Abnormal Costs

In theory if you are putting away enough to cover benefits accrued during the year and paying off any past liabilities over some period of time (30 years in NJ) then your unfunded liability should be going down and your funded ratio going up.  That’s not the case for New Jersey pension plans and it will not be the case when the July 1, 2013 valuation reports are released this coming week.

As of July 1, 2012 the unfunded was reported to have increased to $47.2 billion from $41.7 billion as of July 1, 2011 with the funded ration dropping from 67.5% to 64.5%.  This year those numbers will likely be $52 billion (as already leaked) and around 61%.  Is this an anomaly?

No, it is by design.  Public pension funding is all about getting the contribution as low as possible and a primary tool is the funding method (per the valuation report):

The Projected Unit Credit Method was used as required by Chapter 62, P.L. 1994 as modified by Chapters 115, P.L. 1997 and 133, P.L. 2001.

Logically straight Unit Credit should be used since that values benefits accrued during the year but PUC has the advantage of developing much lower current-year contribution (if interested here is a brief powerpoint explanation) but in the case of New Jersey it also develops some bizarre Normal Costs.

The annual contribution developed by the actuaries (before the state slashes or ignores it) consists of a current year accrual portion (Normal Cost) and an amortization payment for past unfunded liabilities (or a credit for any overfunding but that never seems to develop).  Isolate only the Normal Cost portion form the July 1, 2012 actuarial reports and you would think that benefits being accrued are less than even the employees’ own contributions (spreadsheet with report excerpts as of July 1, 2012).

If you take these numbers seriously then you have to believe that New Jersey is making a profit on pension accruals (6.75% of salaries in employee contributions coming in vs. 5.9% of salaries in Normal Cost being accrued) and if they can keep this plan going long enough the employees’ own contributions should take care of any shortfalls.

Or you can believe that the actuaries are being paid to lie to you.

3 responses to this post.

  1. Posted by Tough Love on March 2, 2014 at 2:19 pm

    With the appropriate % almost certainly multiples greater, I’d love to listen to NJ’s Plan actuary responsible for that 5.9% of pay as a reasonable Normal Cost, trying to justify that in an American Academy of Actuaries disciplinary hearing.


    • Posted by Tough Love on March 2, 2014 at 2:25 pm

      I should have added to the end of my above sentence …, “where the BS routinely fed to politicians and taxpayers, won’t fly.”


  2. Posted by MJ on March 4, 2014 at 10:40 am

    Seems like it has been working so far. Not sure what the problem is as this can go on for years to come. Where is the dire necessity of reform now or lose it all later. I can understand where the confusion comes in when asking publics to give up promised benefits. Old wine in a new bottle. Stay tuned.


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