Real Number on New Jersey Pensions – 6/30/11 update*

The June 30, 2011 valuation reports are out.

You might be seeing numbers tossed at you regarding deficits in the state pension of $40 billion and a funded ratio of 67%.  They’re way off.  Based on actuarial reports for the three largest plans I put the real deficit now at $162 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 @ 6/30/11 (in billions)
……………………………TPAF………..PERS……..PFRS……………TOTAL
Actuarial Assets………32.2…………29.1………23.2……………..84.5
Liabilities……………….49.9…………43.3……….30.9…………..124.1
Deficit………………….-17.7…………-14.2……….-7.7……………-39.6
Funded Ratio………..64.5%………67.2%…….75.1%………….68.1%

The funds did not really have $84.5 billion in assets at June 30, 2011. 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 @ 6/30/11 (in billions)
……………………………TPAF………..PERS……..PFRS……………TOTAL
Market Assets…………27.4…………25.7………21.3……………..74.4
Liabilities……………….49.9…………43.3……….30.9…………..124.1
Deficit………………….-22.5…………-17.6…….. -9.6……………-49.7
Funded Ratio………..54.9%………59.4%…….68.9%………….60.0%

Next, we turn to the liability side of the ledger. As I detailed previously on TPAF the underlying assumptions upon which the value 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 @ 6/30/11 (in billions)
……………………………TPAF………..PERS……..PFRS……………TOTAL
Market Assets…………27.4…………25.7………21.3……………..74.4
Bury Liabilities…………75.0…………65.0……….46.0…………..186.0
Deficit………………….-47.6…………-39.3……. -24.7…………..-111.6
Funded Ratio………..36.5%………39.5%…….46.3%………….40.0%

Next we turn to the COLA theft.  2010 liability numbers were adjusted for the plans to take into account the elimination of all future Cost-of-living adjustments that public employees were promised – in writing.  Were that reinstated the respective adjustments that artificially lowered liabilities will need to be reinstated to the tune of 17% (TPAF), 12% (PERS), and 16% (PFRS) giving us:

BURY NUMBERS WITH MARKET VALUE AND COLA (in billions)
……………………………TPAF………..PERS……..PFRS……………TOTAL
Market Assets…………27.4…………25.7………21.3……………..74.4
Bury/COLA Liab………87.7…………72.8……….53.4…………..213.9
Deficit………………….-60.3…………-47.1……. -32.1…………..-139.5
Funded Ratio………..31.2%………35.3%…….39.9%………….34.8%

Now remember these numbers were as of June 30, 2011. The latest report from the Division of Investments shows assets at $69.6 billion and we can add another year of accruals to the liability side:

BURY/COLA WITH MARKET VALUE @ NOW (in billions)
……………………………TPAF………..PERS……..PFRS……………TOTAL
Market Assets…………25.6…………24.0………20.0……………..69.6
Bury/COLA Liab………95.0…………79.0……….58.0…………..232.0
Deficit………………….-69.4…………-55.0……. -38.0…………..-162.4
Funded Ratio………..26.9%………30.4%…….34.5%………….30.0%

For the year ended June 30, 2011 there was about $7.6 billion paid out in benefits from these three funds. With early retirement incentives, the return of cost-of-living adjustments, longer life expectancies, and baby-boomer retirements this payout number should exceed $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 pieces I did on April, 2009 and February, 2010 , and February, 2011 with minor changes in the text.

23 responses to this post.

  1. Posted by Tough Love on January 25, 2012 at 3:05 pm

    WOW !

    About the only point you and I don’t completely see eye-to-eye is in this … doing the honorable thing.

    Somehow I think you still believe funding (Perhaps … for ALL of these promises) is in order, while I feel a real serious haircut (of 50+%) is in order.

    Clearly, if the collusion between out elected representatives and the Public Sector Unions were removed, the promised pensions would be MUCH closer to what Private Sector workers get from their employers, and that’s WELL less than half the pensions our self-dealing, vote-selling, contribution-soliciting elected representative have promised NJ’s Civil Servants.

    It’s time for a BENEFITS reset, NOT full funding.

    Reply

  2. Posted by Tough Love on January 25, 2012 at 3:13 pm

    John, The $124.1 Million liability was based on the 8.25% discount rate. What rate did you assume to arrive at the $186 Million liability (risk free or something in-between … actual rate used ?)

    Reply

    • Posted by Anonymous on January 25, 2012 at 3:31 pm

      I bumped up their liabilities by 50% which likely translates into using a 4.5% valuation interest rate which would account for about 40% of the difference with the other assumptions (mortality, withdrawal rates) accounting for the rest.

      Reply

      • Posted by Tough Love on January 26, 2012 at 12:32 am

        Sounds like you pushed it a bit too far. A mortality and withdrawal rate differential (from the original assumptions) 60/40=150% greater than the 8.25%-4.5%=3.75% reduction in the liability discount rate seems hard to rationalize.

        Reply

        • If anything I understated:

          37% would be the change attributable to the MV factor alone. For example, GAR94, NRA 62, the life annuity factor is 13.3 at 4.5% and 9.7 at 8.25%.

          Add on the effect of pre-retirement interest; J&S annuities; mortality for a population with lifetime health benefits; opportunities for gaming the system (buying service credits, ERIs) and a case could be made for doubling the liability. But, being conservative…..

          Reply

          • Posted by Tough Love on January 26, 2012 at 12:49 pm

            The life annuity factor change doesn’t surprise me. The other items you’ve now thrown in suggest the Plan actuary has been too using way too liberal assumptions for all these other elements of the valuation. If so, that’s quite an abuse of discretion.

  3. Posted by Eric on January 26, 2012 at 12:29 am

    Tough Love. I believe that the numbers are in billions of $ not in millions of $.
    Eric

    Reply

  4. […] Though I put the real liabilities at $232 billion. Like this:LikeBe the first to like this […]

    Reply

  5. […] actuary and blogger John Bury.   On top of that, said Bury, the pension debt now is at least $162 billion, and Christie’s “reforms” are “whoppers.”   New Jersey is far […]

    Reply

  6. […] actuary and blogger John Bury.   On top of that, said Bury, the pension debt now is at least $162 billion, and Christie’s “reforms” are “whoppers.”   New Jersey is far […]

    Reply

  7. […] top of that, said Bury, the pension debt now is at least $162 billion, and Christie’s “reforms” are […]

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  8. […] in their plans primarily by using ridiculously high investment assumptions resulting, in the case of New Jersey, in reported liabilities of $124 billion when they really are $186 billion ($214 billion if COLAs […]

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  9. […] know for sure that the New Jersey pension underfunding number is garbage but how much variation would there be in the Illinois pension number and both OPEB amounts if […]

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  10. […] now but the reason, as I went into previously, is that a plan like New Jersey’s, which is about 30% funded, will only get earnings on 30% of the assets that should be there.  When setting interest […]

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  11. […] 6/30/11: $40 billion, 68% to $162 billion, 30% […]

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  12. […] This is an update of pieces I did on April, 2009, February, 2010 , February, 2011, and January, 2012 with minor changes in the […]

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  13. […] This is an update of pieces I did on April, 2009, February, 2010 , February, 2011, January, 2012, and March, 2013 with very minor changes in the […]

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  14. How much does the average state worker put into the pension system over their lifetime and what is the average amount they receive in pension payments?

    Reply

    • There’s around $25 billion of assets attributable to employee contributions according to estimates from actuarial reports but that pay-in/pay-out comparison is problematic. Not only do employees put in on different levels (judges get by far the best deal) but there are a lot of McGreeveys out there who are contributing based on a low-ball salary but who will get (they expect) pensions based on a governor’s salary.

      Reply

  15. […] overrules and sticking to the plan) had he been dealing with a $40 billion problem instead of the $160 billion problem it actually was then.  However, each governor does share blame for adding to the crisis and here is my ranking of the […]

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  16. […] not). The reason, as I went into previously, is that a plan like New Jersey’s, which is about 30% funded, will only get earnings on 30% of the assets that should be there.  When setting the interest […]

    Reply

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