State pensions are high on most people’s list of the most boring topics of all time. But in big states, pensions involve huge amounts of money and have been magnets for all kinds of fraud in recent years, sometimes roping in pretty well-known people . When the Securities and Exchange Commission yesterday issued an order against the state of New Jersey , the agency highlighted an interesting twist on pension ripoff—namely, that New Jersey claimed for six years that it was making pension payments that, in fact, it wasn’t. This information would have been very interesting to the people who bought New Jersey bonds during this period—more than $26 billion worth, over 79 offerings.
This means that in hundreds of documents, state officials simply lied about pension investments they’d not made. The SEC didn’t put a specific number on how much the pensions were underfunded, but parsing through the complaint, and based on other estimates, it’s clearly hundreds of millions of dollars or more. The SEC’s action is the first of its kind against any state, though as the New York Times account indicates , other large states have used various forms of pension funding chicanery. Frustratingly in the Jersey case, as the Times puts it, “No penalties were imposed. Nor did the S.E.C.’s order name any individual state officials, nor the bond underwriters and other professionals whose job it was to vouch for the state’s financial statements.” It should be added that the Times , which has been on top of this story for years , also declined to use the names of anyone who might have been involved in this massive, multiyear deception.
Well, if the SEC and the Times won’t name names, I will. How about John McCormac? McCormac was the treasurer for the state of New Jersey from 2002 until January 2006. The period covered by the SEC’s complaint is August 2001 to April 2007, so McCormac occupied a bigger chunk of it than either his predecessor, Peter Lawrance, or his successor, Bradley Abelow (the latter, for the vampire-squid fans out there, is a former executive of Goldman Sachs).
At a minimum, these men are guilty of stunning incompetence and irresponsibility. According to the SEC order, every time the state treasurer issued an official document pertaining to the bond offerings—that includes annual reports—either the treasurer or a designee had to vouch that the documents included no omissions or misrepresentations. And yet: “The Treasurers did not read official statements, and relied on their staff to ensure the accuracy of information contained in the documents.”
How convenient: blame the staff. One of the most important provisions of the Sarbanes-Oxley Act was to make corporate executives who sign official documents personally and criminally liable for any material representations they might contain. How about we extend the same standard to state officials, who in many cases are dealing with bond issues much larger than those from for-profit companies?
I sent McCormac, now mayor of Woodbridge, an e-mail asking him if it was really possible over all that time that he didn’t know about the massive underfunding of state pensions. If he responds, I will update this item. In the meantime, people should borrow some of the outrage vented at Jersey Shore and aim it instead at the esteemed fiscal leadership the state had over the last decade.