By Paul H. Mills

A few days before becoming a car accident victim, New Jersey Gov. Jon Corzine rendered a humble acknowledgment. He admitted his government, beleaguered by questions about its pension fund’s solvency, did not have auditors qualified to evaluate it.

“We don’t have the expertise to do the actuarial assessment, we have to get an outside consultant,” Corzine said, which has left New Jersey’s total debt to its pension system uncomfortably unknown.

Corzine’s observations came in the aftermath of a front page investigative story in the New York Times on April 4, which disclosed serious weaknesses in the nation’s ninth-largest pension system.

Because decisions that led to the fund’s condition predate Corzine’s administration, blame for its plight is not being placed on his doorstep. But because New Jersey governors are vested with the most potent authority of any in the country, and because he is a former U.S. Senator and head of the prestigious Goldman Sachs investment firm, Corzine is in a unique position to undertake critical initiatives to treat the pension fund’s dilemma.

Though it is too early to render a long-term prognosis for the New Jersey pension system – or the health of its gifted governor, for that matter – a look at its fate, and that of another American government, the city of San Diego, Calif. (whose population is nearly equal Maine’s) offers telling lessons on how far pension system’s flaws can reach.

In 2003, a whistleblower on San Diego’s pension board, Diann Shipione, revealed gimmicks were used to mask the fund’s true condition. One of the maneuvers was to report, as a current contribution to the system, gains the board hoped to make from future investments, an approach that has also gotten the New Jersey system into hot water. Another distortion in both was valuing the fund’s equity assets, largely on the basis of stock market peaks from the late 1990s, without making adjustments for subsequent market losses.

Both systems also moved at the political level. The city council in San Diego and the legislature in New Jersey kept increasing benefits to current and future retirees, without knowing what the costs. (This is a step Maine’s Legislature took just prior to last year’s election, when it agreed to pay nearly half of health insurance premiums for retired police and firefighters, an expense not actuarially calculated or funded.)

Though this mismanagement was already a matter of public record, Shipione’s outcries led to greater public awareness of all aspects of the system. Neither San Diego’s government, nor its way of life, has been the same since.

Wall Street-based bond rating services, which should have been aware of many of these defects, could no longer – in the face of Shipione’s well-publicized fingerpointing – gloss over the problems. San Diego’s bond rating was downgraded to the point where it could no longer obtain new credit, in light of the imponderability of the amount owed to its pension system, which was estimated at $1.4 billion.

San Diego, America’s seventh most populous city, was thus unable to cover budget deficits. Swimming pools were shut down, library hours were slashed, and potholes went unfilled.

Though the San Diego and New Jersey pension crises are now the nation’s most prominent, they are not the only governments with problems. The California teachers pension fund is suing its state over a refusal to pay $500 million. An independent actuary, last year, calculated New York City’s pension shortfall as possibly $49 billion.

Is Maine at risk of being next? For this, our state system’s annual financial report, and a valuation study from the Virginia-based Cheiron actuarial firm commissioned by the Maine system is helpful. (Like Gov. Corzine, our leaders realize we aren’t qualified to do an in-house assessment.) This study, together with the Los Angeles-based Wilshire Consulting compilations of retirement system funding levels from throughout the nation, offer some guidance.

The critical figure with which to compare Maine’s system to those in the rest of the country is the funding ratio.

Simply put, a funding ratio is the asset value of the system, in our case $9.53 billion, divided by the amount the state should have to pay future pension payments, which is $12.36 billion.

The $12.36 billion is much lower than the actual future cost, because actuaries consider what an amount on hand now will yield in investment income. Even at this discounted level, however, Maine is underfunded, with a resulting funding ratio of 77 percent – the $9.53 billion divided by $12.36 billion.

The figures are more troubling for the part of the system that’s confined to state employees and teachers – their funding ratio is only 71 percent.

How do we stack up against the rest of the country? Of the 64 state systems included in the Wilshire report, Maine is in the bottom third. Our 77 percent funding ratio is only 10 percentage points above San Diego’s ratio at the time its system crashed. Though our system has not relied on gimmicks that got others in trouble, clearly we need to do much better.

It will take courage and honest innovation for Maine to do this. One place to start would be by greater public recognition of the dilemma.

We are all guardians of this fund so vital to the well-being of our state.

Paul H. Mills is a Farmington attorney well known for his analyses and historical understanding of Maine’s political scene. He can be reached by e-mail: pmills@midmaine.com.
Though it is too early to render a long-term prognosis for the New Jersey pension system – or the health of its governor – a look at its fate offers telling lessons on how far pension system’s flaws can reach.