August 25, 2010
Last week, the U.S. Securities and Exchange Commission did something it has never done before. It charged the state of New Jersey with fraudulently misleading investors about the health of the state's pension plan. From 2001 to 2007, the SEC charged, the state gave out false information about the state's retirement funds. They cooked the books. Now investors, taxpayers and retirees are left to clean up the mess.
Robert Khuzami, Director of the SEC's Division of Enforcement, said: "The State of New Jersey didn't give its municipal investors a fair shake, withholding and misrepresenting pertinent information about its financial situation.
It is not just investors who are not getting a fair shake. Taxpayers and retirees are being abused as well. While the state failed to adequately invest in their retirement funds and misled investors, New Jersey's public employees faithfully made their payments into the funds. Public employees in the Garden State contribute 5.5 percent of their compensation to their retirement fund, and earn an average annual benefit of $20,349.
Now the state's policy of underfunding the retirement security of state employees has been exposed. As The Wall Street Journal noted this week: "The problems go back nearly 15 years, to when the then-relatively healthy state decided to borrow $2.8 billion and stick it in its pension funds in lieu of making contributions from tax revenues."
The state compounded the problem by using accounting gimmicks, giving investors the false impression that everything was fine. And governors from both parties failed to make required payments into the funds. Earlier this year, for example, Governor Chris Christie failed to make the state's required $3.1 billion payment.
No one should be surprised that New Jersey's fraud against investors, retirees and taxpayers began with tax giveaways for the rich. Lost revenue from income tax cuts enacted from 1994 through 1996 - under GOP Governor Christine Todd Whitman - totaled $14 billion, and sales tax cuts totaled $10 billion. That's more than enough to fill the hole in the state's pension funds.
We have every right to be angry with irresponsible public officials in New Jersey. If anything, they got off the hook easy, with the SEC failing to name names or fine the officials who conducted the fraud. Sadly, other states have been just as irresponsible. Many have lost revenue by passing unwise tax cuts, then underfunded their pension plans and used accounting gimmicks to hide their inadequate investments. Investors, taxpayers and retirees all benefit when there is accountability and transparency in pension funds.