Mike Shedlock reports that the state of New Jersey is insolvent:
(emphasis mine)
State of New Jersey Is Insolvent The state of New Jersey is insolvent. Bankrupt might be a better word. New Jersey is $60 billion in the hole on pension funding and the Governor is planning on skipping payments in a "pension payment holiday" until 2012 so as to not increase property taxes. To top it off, the ongoing plan assumptions are 8.25%. Sorry NJ, that simply is not going to happen. New Jersey's pension fund has lost more than $23 billion this year, dropping to its lowest level since 2003 as a collapsing financial market battered its investments, a new state report shows. Q & A on the state pension fund The fund that bankrolls retirement benefits for 700,000 public employees and teachers in New Jersey has lost more than $23 billion this year, falling to its lowest level in five years. New Jersey drawing heat for hedge-fund foray New Jersey's pension fund is under fire over a series of hedge-fund investments, the Wall Street Journal said. What Happens Now?
The Star Ledger is reporting New Jersey pension funds lost $23B so far this year.
The latest losses -- nearly $9 billion in October, and another $3 billion so far this month -- mean the fund is now worth $57.8 billion, or less than half the $118 billion in benefits it is due to pay out over time.
Sen. Bill Baroni (R-Mercer), whose district includes many state workers covered by the fund, called the drop in value "a historic breakdown," and demanded a legislative review and criminal investigation of the state's investment policies.
While Clark delivered his report to the State Investment Council in Trenton, Gov. Jon Corzine was in Atlantic City promising a convention of local government officials that he would let them postpone about a half-billion in payments they are scheduled to make to the pension funds in April.
Specifically, Corzine proposed letting local governments skip paying $541 million of the $1.1 billion due. They would gradually work their way back to full payments by 2012 under his plan.
Cutting the payments in half may avoid a big surge in property taxes, but it also will add to the shortfall in the pension accounts dedicated to local government workers, police and firefighters.
"As much as I prefer another course, I proposed this deferral simply as a practical bridge over today's economic circumstances while reflecting the state's reduced fiscal capacity for direct aid," Corzine said, winning applause from those gathered to hear him at the New Jersey State League of Municipalities Convention. "Taxpayers deserve the help. And they are demanding it."
Lawmakers would have to approve the "pension payment holiday" Corzine proposed. Assembly Speaker Joseph Roberts (D-Camden) said it "will get serious consideration."
"Property taxpayers will shoulder an even greater tax burden in the three years following the gubernatorial election as municipalities raise taxes to pay for this year's pension obligation," said Sen. Kevin O'Toole (R-Essex).
Inquiring minds are considering Financial insecurity: Q & A on the state pension fund
Q: Where did all that money go?
A: The pension fund is invested in stocks and other accounts that are supposed to grow in value. But like anyone else investing on Wall Street, the funds managers have seen the value of their investments plummet in recent months. Their goal is to get an annual return of 8.25 percent; since July 1 the fund has lost more than 20 percent.
Q: So how much is left?
A: As of Wednesday, $57.8 billion.
Q: That's still a lot of money, isn't it?
A: It's plenty to cover the approximately $5.2 billion that retirees collect from the system each year. But when you add up the pensions and benefits promised to retirees and to current employees when they retire, the fund's long-term obligations total $118 billion.
Reuters is reporting New Jersey drawing heat for hedge-fund foray.
New Jersey made the investments last month, to funds run by BlackRock Inc (BLK), Canyon Capital Advisors LLC and GoldenTree Asset Management LP, as they were "facing the equivalent of margin calls," William Clark, director of the New Jersey Division of Investment, told the paper in an interview.
In effect, the funds, which had borrowed money for investments, either faced or anticipated facing demands from lenders for cash as the value of those investments fell, the paper said.
State legislators, upon learning of the investments, are questioning both the wisdom of the decisions as well as the process, according to the paper.
At $49.5 million each, the investments came just below the $50 million threshold that requires the fund to explain an investment to an oversight board before moving forward, the paper said.
New Jersey is burning $5.2 billion a year. If the market is flat over the next 5 years, New Jersey will have a minimum of $118 billion in obligations and will be sitting on $31.8 billion. But what happens if the S&P; falls to 450 or 600?
S&P; 500 at 600 would be a drop of 24% from here. Assuming the pension plan assets dropped the same, plan assets would fall to $44 billion. On a drop to 450 on the S&P;, plan assets would fall 43% from here to approximately $33 billion.
At $5.2 billion a year, New Jersey's pension plan would be completely out of cash in about 6 years in my worst-case scenario of a drop to 450 on the S&P.;
However, even on a drop to 600 or 700 on the S&P; (highly likely in my estimation), New Jersey, would run out of cash rather quickly putting in $1 billion a year and taking out $5.2 billion a year while assuming growth rates of 8.5% that are totally unrealistic.
My reaction: A nightmare scenario is developing for anyone depending on pensions for retirement: Growing pensions shortfalls are going to force down payments and the collapsing dollar is going to force up the cost of basic necessities like food and gas.
On another note, when I read that New Jersey's pension plan is assuming a 8.25%.annual return on its investments, I just have to laugh. That kind of optimism is simply insane.
