The June 30, 2010 valuation reports are out.
You might be seeing numbers tossed at you regarding deficits in the state pension of $54 billion and a funded ratio of 62%. They’re way off. Based on actuarial reports for the three largest plans I put the real deficit now at $160 billion and the real current funded ratio at 30%. Let’s take this in stages as we replace official figures with real-world ones for the three largest plans.
OFFICIAL NUMBERS @ 6/30/10 (in billions)
……………………………TPAF………..PERS……..PFRS……………TOTAL
Actuarial Assets………33.1…………28.8………23.5……………..85.4
Liabilities……………….56.6…………46.4……….34.1…………..137.1
Deficit………………….-23.5…………-17.6………-10.6……………-51.7
Funded Ratio………..58.5%………62.1%…….68.9%………….62.3%
The funds did not really have $85.4 billion in assets at June 30, 2010. The ‘actuarial value’ in this case means an average of the the asset values over the last five years which in the private sector is used to ‘smooth’ valuations but in the public sector is used to distort. Just because the plan held Lehman stock that was worth something in three of the last five years they get to pretend they really have more money now. Here are the figures when we use market value of assets:
OFFICIAL NUMBERS WITH ASSETS AT MARKET @ 6/30/10 (in billions)
……………………………TPAF………..PERS……..PFRS……………TOTAL
Market Assets…………25.8…………23.0………19.8……………..68.6
Liabilities……………….56.6…………46.4……….34.1…………..137.1
Deficit………………….-30.8…………-23.4……. -14.3……………-68.5
Funded Ratio………..45.6%………49.6%…….58.1%………….50.0%
Next, we turn to the liability side of the ledger. As I detailed previously on TPAF the underlying assumptions upon which the values of these promised benefits are based (primarily the 8.25% interest assumption in a plan that now demands liquidity) understate the true benefit costs. Here are the figures using realistic liability valuations:
BURY NUMBERS WITH MARKET VALUE @ 6/30/10 (in billions)
……………………………TPAF………..PERS……..PFRS……………TOTAL
Market Assets…………25.8…………23.0………19.8……………..68.6
Bury Liabilities…………87.0…………70.0……….49.0…………..206.0
Deficit………………….-61.2…………-47.0……. -29.2…………..-137.4
Funded Ratio………..29.7%………32.9%…….40.4%………….33.3%
Now remember these numbers were as of June 30, 2010. Though the asset values have remained steady with earnings growth keeping up with payouts there has been another year of benefit accruals to add on:
BURY NUMBERS WITH MARKET VALUE @ NOW (in billions)
……………………………TPAF………..PERS……..PFRS……………TOTAL
Market Assets…………25.8…………23.0………19.8……………..68.6
Bury Liabilities…………95.0…………78.0……….55.0…………..228.0
Deficit………………….-69.2…………-55.0……. -35.2…………..-159.4
Funded Ratio………..27.2%………29.5%…….36.0%………….30.0%
For the year ended June 30, 2010 there was $6.9 billion paid out in benefits from these three funds. With early retirement incentives, cost-of-living adjustments, longer life expectancies, and baby-boomer retirements this payout number should be around $10 billion in three years by which time the fund will be depleted (after returning the interest-adjusted contributions made by employees) unless, of course, New Jersey politicians step up and do the honorable thing. There’s a debate as to whether you can put a number on that happening.
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* This is an update of a piece I did April, 2009 and February, 2010 with minor changes in the text.
Posted by Javagold on February 8, 2011 at 2:05 am
AMAZING…….there is no way the numbers can be as bad as you claim….this is imminent collapse if this is correct
Posted by muni-man on February 8, 2011 at 12:54 pm
Interesting numbers, JB. If you don’t mind me asking, is your interest rate assumption
above/below 5%? I like to play around a little with my own ‘unscientific’ calcs for some of these plans and I’m just curious because I’m using 5% as a general rule-of-thumb.
Also, what would be the ‘honorable thing’ that NJ politicians should do at this point?
What CC’s gotta start addressing in earnest now is the healthcare expenses for the publics,
since the plans are doomed. He’s gotta start forcing them to pay a hefty chunk for healthcare and should start by capping employer contributions and funding no more than
than a BASIC plan only.
Posted by burypensions on February 8, 2011 at 4:27 pm
My liability numbers are very unscientific. I’m using about 4% for interest since that’s basically what a plan that has to pay out 10% of it’s money annually (and that percentage is rising) could expect to get. The major understatement though is mortality. Public employees with lifetime health benefits will live a lot longer than the actuaries are predicting.
Fall on their swords?
Posted by muni-man on February 8, 2011 at 5:42 pm
John, thanks. Guess I’ll ratchet my number down a bit to the
long-Treasury bond yield thereabouts.
Yeah, looks like the pols will eventually have to do just that -
fall on their swords. I think the NJ election in Nov. might
very well be a bellwether though. Look at the national scene right now – the GOP is in the driver’s seat:
29 states – GOP governor
21 states – (GOP gov. + GOP control of statehouse)
13 states – (Dem gov. + Dem control of statehouse)
8 states – (GOP gov.+ Dem full/partial control of statehouse)
8 states – (Dem gov. + GOP full/partial control of statehouse)
I’m sensing that there’s gonna be a fair number of Dems who are gonna defect and start voting against the union line in a number of states, if only to try to stay in office. Some at least, are correctly sizing up the strong groundswell to finally start reigning in these public unions once and for all. It will be interesting to see if CC can capitalize on this momentum and, hopefully, gain GOP control of the Senate (5 net seats needed). Don’t think they’ll be able to get a net 8 seats to control the Assembly though. Regardless, he’s still got the veto and there are enough GOP-types to frustrate any override efforts by the Dems in both houses.
Posted by Larry Littlefield on February 8, 2011 at 7:45 pm
I guess the argument against smoothing and a high rate of return is that when asset values hit zero, because they have to be liquidated to pay benefits, the rate of return is zero no matter what happens in the market.
I think the problem with the 8.25% rate of return is that market interest rates on bonds are lower that 4.0%, the dividend yield on stocks is 1.8%, the historic inflation adjusted capital appreciation for stocks is less than 1.0%, and expected inflation over the next decade is less than 2.5%.
Bottom line, asset values are inflated and will thus offer lower returns going forward, unless inflation increases nominal stock returns.
Posted by buddyroo30 on February 9, 2011 at 8:58 pm
Just curious, in figuring liabilities does the interest assumption include both contributions (employer and employee) and investment returns, or only the investment returns. For example, say the fund has $10 to start and in the next year it gains $.40 in value (i.e. investment return of 4%) and also gets $.425 in new contributions — does this mean the fund met its assumed interest rate of 8.25%? Or not?
Posted by burypensions on February 9, 2011 at 9:43 pm
Only investment return – not net gain where you’d also be considering payouts.
If you predict 8.25% the entire fund must earn 8.25% each year.
Posted by javagold on February 9, 2011 at 9:49 pm
no one is making 8.25 each and every year…..the last guy with guarenteed returns like that, made off with all the money !
Posted by eric blair on February 11, 2011 at 11:20 am
Dear Mr. Bury,
Do I understand you to mean that approximately one-half of the $68.6 billion in pension assets consists of employee contributions?
Posted by burypensions on February 11, 2011 at 11:34 am
That’s a reasonable guess. There are about 500,000 workers putting in about $1.7 billion a year now. There are also the newly retired who have
not gotten back their contributions. Then there is the interest on those contributions (though NJ gives you 2%) and adding it all up I get
somewhere around $30 billion of the participants’ own contributions.
This is why the drop-dead for NJ will be sooner than 2018, which is the year assets hit $0. The real drop-dead date should be 3 to 4 years off
when assets equal the participants’ own contributions that, by any definition of ethical, they should have returned to them.
Posted by How Governor Christie unknowingly lied about lower property taxes from pension reform « Burypensions Blog on June 29, 2011 at 4:58 pm
[...] have done studies of the 2008, 2009, and 2010 valuation reports and this is what I expect the official numbers for 2011 to be. Liabilities [...]
Posted by Real Number on New Jersey Pensions – 6/30/11 update* « Burypensions Blog on January 25, 2012 at 2:37 pm
[...] This is an update of pieces I did on April, 2009 and February, 2010 , and February, 2011 with minor changes in the text. Advertisement GA_googleAddAttr("AdOpt", "1"); [...]