But the Pension Fund Was Just Sitting There

doonesbury
Senate President Steve Sweeney says the investment strategies of the state pension funds need changes to improve returns.

“I believe that instead of going to Wall Street to borrow money, that in the fixed portfolio of your pension system, borrow it from the pension system because right now you might get 2 percent on a 10-year bond. Well if I’m paying Wall Street 6.2, why not pay it to my pension instead. It will get us funded quicker, and I’m working on legislation to do that”.

So what’s wrong with this idea?

It’s illegal.

There are a lot of federal pension laws that do not apply to public retirement systems (funding topping the list) but, among the laws that do, is the exclusive benefit rule:

Applicable to governmental plans. Code section 401(a)(2) requires that a qualified plan be maintained for the exclusive benefit of employees or their beneficiaries and that under the plan’s trust instrument, it be impossible, at any time prior to the satisfaction of plan liabilities, for any part of the principal or income of the trust to be diverted for any other purpose.

Sweeney’s gambit is not new.  Denny McClain and the Roarks tried it though I don’t believe they considered passing a law on their own before they taking the money.

11 responses to this post.

  1. Posted by Anonymous on November 7, 2016 at 10:08 am

    Besides the State would never pay the money back.

    Reply

  2. Posted by Analyst on November 7, 2016 at 10:32 am

    So was it illegal when the pension funds of NYS and NYC bought NYC bonds to bailout the city in the 70’s?
    While I agree that one must be careful and prudent, what is difference between paying a market rate to the pension fund vs. paying to wall St?

    Reply

    • Because bonds default and there is an a much higher possibility of default for a borrower desperate enough to be left no alternative than pension assets because their credit rating is so low that nobody will lend to them except at usurious rates.

      NJ is there and has already been borrowing pension assets (by not making contributions) but that’s not enough.

      ERISA was effective in 1976 so it may not have been illegal in NYC case. Would be interested to see if anyone has any information on any public pension that is investing in their state’s bonds.

      Reply

      • Posted by Theodore Konshak on November 9, 2016 at 11:23 am

        Here is a possibility. The Chicago Teachers’ Pension Fund buys the bonds of the Chicago Public Schools. They have a junk bond status and pay a high yield in excess of the investment return assumption.

        Reply

  3. Posted by Eric on November 7, 2016 at 6:12 pm

    John:
    We have already seen that the law does not exist in NJ. I read the briefs in the cost of living adjustment case. The non-forfeitable right was clear. The benefits program shall not be reduced. There are only 3 benefits for a retiree ie the base pension, the cost of living adjustments, and the post-retirement health care benefits. Since the non-forfeitable right, by statute, does not apply to the post-retirement health care benefits, what is left for the BENEFITS (plural) program that cannot be reduced? Base pension AND cost of living adjustments.
    Associate Justice Barry Albin asked the state if the cost of living adjustments are not a benefit. He also asked the state how a retiree, who retired prior to the law having been changed, can plan his or her life with the retroactive application.
    What is my point? Since the law does not exist in the Banana Republic of NJ, Sweeney can do whatever the hell he wants. Federal laws are flaunted as well.
    He can borrow from the pension fund, and never replace the money, and there is absolutely no recourse.
    Zero.
    Eric

    Reply

    • Eric,

      I read the pension law too and agree with you that cutting COLAs didn’t look legal.

      Do you have any idea why the legislature and Christie didn’t cut health care since health care didn’t have those legal protections?

      Reply

      • Posted by Yeah_Right on November 8, 2016 at 2:15 pm

        How is the COLA a non forfeitable right? It’s money you didn’t earn while in service and if not in a legal agreement is not an active promise.

        Reply

        • Posted by Anonymous on November 8, 2016 at 4:54 pm

          My unsolicited opinion is it was an easy out that presumably had less of an impact on most retirees bottom line?

          Reply

  4. Posted by Eric on November 8, 2016 at 3:37 pm

    Yeah-Right:
    The cost of living adjustment is part of the benefits program that cannot be reduced for those who have retired prior to the law having been changed in 2011.
    It is not the present monetary amount, but rather the program itself that allows for the cost of living adjustment that cannot to be reduced. For those who retired prior to the law having been changed, it was not only reduced, but also was abolished.
    Focus upon the program not the money earned to date.
    Eric

    Reply

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