New Jersey’s public-worker pension fund closed out the last fiscal year with healthy investment gains and a big increase in overall market value, according to new estimates released Wednesday.
The full review of the pension fund’s fiscal year 2023 performance was a major subject of discussion during a Wednesday meeting of the New Jersey State Investment Council, the panel that sets policy for the pension fund.
In all, net investment returns hit 9% during the 2023 fiscal year, which ended June 30, according to the new estimates reviewed by members of the council.
While still subject to final auditing, the fiscal year 2023 investment performance will easily top the pension fund’s assumed rate of return of 7%, said Shoaib Khan, the director of the Department of Treasury’s Division of Investment.
“We’re pleased with the outcome,” said Khan, who credited the efforts of division staff during his remarks to the council.
Up some $6B in value
Meanwhile, the overall market value of the pension fund topped $91 billion as of the end of June, according to the latest estimates. That marks a big increase compared to the prior fiscal year, when net negative returns helped drag the fund’s overall market value below $85 billion.
Credit: (NJ Treasury)The surge in market value also coincided with state government’s relatively recent return to funding full employer pension contributions in the annual budget, a practice that allowed the fund to maximize the upswing in investment returns during the 2023 fiscal year.
Moreover, the pension fund last year also benefited from $3.72 billion in state Lottery sales, a banner year. That’s because a portion of Lottery revenues is dedicated by law to funding public-worker pensions in New Jersey. Those contributions to the pension fund totaled $1.13 billion during the 2023 fiscal year, the Lottery reported earlier this year.
Turbulence ahead?
However, in the face of these positive developments, the pension fund already appears to be facing more turbulence, including during the first quarter of the current fiscal year, which began July 1.
Preliminary estimates suggest investment returns were running net negative through the end of September, although not all asset classes were included in the initial snapshot provided to council members on Wednesday due to a reporting lag.
The state pension fund covers the retirement benefits for an estimated 815,000 current and retired state and local government workers.
Looking beyond June 30, the latest estimates suggest a more difficult period may be looming.
The pension fund operates separate from the state budget and is supported by regular contributions from both government workers and taxpayer-funded employers, including the state. The state now spends roughly $7 billion annually, including the Lottery contributions, on its employer pension obligation, making it one of the largest expenditures in the current $54.3 billion state budget.
The dedicated revenue from the state Lottery and gains from fund investments also help support the pension fund.
However, due to state government’s long history of underfunding annual employer pension contributions — and, in some years, making no contributions at all — New Jersey’s pension system remains among the nation’s worst funded, and the latest actuarial estimates indicate it will take decades of robust state funding to fully reverse the damage.
Decline seen in FY ‘22
During the fiscal year that ended June 30, 2022, pension-fund investments generated net negative returns of 7.9%, according to the investment council’s annual report. Total pension fund value also dropped below $85 billion as of the end of that fiscal year, according to the report.
But as market conditions improved during the 2023 fiscal year, both the pension fund’s investment returns and overall market value enjoyed solid rebounds, according to the new estimates released Wednesday.
At 9.06%, the net annual returns for fiscal year 2023 easily topped the fund’s benchmark rate of return, which was 8.43%, according to the estimates.
Allocations in equities and shifting more resources to cash equivalents were among the moves that were credited with helping to provide the fund’s strong annual returns.
“In a rising interest-rate environment, this adds value to the pension fund portfolio, while at the same time, it allows us to preserve liquidity,” Khan said while discussing the cash allocations.
However, looking beyond June 30, the latest estimates suggest a more difficult period may be looming. Preliminary estimates of the pension fund’s fiscal year 2024 investment returns indicate they barely broke even during the months of July and August, before falling slightly into net negative territory through the end of September.
Still, the preliminary estimates indicate the pension fund was generating more than 6% net returns so far this calendar year, and was boasting three-year returns of 6.67% and five-year returns of 5.86%.
The pension fund’s estimated market value as of the end of September was slightly below $90 billion, well off the nearly $100 billion in market value that was recorded at the end of September 2021.
