Author: James

March 21,2017

the staff of the Ridgewood blog with a little help from our friends

Ridgewood NJ, Funny you never mention all of the contributions that weren’t made since 1995. Why is that? Could it be that if the appropriate contributions were made the pensions would be properly funded today? Lets look at the Status Report of the New Jersey Pension and Health Benefit Study Commission which was issued on September 25, 2014 to see what they say about this issue.
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Page 3) Both public employees and taxpayers as a whole, however, have been poorly served by a long-standing and bipartisan tradition of increasing benefit levels without adequate funding. Successive Governors and State Legislatures have committed the State to providing these benefits based on relatively optimistic financial assumptions without adequate consideration of the long-term costs to taxpayers if economic reality were to fall short of these assumptions.
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The specific cause of the $3 billion gap in FY 2014 is that the State paid less than $700 million of the $3.7 billion it would have had to have paid to meet its statutory annual required contribution (“ARC”)2 to the pension funds for that year.
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Page 4) This problem, which all major stakeholders had a role in creating, has immediate, real-world implications. In April and May 2014, Standard & Poor’s, Fitch and Moody’s each downgraded New Jersey’s general obligation bonds, citing the State’s challenge of “structural budget imbalance exacerbated by rapidly growing pension and OPEB (Other Post-Employment Benefits) costs.” Within the last few weeks, Fitch and Standard & Poor’s have each again downgraded New Jersey’s general obligation bonds.4 This has the potential to cost the State millions of dollars going forward in higher interest costs.
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Page 6) All that being said, however, the failure of the State to make required pension contributions when they have been due has made a bad situation much worse. Local governments participate in the same plans but have made more of their required payments with greater regularity, resulting in the local government share of the funds having a funded ratio of 75%, compared to the State’s 54% funded ratio.11 Under-funding the State’s share of the plans has been consistent under the stewardship of both major parties, as shown by the chart on the following page:
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Page 13) The unfunded liability of the State plans reflects a long-term disconnect between the willingness to provide public employees with benefits and the willingness to pay for them. The consequences of this disconnect have now come home to roost.
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Page 15) As the table below indicates, largely due to the extremely high investment returns of the late 1990s, at the turn of the century the funded ratio of the plans based on actuarial values approached or exceeded 100%, even during the 2000-02 economic downturn. However, the apparent resiliency of the plans during that downturn is misleading. The actuarial asset values are rolling multi-year averages. For some time after the flush years of high returns, those averages continued to reflect high actuarial asset values for those years even though the market value of the assets was declining. Statutory changes also increased the expected rate of return from 7% to 8.75% and modified the actuarial funding method to allocate more costs to future years, thereby reducing the apparent value of the liabilities. This further reinforced the misperception that the plans were safely and permanently in surplus.
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The reported asset values and statutory changes enabled the State, in full compliance with the standards then in place, to discontinue making contributions to the funds. While there were clear warnings then that this could lead to huge fiscal problems in the future, at the time it permitted hundreds of millions of dollars to be diverted to other purposes ranging from education to tax relief. Compounding the problem, during the years when the pension plans were apparently well-funded (but actually lapsing into deficits), the Legislature enacted a series of benefit enhancements, including a retroactive 9% increase in TPAF and PERS pensions in 2001, which increased State pension liabilities by $4.2 billion.35