconduct of the highest order.

    2C:30-2. Official misconduct
    A public servant is guilty of official misconduct when, with purpose to obtain a benefit for himself or another or to injure or to deprive another of a benefit:

    a. He commits an act relating to his office but constituting an unauthorized exercise of his official functions, knowing that such act is unauthorized or he is committing such act in an unauthorized manner; or

    b. He knowingly refrains from performing a duty which is imposed upon him by law or is clearly inherent in the nature of his office.

    The unions should charge Fatboy McTripleChin (and any other Gov./politician) with this offense since it’s obvious he has a clear intent to deprive others of a benefit and did so knowing such non-funding would undermine it.


    • And how about retroactive pension deals like the 2008 deal for NYC teachers that increased payouts by $1.1 billion per year, with no money having been set aside to pay for it?

      “The unions should charge Fatboy McTripleChin (and any other Gov./politician) with this offense.”

      What offense can the general public, which was not part of the pension increase for political support deals but is now being made to pay for it, charge both the union leaders and the politicians with?


      • Tough Love makes no distinction between pension disasters caused primarily by past taxpayer underfunding, and pension disasters caused primarily by retroactive pension increases. Neither do the union/pension apologists.


        • Posted by Tough Love on July 21, 2014 at 1:48 pm


          Clearly there is a distinction, with there being ZERO justification for ANY “retroactive” pension increases.

          But you speak of pension “underfunding” as though by definition it MUST be wrong.

          By assuming that, you fall into the trap of assuming that the approved pensions were fairly obtained … because THAT is what we are told to “fund”. But they weren’t fairly obtained, with nobody on EITHER SIDE of the “bargaining table” representing Taxpayer interests, and with those granting these rich pensions most often accepting campaign contributions and election support from the Unions representing these workers……….. collusion I say, and Taxpayers shouldn’t be obligated to fund the results of such collusion.


          • Posted by Carlos on July 21, 2014 at 6:48 pm

            TL- We get it. You don’t want to pay what you legally are obligated to pay. Let me ask you this : If you are so sure you aren’t going to have to pay for these pensions then why are you on here every single day trying to get John Bury to reinforce that thought for you ? As if he or any one else knows how anything in life will play out. If I was as sure as you claim to be I wouldn’t need John Bury to pat me on the head and tell me it will all be ok. If it was me I certainly wouldn’t be in the state of panic you are day after day,I would just smile knowingly.

          • Posted by truthnolie on July 21, 2014 at 7:07 pm


            BEST REPLY EVER!!!!!

          • Posted by Tough Love on July 21, 2014 at 9:19 pm

            Carlos, I comment because in just a few years NJ’s Plan assets will hit ZERO, meaning that the only way retirees continue to be paid their full pensions is via a tax increase of roughly $9 Billion…… noting that NJ can’t even come up with $1 Billion to put into these Plans today.

            While I don’t believe there is a snow-ball’s chance in hell that that will happen (because our elected officials will lightly switch sides and throw Public Sector workers “under the bus” … perhaps by ending retiree healthcare subsidies), I want to educate as many Taxpayers as possible as to the enormity of the decades-long taxpayer ripoff that has resulted from the Public Sector Unions’ BUYING of the favorable votes (on Public Sector pay, pensions, and benefits) of our elected officials via campaign contributions and election support.

            With that education, hopefully Taxpayers will put a a united front to demand pension/benefit reductions rather than tax increases.

  7. Posted by Tough Love on July 21, 2014 at 8:59 pm

    For those who DO want to be “educated” on NJ’s true pension status, I have something new to offer …..

    NJ has 7 Public Sector pension Plans, for which the actuarial reports can be found here:…

    Before I go on, let’s define “Funding Ratio”. It’s the ratio of (a)/(b) where (a) is Plan assets, and (b) is the interest-discounted value of expected future pension payouts (ALREADY earned based on PAST service).

    While the Official funding ratios differ by Plan, for State workers, let’s assume the overall average “official” Funding Ratio is just about 55% and for Local workers it is 75%, The key word is “official”, because the methodology used under Government accounting (used in the calculation of the “official” funding ratio) is WAY more liberal than that REQUIRED (by US Gov’t Regulations) in the valuation of Private Sector Pension Plans.

    It has become so widely accepted that the very liberal Gov’t valuation standards UNDERSTATE the true financial condition of Public Sector pension Plans that (1) the Gov’t Standards themselves are being materially tightened (by the GASB), and (2) Moody’s has developed a formula-based process to adjust the “official” funding ratios to a more reasonable and financially appropriate funding ratio. Moody’s determined that this was necessary to have a more accurate picture of the financial position of Public Sector Plans in it’s creditworthiness analysis of States and Cities.

    First, while current Gov’t accounting standards use “smoothed” assets (spreading gains and losses from one year over a number of years) in the numerator of the Funding ratio, Moody’s process uses the actual current “market” value. Second, while Gov’t accounting standards use the Plan’s investment-return assumption as the interest rate for discounting Plan liabilities (in the denominator of the funding ratio), Moody’s process uses an interest rate determined by the Citibank Pension Liability Index.

    Let me explain why the latter distinction is VERY VERY important……

    The HIGHER the interest rate assumption, the LOWER the PV of Plan Liabilities and (because the PV of Plan Liabilities are in the DENOMINATOR of the Funding ratio formula) the HIGHER the Funding ratio. The “official” Funding Ratio calculation uses an interest rate 7.9% (in NJ) in the calculation of the PV of Plan Liabilities while Moody’s uses the Citibank Pension Liability Index interest rate, which for June 2014 is 4.33%.

    Specifically, Moody’s adjustment formula is as follows:

    Adj PV of Liabilities = [Official PV of liabilities x (1 + official %i )^13 ] / [(1 + adjusted %i) ^13]

    So, for each $1,000 of “official” Plan liabilities (calculated using the 7.9%), Moody’s process would re-state the PV of Plan liabilities to the more appropriate level of:

    [$1,000 x ( 1.079^13)] / (1.0433^13) = $1,548.67

    Now lets say that for State workers (with the “official” funding ratio of 55%) Plan assets were $550 for each $1,000 of “official” PV of Plan liabilities, giving us the 55% funding ratio from the calculation $550/$1,000 = 55.0%.

    Then Moody’s would re-state the funding ratio …. to what THEY believe is a MUCH more accurate picture of the Plan’s financial position to $550/$1548.67 = 35.5% … noting that I assumed that “Smoothed” assets = “Market” assets because I do not know the current relationship ….. although the DIRECTION would result in an even LOWER Moody’s-adjusted Funding Ratio.

    Yup, a 35.5% Moody’s-adjusted funding ratio for STATE workers, and with a similar re-calculation dropping the 75% “official” funding ratio for LOCAL workers to $750/$1,548.67 = 48.4%.

    To put these low funding ratios of 35.5% and 48.4% in perspective, US Gov’t regulation of Private Sector pensions considers a funding ratio (calculated in a manner for Private Sector Plans that would yield a result very close to that produced by the Moody’s process) below 60% to be SO POOR that the Plan would not be allowed to credit any additional pension accruals (for additional service years or salary increases) until the funding ratio rose above 60%. And most pension experts agree that Plans with such low funding ratios have entered the “death spiral” phase from which they cannot recover.


    • Posted by Anonymous on July 21, 2014 at 10:55 pm

      Does the rest of the peanut gallery concur with TL’s analysis? And, if so, why is Christie so confidently saying the there are enough funds for the next 30 years?


      • Because Christie is not a pension expert (nor apparently is anyone he listens to) so he says what i most convenient at the time for his purposes (one of which is obviously not to fund the thing).


      • Posted by Tough Love on July 21, 2014 at 11:50 pm

        To be clear, the exact words were ….

        Based on actuarial assumptions and assuming that the State returns to a regular payment schedule, “the pensions systems are projected to continue providing benefits to retirees for at least the next 30 years”

        which can be found on page 21 of THIS report:

        And THE PROBLEM with the above words which make the conclusion (of being able to pay retirees for 30 more years) ridiculous, are the 2 QUALIFIES;

        (1) “Based on actuarial assumptions” …. meaning we would need to earn 7.9% annually for 30 years, and
        (2) “assuming that the State returns to a regular payment schedule” ….. which doesn’t have a snowball’s chance of happening


  8. Posted by Eric on July 22, 2014 at 12:06 am

    Tough Love:
    I like your analysis. However, I do think that John’s calculation of a 5 year life, assuming that contributions are returned to current workers, is a bit too pessimistic. CC’s 30 year life projection, on the other hand, is a bit too optimistic. What are your thoughts on your so called “death spiral?” How long would the spiral occur until impact?


    • Posted by Tough Love on July 22, 2014 at 12:14 am

      I agree with John’s estimate of less than 5 years to zero assets …. assuming that the actual contributions of current actives cannot be diverted to pay current retiree pension (which seems quite reasonable and appropriate).

      Of course, the 5 year period could be extended if additional pension contributions can be found … perhaps by materially reducing retiree healthcare subsidies and using that savings to help fund the pensions.

      I just don’t see substantive amounts being raised via tax increases.


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