The state of New Jersey is insolvent. Bankrupt might be a better word. New Jersey is $60 billion in the hole on pension funding and the Governor is planning on skipping payments in a "pension payment holiday" until 2012 so as to not increase property taxes. To top it off, the ongoing plan assumptions are 8.25%. Sorry NJ, that simply is not going to happen.



The Star Ledger is reporting New Jersey pension funds lost $23B so far this year.



New Jersey's pension fund has lost more than $23 billion this year, dropping to its lowest level since 2003 as a collapsing financial market battered its investments, a new state report shows.



The latest losses -- nearly $9 billion in October, and another $3 billion so far this month -- mean the fund is now worth $57.8 billion, or less than half the $118 billion in benefits it is due to pay out over time.



Sen. Bill Baroni (R-Mercer), whose district includes many state workers covered by the fund, called the drop in value "a historic breakdown," and demanded a legislative review and criminal investigation of the state's investment policies.



While Clark delivered his report to the State Investment Council in Trenton, Gov. Jon Corzine was in Atlantic City promising a convention of local government officials that he would let them postpone about a half-billion in payments they are scheduled to make to the pension funds in April.



Specifically, Corzine proposed letting local governments skip paying $541 million of the $1.1 billion due. They would gradually work their way back to full payments by 2012 under his plan.



Cutting the payments in half may avoid a big surge in property taxes, but it also will add to the shortfall in the pension accounts dedicated to local government workers, police and firefighters.



"As much as I prefer another course, I proposed this deferral simply as a practical bridge over today's economic circumstances while reflecting the state's reduced fiscal capacity for direct aid," Corzine said, winning applause from those gathered to hear him at the New Jersey State League of Municipalities Convention. "Taxpayers deserve the help. And they are demanding it."



Lawmakers would have to approve the "pension payment holiday" Corzine proposed. Assembly Speaker Joseph Roberts (D-Camden) said it "will get serious consideration."



"Property taxpayers will shoulder an even greater tax burden in the three years following the gubernatorial election as municipalities raise taxes to pay for this year's pension obligation," said Sen. Kevin O'Toole (R-Essex).

Q & A on the state pension fund

The fund that bankrolls retirement benefits for 700,000 public employees and teachers in New Jersey has lost more than $23 billion this year, falling to its lowest level in five years.



Q: Where did all that money go?



A: The pension fund is invested in stocks and other accounts that are supposed to grow in value. But like anyone else investing on Wall Street, the funds managers have seen the value of their investments plummet in recent months. Their goal is to get an annual return of 8.25 percent; since July 1 the fund has lost more than 20 percent.



Q: So how much is left?



A: As of Wednesday, $57.8 billion.



Q: That's still a lot of money, isn't it?



A: It's plenty to cover the approximately $5.2 billion that retirees collect from the system each year. But when you add up the pensions and benefits promised to retirees and to current employees when they retire, the fund's long-term obligations total $118 billion.

New Jersey drawing heat for hedge-fund foray

New Jersey's pension fund is under fire over a series of hedge-fund investments, the Wall Street Journal said.



New Jersey made the investments last month, to funds run by BlackRock Inc (BLK), Canyon Capital Advisors LLC and GoldenTree Asset Management LP, as they were "facing the equivalent of margin calls," William Clark, director of the New Jersey Division of Investment, told the paper in an interview.



In effect, the funds, which had borrowed money for investments, either faced or anticipated facing demands from lenders for cash as the value of those investments fell, the paper said.



State legislators, upon learning of the investments, are questioning both the wisdom of the decisions as well as the process, according to the paper.



At $49.5 million each, the investments came just below the $50 million threshold that requires the fund to explain an investment to an oversight board before moving forward, the paper said.

What Happens Now?

Can The Market Recover?

One of the implications of Peak Credit is that financial earnings have peaked. And because of reduced leverage, earnings in the financial sector are not coming back for decades. Those earnings were all a mirage in the first place.



Next consider homebuilders given that lending standards have dramatically tightened at banks. Those profits are never coming back. What happenes to profits at major pharmaceuticals if and when the Obama administration allows drug imports from Canada and other places?



One must also factor into the earnings equation boomers facing retirement in the wake of falling home prices and retirement accounts taking a cliff dive. Trillions in potential spending power has been wiped off the books.



Expect boomers to travel less than expected, buy fewer toys (boats, cars etc) than expected, gamble less than expected, and downsize much more than expected in every aspect. This in turn will reduce the earnings potential of non-financial corporations for decades to come. Thus expectations that a new rip roaring bull market will commence once the market bottoms is sadly misplaced.



In the meantime, remember that rising unemployment, rising credit card defaults, rising foreclosures, rising numbers of walk aways, and declining earnings of non-financials means we have not even bottomed yet.



This secular bear market will last a lot longer and be much deeper than anyone thinks. Sadly, very few are prepared for it.

Nikkei Monthly Chart

Think That Can't Happen Here?

can

What Has To Happen

States have to dramatically raise taxes to pay for unrealistic promises

A voluntary reduction in pension promises will be negotiated



Cities, municipalities, and states declare bankruptcy or find other ways to default on promises made



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