Federal criminal investigators and the Securities and Exchange Commission are looking into New Jersey's pension system after a report found the state diverted billions of dollars from it for other purposes, such as state aid to Abbott school districts.

Abbott districts have been spending at some of the highest levels in the State, and well beyond non-Abbott districts, with no discernable correlation to improved achievement.

Of the 25 highest spending K-12 districts, 17 are Abbott districts. Moreover, the three highest spending K-12 districts in the State are Abbott districts.

The Abbott districts have not been required to exercise the fiscal discipline that the State and other school districts must undergo; instead they have been allowed to balance their budget through virtually unlimited supplemental funding requests.

The SEC, which regulates stock and bond markets, will try to determine whether state officials misrepresented the impact of pension-fund maneuvers in documents provided to investors and the U.S. Attorney's Office is looking into any criminal violations. Investigations into the state’s mismanagement of the grossly under-funded pension system could take years.

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 state of New Jersey’s Division of Law employs 530 attorneys, but apparently none with the expertise to represent the state in these federal civil and criminal investigations. The New Jersey Treasury Department has hired a law firm, Fried, Frank, Harris, Shriver and Jacobson, to defend the state.

David Wald, spokesman for state Attorney General Stuart Rabner, said he didn't know immediately how much money has been spent on the outside law firm, but said its lawyers will get $495 per hour, with associates paid $180 per hour.

So, let’s review how New Jersey taxpayers got into this mess.

• As the state admitted to the New Jersey Supreme Court, the Abbott school districts have spent billions upon billions of taxpayer money without the slightest bit of fiscal discipline and with no discernable improvement in student achievement.
  
  To help fund the Abbot districts’ virtually unlimited funding requests, the state diverted billions from state pension contributions to satisfy these insatiable demands.
  
  The additional Abbott funding was used to increase pay, benefits and the number of jobs in these school districts, which further exacerbated the state’s pension funding liability.
  
  To curry favor with the state’s public employees, pension benefits were increased in 2001 and were “paid” for with accounting gimmicks, further compounding the state’s pension funding crisis.
  
  Facing federal investigations into the state’s pension funding debacle, taxpayers will foot the tab for outside council to defend the politicians and state employees who got us into this mess. The 530 lawyers on the state’s payroll and in the pension system aren’t up to the job.

Is it any wonder why New Jersey’s broke?

New Jersey’s Pension Funding Crisis

New Jersey’s public employee pension plans were fully funded as of July 2001. Now we are being told there is a funding gap, estimated to be between $25 billion to $56 billion. How did this enormous deficit develop? The Star-Ledger provides this explanation:

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 Ledger fails to mention two other major factors driving up the state’s pension costs – the number of active public employees added to the pension rolls and the salary increases granted to state and local government workers.

The number of active employees added to New Jersey’s pension plans increased by 41,000 from July, 2001 to July, 2005, according to the latest audited enrollment numbers available from the state. New Jersey’s public workforce has continued to grow by the thousands from that point until today.

In addition to adding more employees, increasing salaries upon which pensions are calculated has further exacerbated the funding crisis. State and local public employees have been granted incremental salary raises on top of wage scale increases that greatly out pace inflation and far exceed the average raises received by employees in the private sector. Taxpayer income and state revenue haven’t kept up with these escalating public employee payroll costs, including pension obligations.

Making matters worse, Governor Jon Corzine has recently offered state workers a salary package that will provide the average employee with a 35 percent increase in salary over the next four years - 13.6 percent in wage scale increases, the balance in incremental salary increases.

The so-called “give backs” in the contract, a 1.5 percent of salary contribution for healthcare benefits and a 0.5 percent increase in employee contributions for pension, are more than covered by with the 13.6 wage scale increases in the new agreement. Raising the retirement age from 55 to 60 for new hires will “save” peanuts, $77.3 million per year by 2022.

As the Star-Ledger points out, lawmakers also unilaterally enhanced pension benefits without a means to actually pay for the increased costs. In July of 2001, completely outside of the union contract negotiation process, the legislature recklessly granted a huge 9 percent increase in pension benefits and lowered the retirement age, effective October 1, 2001.

The state’s pension funds certainly took a hit when the stock market (DJIA) went from, a then all-time high of, 11,722.98 on January 14, 2000 to 10,593.72 on July 1, 2001 and finally, to a five-year low of 7,286.27 on October 9, 2002. But has the state invested its pension funds so poorly that little of that reported $22 billion loss was regained as the market began its climb back to record highs? The market closed yesterday at 12,530.05.

Using accounting gimmicks to skip necessary state payments into the pension funds certainly didn’t help matters, but state contributions are in addition to employee contributions and fund investment gains. How many billions would taxpayers have needed to contribute since 2001, when the pension plans were fully funded, though 2007 in order to close a $25 billion to $56 billion funding gap?

Assuming the state’s estimated investment return rate of 8.25 percent, New Jersey taxpayers should have been contributing about $3 billion every year beginning in 2002 to close a $25 billion gap and about $7.1 billion annually if the pension fund deficit is $56 billion. And that’s just to pay for pensions – the state’s obligation for retiree healthcare benefits is now estimated to be $78 billion.

State officials should have been honestly stating pension obligations and making necessary pension fund payments. Had that happened, perhaps tens of thousands of additional public workers wouldn’t have bee hired, salary increases wouldn’t have been so extravagant, healthcare and other fringe benefits would have been scaled back to a sustainable level, retirement ages wouldn’t have been lowered and pension benefits wouldn’t have been increased.

Now we all know the extent of the problem and we know the cause. It should be obvious to everyone, taxpayers can’t afford the spending binge New Jersey’s politicians have been on since 2002. Lawmakers got us into this mess and it’s within their power to clean it up. Not with more tax increases and hocking state assets, but with meaningful public employee headcount, salary and benefit cuts. That’s only solution and every politician knows it now, if they weren’t aware of it before.

Our elected officials have a choice to make and so will voters come this November. Let your representatives know where you stand!