The funding status of New Jersey’s pension system dropped 20 points this week as the state’s Treasury Department began measuring funding using new accounting rules.
In a document released on Tuesday after a bond sale, the state revealed that one of its five main pension funds will have insufficient assets to cover projected benefit payments within 10 years.
Under new pension accounting standards, issued by the Government Accounting Standards Board (GASB), the New Jersey system’s overall funded level stands at 44 percent for fiscal 2014, compared to the 63 percent previously determined by standard actuarial methods. Eighty percent or more is generally considered healthy.
New Jersey Treasury Department spokesman Christopher Santarelli said in a statement that the retirement system had current assets of about $40 billion.
But he added that the new pension reporting system, based on actual contributions, “underscores the urgent need for additional, aggressive reform of a pension and health benefits system that if fully funded would eat up 20 percent of New Jersey’s budget.”
The GASB rules measure a retirement system’s net position as a percentage of total pension liability.
The net position uses market asset values instead of actuarial ones. In the case of more poorly funded systems such as New Jersey’s, it also uses lower discount rates that make the liabilities appear much higher.
Fitch said the funding drop “wasn’t a surprise”, but that pensions remain a serious problem. From Fitch:
The significantly weaker pension figures released by the state of New Jersey today in a supplemental bond sale disclosure are not a surprise, in Fitch’s view. The state is the first to disclose materially weaker pension metrics following its conversion to new accounting requirements under GASB statement 67.
For more than a decade, the state has severely underfunded the actuarially calculated contributions needed to progress toward full actuarial funding, even following extensive plan reforms, and the state cut its already insufficient contributions for fiscal years 2014 and 2015 to address unexpected structural budget weakness. The governor has convened a special pension taskforce to propose options for additional pension reform and is expected to make a proposal to the legislature in early 2015. Fitch’s Negative Outlook at the current rating level reflects the concern that state corrective action to address its budgetary and pension challenges will be difficult to achieve and sustain over time, particularly given its narrow liquidity, limited fiscal flexibility, and the risk that litigation may defer or dilute pension reforms.
Fitch continues to believe that the new GASB pension standards represent a step forward in improving pension transparency. For example, the requirement to calculate total pension liabilities under the more conservative entry age normal cost method, rather than the multiple options allowable under the old standards, will increase the comparability of governments’ pension liabilities. Although most large public plans already used entry age normal, New Jersey did not, and the materially higher total pension liabilities that it disclosed under the GASB 67 standard reflect in part this switch.
Read Fitch’s full statement here.