New Jersey Diverts Billions and
Endangers Pension Fund
By MARY WILLIAMS WALSH
Published: April 4, 2007
In 2005, New Jersey put either $551 million, $56
million or nothing into its pension fund for
teachers. All three figures appeared in various
state documents — though the state now says that the
actual amount was zero.
The phantom contribution is just one indication that
New Jersey has been diverting billions of dollars
from its pension fund for state and local workers
into other government purposes over the last 15
years, using a variety of unorthodox transactions
authorized by the Legislature and by governors from
both political parties.
The state has long acknowledged that it has been
putting less money into the pension fund than it
should. But an analysis of its records by The New
York Times shows that in many cases, New Jersey has
overstated even what it has claimed to be
contributing, sometimes by hundreds of millions of
The discrepancies raise questions about how much
money is really in the New Jersey pension fund,
which industry statistics show to be the ninth
largest in the nation’s public sector, with reported
assets of $79 billion.
State officials say the fund is in dire shape, with
a serious deficit. It has enough to pay retirees for
several years, but without big contributions, paid
for by cuts elsewhere in the state’s programs,
higher taxes or another source, the fund could soon
be caught in a downward spiral that could devastate
the state’s fiscal health. Under its Constitution,
New Jersey cannot reduce earned pension benefits.
The Times’s examination of New Jersey’s pension fund
showed that officials have taken questionable steps
again and again. The state recorded investment gains
immediately when the markets were up, for instance,
then delayed recording losses when the markets were
down. It reported money to pay for health care costs
as contributions to the pension fund, though that
money would soon flow out of the fund. It claimed it
had “excess” assets that allowed it to divert
required pension contributions to other uses, like
providing financial assistance to poor school
Frederick J. Beaver, director of the Division of
Pensions and Benefits in the New Jersey Treasury
Department, pointed out that other places had taken
similar steps occasionally when dealing with a
budget crunch, but acknowledged that New Jersey was
unusual. “The problem we had was doing it on a
repeat basis,” he said.
An in-depth look at the reporting discrepancies for
the teachers’ fund, which covers about 155,000
current teachers and 65,000 retirees, shows how the
system ran awry over many years, using many
New Jersey recorded the $551 million contribution
for the 2005 fiscal year in a bond offering
statement at the end of last year. The $56 million
figure appeared in an audited financial statement
for the fund.
Treasury officials said that everything had been
done legally. But they confirmed in a recent
interview that the correct amount for that year’s
pension contribution was zero, which appeared in an
actuarial report. They explained that the
conflicting figures elsewhere had been inflated by
other items, like health care contributions.
If New Jersey violated federal securities, tax or
other rules, it could be forced to make up some of
the contributions. The Internal Revenue Service has
very specific rules against mixing pension money
with money for other uses, like health care. Federal
securities law also requires bond issuers to provide
complete and accurate financial information.
The New Jersey Education Association has sued the
state for failing to put enough money into the
teachers’ pension fund. The lawsuit does not
describe all the accounting maneuvers, but a State
Superior Court judge has held that the case, now
scheduled for trial in May, can proceed.
State law requires New Jersey’s seven pension plans,
large and small, for various types of public
employees, to be funded according to actuarial
standards. Over the last decade, though, the
Legislature has passed, and various governors have
signed, a series of amendments to statutes that
allow smaller contributions or none. These were
justified by various maneuvers and approved with
little scrutiny. In interviews, officials of the
Treasury said the changes were made at the behest of
the Legislature, while legislators faulted the
Donald T. DiFrancesco, the acting governor in 2001,
when the Legislature approved an expensive pension
increase for teachers and other state employees,
said he recalled that “people thought it was good
public policy,” devised to attract the best people.
He said he did not think the measure was considered
financially unsound and did not recall anyone
challenging it or calling it improper.
The state’s practices have nevertheless left its
retirement system in a much more perilous condition
than is widely understood.
“If people ran their households like this, they’d be
in bankruptcy,” said Lynn E. Turner, a former chief
accountant for the Securities and Exchange
Commission. “If businesses did, the best example is
the old steel mills when they got so far behind and
didn’t fund their pensions as they should have. It
tipped them into bankruptcy.”
A Governor Seeks Changes
Since taking office in January 2006, Gov. Jon S.
Corzine, a former chairman of Goldman Sachs, has
been warning that the pension fund is in worse shape
than people may realize. “It’s impossible for us to
stay on the course that we are on today, and deliver
what people are asking for,” he said in an interview
late last year. “The money will not be there.”
Governor Corzine has succeeded in getting the
Legislature to contribute more to the pension fund,
though not enough to meet its future obligations.
There appears to be too little money to both restore
the pension fund and fulfill the popular promise of
property-tax relief without cutting services to an
Governor Corzine has also pressed to raise the
retirement age, increase employee contributions and
to institute other changes to stem the growth of
future costs. Now his administration is studying
novel steps, like the sale of the New Jersey
Such strategies carry risks of their own. If the
Corzine administration sells a big asset without
first correcting the system’s entrenched problems,
the new money could disappear into other government
“When you sell the assets of the state, you’d better
not use them for current spending. You’re eating
your seed corn,” said Douglas A. Love, a member of
the system’s investment oversight board. Mr. Love
recently completed a calculation showing that the
fund had not measured its future liabilities
properly and estimated it had a $56 billion deficit,
much higher than the $18 billion that the state had
reported. Of course, the deficit could be greater if
the assets have been inflated.
Increasing Federal Scrutiny
New Jersey’s situation may be extreme, but some
other state and city governments will come under
pressure in the coming years as longtime public
workers retire in large numbers and the true cost of
their benefit plans becomes more apparent.
The handling of public pension money has not drawn
much scrutiny in the past but that is beginning to
change. Members of the United States Senate have
asked the Government Accountability Office for a
review of public pension operations and whether new
rules are needed.
The chairman of the Securities and Exchange
Commission, Christopher Cox, recently said he wants
to step up enforcement in the municipal bond markets
and to improve financial reporting. He said he had
come to this conclusion after a scandal in San
Diego, where officials put false information about
the pension fund into bond offering statements.
After an investigation, the S.E.C. found it amounted
to securities fraud.
The Internal Revenue Service may also be flexing
some muscles. It intervened in San Diego after
learning that the city was using its pension fund to
pay other expenses, like retiree health care costs.
The money in pension funds gets preferred tax
treatment and must be spent solely on pensions.
Andy Zuckerman, the I.R.S.’s director for employee
plans, rulings and agreements, said he could not
discuss New Jersey’s situation because of rules on
tax confidentiality. But in general, when local laws
conflicted with the rules in the tax code, “the
federal law applies, period.”
When asked about the discrepancies in the records
for New Jersey’s pension plans, Treasury officials
who met with two reporters at a conference room at
an office building in Trenton last month
acknowledged some unusual practices.
“We were not the ultimate decision-makers,” said
John D. Megariotis, the deputy director of the
Division of Pensions and Benefits. “We were the
Mr. Megariotis was asked about the reference to the
$551 million contribution to the teachers’ pension
fund. He said that most of that amount had been the
state’s payments for health care benefits.
The items were combined, he said, because New
Jersey’s health plan for retired teachers lies
within their pension fund. It is not clear whether
New Jersey’s practices satisfy I.R.S. rules on the
commingling of such assets.
Mr. Beaver, the division’s director since 2003,
asked Mr. Megariotis why he had accounted for health
care costs that way.
“Those are not my numbers,” Mr. Megariotis, a
certified public accountant, responded emphatically.
He added that New Jersey would not do it again. Both
officials said the numbers had been approved by
As for the $56 million pension contribution listed
in the audited financial statements, Mr. Beaver said
he preferred the state’s actuarial reports — the
ones showing a contribution of zero.
Seizing on $5.3 Billion
To explain the $56 million, though, Mr. Beaver and
Mr. Megariotis recounted a bit of history. In 2001,
the Legislature voted to increase teachers’ pensions
by 9 percent, raising the plan’s total cost by an
estimated $3.1 billion. Because New Jersey’s
Constitution forbids creating debts without creating
a funding source, the lawmakers needed to pay for
it. They looked back to June 30, 1999, the height of
the bull market.
Records showed that the pension investments were
worth $5.3 billion more on that day than the plan’s
actuary showed, because actuaries phase in gains and
losses slowly to avoid sudden swings in market
value. The lawmakers seized on this paper gain of
$5.3 billion, and voted to channel it as an actual
windfall into a new reserve in the pension fund, to
pay for the new benefits.
I.R.S. officials said that a company would not be
permitted to do this with a pension fund.
By the time the Legislature did this in 2001, of
course, the stock market had tumbled and much of the
$5.3 billion had melted away. That appeared not to
have concerned the Legislature. An election was
looming, and the teachers’ union was complaining
bitterly about past failures to put money into their
John O. Bennett, the Republican who was co-president
of the State Senate in 2001, said the DiFrancesco
administration had pushed for the increase and said
there would be money to cover it.
“Now history has shown that that hasn’t been the
case,” said Mr. Bennett, who abstained from voting
on the bill because it also increased the pensions
Mr. Beaver, of the Treasury, said he thought the
Legislature “went back and rewrote history” when it
passed the 2001 bill.
This unusual arrangement did not last long. Two
years later, the state needed to make a big
contribution to the pension fund as those earlier
market declines showed up in its overall value.
Lacking the resources, the state laid claim to the
special reserve. The assets were recycled back into
the main body of the pension fund — and labeled a
state contribution. That was $56 million in one
year, Mr. Beaver said pointing to the state’s
audited financial report. The state did this three
years in a row, until fiscal 2007, when the reserve
Independent experts said they could not understand
how New Jersey could designate this a pension
contribution. “It’s a real misnomer,” said Mr.
Turner, the former S.E.C. official. “The reality is,
there was no new money.”
Because steps like these were taken over many years,
it is difficult to judge the accumulated damage to
the New Jersey system, experts said.
“It would be a really shocking picture, to show it
all in one place, all the money that’s been taken
out of the retirement system at precisely the times
when the benefits were increased,” said Douglas R.
Forrester, who ran New Jersey’s pension fund years
ago, in the administration of Thomas H. Kean. In
2005, Mr. Forrester, a Republican, ran for governor
against Mr. Corzine.
The state has about $31 billion of long-term debt
outstanding, most of it in bonds. But Mr. Forrester
said he thought that if all the unfunded debts of
the state retirement system were correctly measured
and added to that, “you’d get a number that’s about
“I don’t see how we’re going to get out of this,” he