Article

Thursday, April 05, 2007 • BY DUNSTAN McNICHOL • Star-Ledger Staff

Gov. Jon Corzine said yesterday he will revamp some accounting procedures for the state's largest pension fund and ask state attorneys to determine whether New Jersey's seven public employee retirement accounts ran afoul of Internal Revenue Service rules.

The governor's vows came in response to questions about a New York Times report that detailed maneuvers state officials took over the past 15 years to divert billions of dollars earmarked for pension funds into the state budget. The newspaper report said it was not clear if the state violated federal rules on pensions, but noted the state would face sanctions if it did.

Corzine said he would ask his counsel or Attorney General Stuart Rabner to answer that question.

"You probably have questions of law that are in the gray zone," he said.

The governor said he will change accounting procedures for the Teachers Pension and Annuity Fund, the state's largest pension fund, to ensure that hundreds of millions of dollars in annual health insurance payments are not wrongly characterized as payments into the longterm retirement account.

The newspaper report suggested the state's practice of funding hundreds of millions of dollars in annual health costs for retired teachers with a separate account in their pension fund may violate an Internal Revenue Service prohibition on comingling retirement funds with cash used to cover other expenses.

Tom Vincz, spokesman for Treasurer Brad Abelow, said the state's annual appropriations for retiree medical costs are kept separate from the retirement funds and are not considered contributions into the retirement accounts.

"From an accounting perspective, we take the money needed for post-retirement medical and pass it through the TPAF fund," he said. "It is how it has been accounted for for as long as anyone can remember."

Corzine said the rules should change.

"I don't think it's a good idea to be mixing health benefits with pension benefits," he said. "It's one of those ways we set up the accounting long ago that needs to be changed. Really, you have to have two different systems."

Still, Corzine and Vincz insisted the pension fund's accounting is straightforward, and said the state has never tried to downplay the growing shortfall in the retirement accounts. Last month, actuaries reported a combined long-term shortfall of almost $25 billion in the seven retirement accounts set up to bankroll benefits for teachers, government workers and police and firefighters.

The seven pension accounts currently total $78 billion.

"All this information has been transparent," Vincz said. "It's false to say in any way the state has overstated or understated the problem. We've done all we can to shed light on this problem."

Douglas Love, an investment expert who monitors the retirement accounts as a member of the State Investment Council, said at a council meeting last month his independent analysis of the state's pension debt puts the shortfall even higher -- at $56 billion.

The shortfall developed since 2001, as the collapse of the stock market drained $22 billion from the funds. Lawmakers compounded the problem by using accounting gimmicks to skip required annual payments into the funds and to cover billions of dollars in additional costs from increased retirement benefits they granted to public employees.

"The fact is we have a huge hole," Corzine said. "It has been created by failure to deal with this issue, frankly, for the better part of a decade."

The erosion of the retirement fund was highlighted in a special task force report ordered by former Gov. Richard Codey in 2005. The impact of the gimmicks and skipped state payments also featured prominently in testimony before a special legislative committee that met last summer to consider changes to the state's public employee retirement system.

Republicans demanded a formal review of the issues raised by the newspaper report.

Senate Minority Leader Leonard Lance (R-Hunterdon) requested a special Senate Budget and Appropriations Committee hearing on the pension system.

"Many of us have tried to raise awareness of this dangerous situation as the state has employed more unorthodox and fiscally unsound accounting practices with respect to the pension system," Lance said.

Senate Majority Leader Bernard F. Kenny Jr. (D-Hudson), chairman of the budget panel, said he would take Lance's hearing request under advisement.

In his first state budget, Corzine included $1.2 billion in pension payments, including the first state payment into the retirement fund for teachers in almost a decade. His proposed budget for the upcoming year includes about the same amount.

At the same time, municipal governments and school boards are scheduled to pay another $1 billion into the funds during the upcoming budget year, as they also attempt to make up for years of skipped payments.

Those payments, however, cover barely half the amount actuaries say the state needs to contribute to keep the pension fund current.

To help close the gap, Corzine has proposed leasing operating rights or access to state assets like the New Jersey Turnpike, a plan he expects to iron out later this month.

"We're going to have to come up with $25 billion or $56 billion and close that gap," Corzine said. "We're trying to take those steps. ... We've got real challenges ahead."

Corzine to overhaul pension fund accounting methods

Return to Articles page