New Jersey's Republican state treasurer sharply reduced the New Jersey Pension Fund's assumed rate of return, producing a financial and political dilemma for Gov.-elect Phil Murphy, a Democrat, who will be sworn in later this month.
Last month, Treasurer Ford Scudder announced a cut in the assumed rate of return to 7% from 7.65% for the fiscal year that starts July 1, the second rate cut in 12 months. Last February, he reduced the rate to 7.65% from 7.9% for the current fiscal year.
The lower rate means cash-strapped municipalities and the state must raise more money to feed the severely underfunded New Jersey Pension Fund. Mr. Murphy will be hard-pressed to find politically palatable and sufficient additional revenue sources, even from a Democratic Party-controlled state Senate and Assembly.
As of July 1, the funding ratio was 59.3%, according to the state Treasury Department. This statutory funding status includes the estimated present value of the state lottery. Last year, Gov. Chris Christie signed a law making the lottery an asset of the pension fund, using the proceeds to cover part of the state's pension contribution.
Pension experts say the 7% assumed return figure represents a more realistic rate given forecasts for lower stock market gains and modest interest rate increases. They also said the size of the cuts within the time frame is unusual.
"It's pretty dramatic," said Richard Keevey, a lecturer at the Woodrow Wilson School, Princeton University, and a senior policy fellow at the Bloustein School of Public Planning and Policy at Rutgers University. "I would have been inclined to reduce it over time." Mr. Keevey is a former New Jersey state budget director and comptroller.
"It is significant, but we are getting realistic," said Thomas Brendan Byrne Jr., chairman of the State Investment Council, which develops policies for the Treasury Department's division of investment to manage the pension fund's investments. The Trenton-based fund has $76.6 billion in assets.
"Timing aside, the direction is clear," Mr. Byrne said. "Experts say stocks will return to single-digit gains and long-term interest rates will stay low. We can't bet the ranch on stocks."
The New Jersey Pension Fund produced a 13.07% return for the fiscal year ended June 30. The annualized return for the past three fiscal years was 5.25%; for five years, 8.75%; and for 10 years, 5.55%.