WSJ Reports New Jersey Pension Deficit at $54 Billion; Actual Deficit $174 Billion; Illinois, California, New Jersey Among Worst States
The Wall Street Journal reports New Jersey Pension Gap Hits $54 Billion.
New Jersey’s pension gap grew to $53.9 billion in the last fiscal year, up from $45.8 billion, thanks to market losses and a lack of state funding, according to figures released Thursday.
Gov. Chris Christie’s administration said the gap, which reflected the state’s investment positions as of June 30, highlighted the need for proposed cuts to current public workers’ pensions. The $53.9 billion figure reflects the difference between the retirement benefits the state has promised to roughly 780,000 state and local workers over the next few decades and the amount on hand to pay those benefits.
In addition, an accounting practice called “smoothing” allows the state to factor market gains and losses over several years — meaning pension funds, on paper, are still feeling the effect of the 2008 market crash.
Christie, a Republican, wants to reverse a 9% pension bump workers received in 2001 under a Republican administration. Unions argue their members have an irrevocable right to benefits they have earned. The governor has challenged the unions to meet him in court.Actual Deficit Much Higher
There are at least two problems with that $54 billion number.
1. It allows smoothing
2. Plan assumptions expect average annual returns of 8.25%.
I highly doubt pensions return 8.25% total (let alone annual) over the next 5 years.
10-year treasury yields are a mere 3.4%. To get higher returns, requires higher risk. History shows how well that idea has worked out for the last 10 years. There is no reason to assume the next 10 years will be any different.
In fact, given stretched valuations and overly optimist earnings estimates, there is every reason to suspect the next 5 years will be worse.
New Jersey Pension Funding
Here is a look at New Jersey pension funding from Interactive Map of Public Pension Plans; How Badly Underfunded are the Plans in Your State?
see above link for a workable map
New Jersey Subtotals
- PERS - $48 Billion
- Teachers - $61 Billion
- Police and Fire - $36 Billion
The interactive map and those subtotals are based on data fromCalculating the Market Price of Public Sector Pension Liabilities, by Andrew Biggs at the American Enterprise Institute.
The American Enterprise Institute report is quite detailed. However, it only includes 3 of 7 New Jersey defined benefit pension plans.
New Jersey Defined Benefit Plans
Teacher's Pension Annuity Fund (TPAF)
Public Employees Retirement Fund (PERS),
Police and Firemen's Retirement System (PFRS)
State Police Retirement System (SPRS)
Judicial Retirement System (JRS)
There are two existing defined benefit plans closed to current workers, the Consolidated Police and Firemen's Pension Fund (CPFPF), and the Prison Officer's Pension Fund (POPF).
Thus, New Jersey's liability is hugely understated, even at $145 billion.
Crisis in Public Sector Pension Plans
Please consider Crisis in Public Sector Pension Plans by George Mason University.
Pension plans operated by state governments on behalf of their employees are underfunded by an estimated $452 billion according to official reports, with total liabilities of $2.8 trillion and total assets of $2.3 trillion in 2008. However, many economists argue that even these daunting liabilities are understated. Current public sector accounting methods allow plans to assume they can earn high investment returns without any risk. Using methods that are required for private sector pensions, which value pension liabilities according to likelihood of payment rather than the return expected on pension assets, total liabilities amount to $5.2 trillion and the unfunded liability rises to $3 trillion. The ability of governments to pay for the retirement benefits promised to public sector workers runs up against the reality of limited resources.
The state reports that its pension systems are underfunded by $44.7 billion, when liabilities are discounted at the 8.25 percent annual return that New Jersey predicts it can achieve on funds' investment portfolios.
However, when plan liabilities are calculated in a manner consistent with private sector accounting requirements, methods that economists almost universally agree are more appropriate, New Jersey's unfunded benefit obligation rises to $173.9 billion. This amount is equivalent to 44 percent of the state's current GDP8 and 328 percent of its current explicit government debt. This calculation applies a discount rate of 3.5 percent (the yield on Treasury bonds with a maturity of 15 years) to reflect the nearly risk-free nature of accrued benefits for workers. It is estimated if state pension assets average a return of 8 percent, New Jersey will run out of funds to meet its pension obligations in 2019. If asset returns are lower than 8 percent, they will run out of funds sooner. State actuaries estimate that under certain assumptions, New Jersey's pension plans will run out of assets to make benefit payments beginning in 2013.
Governor Chris Christie signed legislation on March 22, 2010 to reduce the size of the unfunded liability. These measures include capping payments for unused sick days, banning part-time workers from receiving pensions, and requiring government workers to contribute 1.5 percent of their salaries toward health care. Legislation also adjusted the formula used to calculate benefits, returning to the pre-2001 formula where benefits equalled 1.7 percent of final salary times number of years of service, versus 1.8 percent of final salary in the TPAF and PERS plans. Also, members of these plans would have their retirement allowance calculated based on the final five years of service, instead of the final three. However, these changes to benefits would apply only to newly-hired public employees. Current workers, even those who recently entered the job rolls, would be able to continue under the current benefit formula for the rest of their careers.
These measures will help at the margins but do little or nothing to address the size of the liability that has already been accrued. The rate of accrual of benefits will have to be reduced further, and employees will have to contribute more to their plans. The state must recognize that adding more workers to a system that is underfunded by $173 billion by market standards, representing over 40 percent of New Jersey's GDP, is not a tenable option.The report cites Calculating the Market Price of Public Sector Pension Liabilities, the same study used to create the interactive map.
Report Recommendations
Reduce benefits for newly-hired public employees
All newly hired employees should be shifted to a defined contribution pension model based upon the plan already offered to New Jersey's university employees
Current reforms lowering pension replacement rates should be continued and, if possible, extended to current employees. All vested benefits should be honored, but the rate at which future benefits are earned should be reduced.
Current employees who are not yet vested in their benefits might be shifted along with newly hired employees to a defined contribution plan. This step could produce savings to existing DB plans while moving more quickly to a sustainable pension model for public employees.
I agree with those except honoring vested benefits. I recommend taxing the hell out of benefits above a certain level.
Here is a look at liabilities state by state.
Unfunded Liabilities by State
click on chart for sharper image
California is the worst state in absolute terms. In per capita terms, Illinois appears to be in the worst shape. However that statement does not factor in all of New Jersey's pension plans. Then again, the Biggs report does not include all of Illinois' public pension plans either. The mess everywhere is far bigger than it looks.
Pension Apartheid Doesn't Work
Unions are screaming about an Irrevocable Right to Benefits. Leo Kolivakis at Pension Pulse sums up the situation nicely.
State governments have little choice but to raise the retirement age, cut benefits, and partially or fully remove inflation protection of public sector pensions. They should also revise their rosy investment assumptions for state plans.
This may seem unfair and unreasonable to public sector workers, but to quote a strategist who I spoke with yesterday, "deleveraging sucks". You can't have pensions apartheid between the private and public sector. And there are no "irrevocable rights to benefits". Just look at the mess Greece and Ireland are in right now. When the money runs out, cuts are guaranteed.Yes indeed. Not only do Greece and Ireland prove it, but so does Prichard, Alabama the first city in the country to default on pensions. Please see Alabama Town Defaults on Pensions, Breaks State Law; Renewed Calls For San Diego Bankruptcy; "Prichard is the Future"for details.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Even using their numbers and optimistic recommendations, a public pension study released this week by the Center for State and Local Government Excellence proves the hopeless magnitude of this catastrophe that SLGE admits will require extorting at least $50 trillion more out of citizens over the next 30 years.
That’s on top of all taxes they now squeeze out and future increases required to pay off debt, rebuild infrastructure, fund insurance subsidies, meet Medicaid and unemployment obligations, and maintain minimal services.
SLGE claims there is no crisis in state and municipal pensions because, according to President and CEO Elizabeth Kellar in her “State and local governments as scapegoats” blog Tuesday, real concerns about fiscal uncertainty are “crazy talk. … States and local governments are balancing their budgets, as painful as that is.”
What truly is crazy is the thought that state and local governments are balancing their budgets. That meets every clinical definition of dissociative disorders and cognitive dissonance.
Think not? Let’s look at “State & Local Pensions: An Overview of Funding Issues and Challenges.”
In numbers that reveal for the first time this nightmare is even worse than critics estimated, SLGE admits the staggering 2008 Wall Street sucker punch to pension funds was $880 billion, 27.5 percent. That requires 2009 market gains of almost 61 percent to get even based on official assumption of 8 percent every year forever.
According to SLGE numbers, pension funds had a median annualized one-year investment return of only 20 percent. That means funds had to get more than 49 percent in 2010. According to SLGE, as of the third quarter, they were up about 1.5 percent.
Pension funds are falling farther and farther behind every year toward a fiscal event horizon beyond which there is no return.
These numbers are not Democrat or Republican, Right or Left, progressive or reactionary, fair or unfair. The numbers are the numbers. Reality is reality.
Politicians, pension fund officials, brokers, placement agents, financial institutions and union bosses – all enriching themselves from perpetuating fiscal insanity – either are in a state of total denial or cynically misleading citizens and public workers so they can take their cut and run before this whole rotten cathedral of profligacy collapses.
For example, SLGE claims spreading recent losses over 30 years will fix the problem.
That truly is crazy talk. Merely plugging their numbers in from 2007 to 2036 shows it would require an average annual return of 9.8 percent, and it would cost taxpayers an additional $49.5 trillion even if fund managers somehow achieve that miraculous return.
SLGE admits the median annualized 25-year return is only 9.3 percent, and that includes a decade of gain most market experts say never will be repeated.
Amortizing recent losses over 25 years would require 10.3 percent annual returns every year and, again, even if funds achieve that miraculous performance pensioners would have to squeeze an additional $34.5 trillion out of taxpayers.
Taxpayers are not in the mood. We cannot grow out of this: Total U.S. Gross Domestic Product is less that $15 trillion a year, with the most optimistic projections of growth pegged at less than 3 percent.
Worst of all, this study assumes every state and local government makes full Annual Required Contributions to pension plans every year. According to SLGE data through 2009, those governments in aggregate did not. We know fewer did in ’10 and ’11.
And the way operating budget deficits are shaping up for fiscal year 2012, they will not again.
Clinging to delusions while admittedly knowing overwhelming facts to the contrary is evidence of denial used in diagnosing mental illness, drug addiction, alcoholism, gambling and other self-destructive behaviors.
So are reactions such as accusing those who attempt intervention of being the ones who are “crazy,” and manifesting a persecution complex through expression of “scapegoat” paranoia.
Kellar, public union leaders, legislators and governors must get in touch with reality now and act decisively this year to cut spending and impose reforms even as real “crazy talk” of meager market gain and small revenue rise based on massive tax increases lull them into a false sense of recovery.
Anything less is proof of ongoing insanity.
The longer they delay, the more ruthless will be the people’s intervention.
Frank Keegan is a national editor for The Franklin Center for Government and Public Integrity, watchdog.org and statehousenewsonline.com . Any disgusted public employee, journalist, activist organization or citizen watchdog who wants help exposing government waste, fraud and abuse may contact him at: frank.keegan@franklincenterhq.org
