Chairman Sarlo and Members of the Senate Budget Committee, my name is Beth Schroeder Buonsante and I am here representing over 200,000 active and retired members of the New Jersey Education Association to oppose this legislation.
We are opposed for three main reasons:
1- We believe that all investment decisions and strategy should be left to the Director of the Division of Investment (Division) and the State Investment Council, who have a fiduciary obligation to make decisions for the sole and exclusive benefit of the participants. We do not believe the Legislature should interfere in their process or procedures for investing, but rather should leave it to the experts in the Division.
Despite the bill’s amendments, we remain concerned that there will be immense political pressure to purchase all of the Transportation Trust Fund (TTF) bonds and risk violating this principle. Any change to investment policies should reduce the opportunity for political interference in investment decisions, not increase the risk of such pressure.
2- We believe the regulation imposing a 10 percent cap on the pension fund’s investment in any bond offering is there for a good reason: to protect the beneficiaries of the pension funds. In fact, there are many different regulations guiding the investment procedures for the Division. These rules did not come from the Legislature. They were developed by the experts in the Division of Investment and the State Investment Council, in order to fulfill their fiduciary obligation to the pension fund beneficiaries.
If they believe any of their own regulations are hampering investment strategy, then they should change their own regulations. They do not need legislative intervention.
3- We fail to see how investing in TTF bonds will be a good deal for the beneficiaries of the pension funds. Experts who we have spoken to believe this will involve a “private placement” in which the TTF bonds will not follow the typical procedures of a bond sale, where the bond price is determined by the market. As such, it is possible that the pension funds could pay more for these bonds than if they were publicly traded. By purchasing more than 10 percent of the TTF bonds – and potentially 100 percent of the offering – the funds could be taking on undue risk. That risk should be shared by other investors and mitigated by investment in a wide range of bonds.
Furthermore, looking at the return of investment, there is no guarantee this proposal would earn more for our pension funds. The sponsors believe this could yield a five percent return of investment. If we look at the performance of our Fixed Income portfolio, our Division of Investment is already achieving more than that through current investments. In fact, they achieved an average return of 6.28 percent over the last five years and 7.46 percent over the last 10 years. Additionally, because the price would not be set by the market, it is not clear that even the anticipated five percent return is the full amount the pension system should earn for such an investment.
The bottom line is that we should continue to leave investment decisions up to the Director of the Division of Investment. If you agree with this key principle which is embraced by our pension statutes, embraced by the federal Employee Retirement Income Security Act (ERISA) and embraced by private and public sector pension fund managers around the world, then you should oppose this bill.
NJEA believes this legislation is not necessary and inappropriate. We ask you to oppose this legislation and instead focus your work on fully funding our pensions.
The impact of underfunding our pension system by billions of dollars is far-reaching and devastating, leading to repeated bond downgrades, higher borrowing costs, and a larger unfunded pension liability that is costing taxpayers even more.
It is no surprise that some are looking for a more advantageous way to sell our TTF debt. The problem of pension underfunding is exemplified in the unfavorable conditions that our TTF Authority will now operate under in selling its bonds. The New Jersey pension fund should not be expected to buy bonds that the TTF might well struggle to sell on the open market. It is not the job of the pension fund to subsidize the state or to be a lender of last resort.
Properly funding our pension system would not only give us a healthy pension system, but it would provide better fiscal conditions for the State of New Jersey and all of its authorities.
Please abandon this inappropriate legislation and, instead, work toward a comprehensive and responsible pension funding plan.