Explaining the GASB Funding Ratio Drop

In a Supplement (dated 11/25/14) to a Preliminary Official Statement (dated 11/19/14) for a bond sale the state of New Jersey disclosed that, under new rules promulgated by accountants, the funded ratio of the New Jersey Retirement System as of June 30, 2014 is 44% for all plans and 33% for the portion the state itself is currently obligated for.  This is a substantial drop from the official funded ratios that the actuaries have been reporting and the press coverage has not been entirely helpful when it comes to the math so here are some points that may make the situation clearer.

Politicians’ Numbers
Those inflated funded ratios passing as official are not the “best estimate” of any actuary but rather the manifestation of the whims of politicians and other very-interested parties looking to understate pension values who get actuaries to do their bidding.

Depletion Date (DD)
I call it a drop-dead date and it provides a simplistic estimate of when a plan will run out of money.  GASB requires contribution estimates to be based on the last five years of actual deposits which in New Jersey corresponds to the Christie contribution-shirk years so our DD dates will likely be worse than any other state.  For example, the Judicial Retirement System (JRS) is projected to run out of money by June 30, 2021 and here is my guess as to how that date was arrived at in an Excel spreadsheet.

The Situation Is Worse Than Even These New GASB Numbers Lead You To Believe
As helpful as the new accounting numbers could be there are still pertinent factors being ignored:

  • Employee contributions are considered as trust assets though upon plan bankruptcy these would need to be returned (theoretically)
  • Asset values include massive amounts in Alternative Investments that are prime candidates for the next crash
  • Pension Obligation Bonds: a gimmick to push contributions onto future taxpayers that rightfully should be removed from asset values when calculating funded ratios
  • Payout projections appear static but with no impingement of benefits for current employees and retirees and the return of COLAs it can be expected that annual payouts will increase by about 10% until depletion which will come sooner per this updated spreadsheet for the JRS plan
  • Ability to pay: A similar projection of contributions is inappropriate since future deposits, absent any effective authority demanding reasonable funding, will continue to be dictated by political exigencies and in New Jersey here is our dictator:

7 responses to this post.

  1. Posted by skip3house on November 28, 2014 at 3:25 pm

    Governmental Accounting Standards Board – Wikipedia, the …
    The Governmental Accounting Standards Board (GASB) is the source of generally accepted accounting principles (GAAP) used by State and Local governments


  2. Posted by hondo on November 28, 2014 at 5:34 pm

    John, I hope your DD calualtions are wrong. If this does happen other states will follow, it will not just be NJ?


    • Posted by Tough Love on November 28, 2014 at 6:22 pm

      Let’s keep it in context…….

      The “Drop Dead” date (3-5 years away assuming contributions of CURRENT “actives” cannot be diverted/run-down-zero to continue paying pension benefits to current retirees), means that NJ’s Plans will reach a “pay-as-you-go” status and continued payments to retirees must come form General Account annual budget revenues (i.e., Tax collections).

      The “problem” with that in NJ is that to do so, tax revenues would need to bring in about an ADDITIONAL $6 Billion annually, and there isn’t a “snowball’s-chance-in-hell” that even our “In-The-Union’s-Pocket” Democratic legislature would do so ………. because not only would NJ’s economy collapse, but Legislators that voted for such increases would promptly be shown the door (ala Gov. Florio)………. and self-preservation is ALWAYS a politician’s PRIMARY goal.

      One possible change in that scenario is VERY material cutbacks in retiree healthcare subsidies for all CURRENT (and future) retirees, and use But df the “savings” so obtained to push the pension Plan drop-dead date out a few years.

      Doing so still begs the issue (kicks the can down the road) …. we need to address the “structural imbalance” between revenue and expenses, and a VERY lager driver of our VERY high expenses is the cost of pension promises that are by every and any reasonable metric, MULTIPLES greater than what similarly situated Private Sector workers get from their employers ………. and all while Public/Private Sector CASH PAY is VERY close (thereby shooting-down arguments trying to justify higher Public Sector pensions/benefits).


  3. Posted by Javagold on November 29, 2014 at 6:25 pm

    Just wait until the S&P rolls over and drops 40%. Then watch for the rats jump the sinking ship. When The Fat Liar in charge announce he will run for President, which he has no shot at, that will be the signal , The Game is Over !!!

    Hope the public takers have been saving all their pension treasures..


  4. Posted by hondo on November 29, 2014 at 8:32 pm

    Wow so much on keep it in context. Whatever, happens you must plan for the worse. I will laugh if the pension doesn’t go as predicted! If S&P drops 40% the rats jump the sinking ship, that is when you buy more!


    • Posted by dentss dnnigan on November 30, 2014 at 5:16 pm

      So I guess you loading up on oil stocks as we speak because they are a precursor to what is going to happen once the fed really stops blowing this bubble up


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