3 Reasons Pension Costs Will Sink New Jersey First

The average municipality has to pay 2.25% to sell their 10-year bonds.  New Jersey now has to pay 2.75% and Illinois has to pay 3.68% primarily due to the disasters they have made of their pension funding (New Jersey with an $83 billion hole and Illinois with $111 billion).  It would appear that Illinois will implode first but there are three factors that I know exist in New Jersey that may move it ahead.

1) GASB Numbers Still Rosy

They still use that 7.9% plan rate until the depletion date when it drops to 4.29% but in a plan this underfunded it really should be 3% (adjusting for the funding flaw) and then 0% when it runs out of money* which would drop that 44% funded ratio to about 25% before considering…..

2) That $80 billion New Jersey is supposed to have in their fund is illusory

$21 billion in Alternative Investments valued-as-needed including at least one investment double-counted (Lone Star Fund VII (U.S.) LP with a value of $108,631,903 listed twice).  Add on liabilities for those 1996 Pension Obligation Bonds being repaid ($10 billion?) and the return of employee contributions ($30 billion?) and you have barely enough to make retiree payments for the next two years absent government contributions (which indeed have been mostly absent for the last 20 years).

3) Not Even at Square One

The current status of pension reform in New Jersey is that we are over two months late in getting recommendations from a study commission handpicked by the governor.  This governor:

Can Illinois match that?



* since without money to invest you do not get investment earnings as I went into for OPEBs here.

13 responses to this post.

  1. Posted by test on December 4, 2014 at 3:31 pm

    Oh, the audacity. Remember that $111B in Illinois does not include $53B in healthcare that our Supreme Court just said is constitutionally protected along with pension benefits. And we have 670 other municipal pensions, most of which are hopeless.


  2. And here’s a new ranking of best and worst run state’s. We’re 50 in Illinois, you’re only 43. In your face, New Jersey.


    • Not to be argumentative since my heart is not really in winning this type of argument but bringing localities into this discussion clinches it for New Jersey based on this:

      New Jersey localities, as I’ve seen over and over in Union County, make up their own rules as they are not subject to GAAP standards. If someone ranks NJ as 43rd worst run it’s because of a lot of numbers even phonier than what the state puts out there.


  3. Posted by Tough Love on December 4, 2014 at 5:23 pm

    Quoting ….

    “1) GASB Numbers Still Rosy

    They still use that 7.9% plan rate until the depletion date when it drops to 4.29% but in a plan this underfunded it really should be 3% (adjusting for the funding flaw) and then 0% when it runs out of money* which would drop that 44% funded ratio to about 25% before considering…..”

    My thoughts ……..

    GASB acquiesced (i.e., “chickened-out”) to pressure from States and Cities worried about borrowing rates (and to those who oppose to pension reform and are concerned with the MUCH lower funding ratios that would be reported to the public) fearful of the financial reporting implications of putting in place PROPER new procedures that would have called for discounting future Plan liabilities OVER ALL YEARS using a discount rate truly reflective of the strong guarantees associated with Public Sector pension promises ….. meaning a rate somewhere between 3% and 5%.

    The GASB decision to allow discounting up to the asset depletion date using the official Plan earnings rate assumed for assets, and then a formula-driven rate (now the 4.29% rate in the quote above), was a cop-out. By examining extremes, this becomes clear. Suppose a Plan was 100% funded today with a very high “official” 9% (or even 10%) assumed return on assets. Under GASB procedures, that Plan would be allowed to discount (and Report) the PV of Plan liabilities by discounting future Plan liabilities IN ALL FUTURE YEARS using that same 9% (or 10%). Clearly preposterous in this interest environment.

    John, while I agree with you that the “appropriate” liability discount rate should be the GASB 4.29% (or perhaps your 3%) until Plan assets are depleted, Using 0% thereafter is inappropriate, as we’re trying to separate the 2 issues: what may be expected to be earned on Plan assets (if any), and (2) the proper PV of Plan Liabilities. EVEN if Plan asset reach zero, TODAY’S financial value (the PV) of Plan liabilities not due until some future date is NOT the $ amount due on that future date (i.e., the value obtained by using zero as the discount rate) but some lower, discounted amount. I believe that the 3%-4.29% liability discount rate is appropriate even AFTER Plan assets are depleted.


  4. Posted by Tough Love on December 4, 2014 at 5:44 pm

    John, When I first saw the reduced funding ratios for NJ’s State and Local Plans under the new GASB standards, I was initially surprised that while the State-Plan funding ratios dropped by about 1/3 (about what I had expected), the Local-Plan funding ratios decreased by a smaller percentage (about 20%, if I recall correctly).

    In the back of my mind, I was thinking of the financial impact on funding ratios associated with each 1% drop in the liability discount rate. It is exactly BECAUSE of the combination of two items ((A) and (B) below) that the Local Plans decreased by a considerably smaller percentage:

    (A) With the Local Plan currently having a higher funding ratio, the asset depletion date for the Local Plan is farther out than that of the (less well funded) State plans

    (B) GASB’s new procedures triggers the switchover of the liability discount rate from the “official” asset assumption rate of 7.9% in NJ to the 4.29% GASB rate STARTING at (and applicable only to years beyond that asset depletion date.

    The mathematics of this approach will ALWAYS result in a smaller and smaller PERCENTAGE reduction in the funding ratio (associated with the GASB methodology changeover) as the asset depletion date moves further out into the future. This GASB approach seems to make little sense as there is little reason to assume that a Plan whose assets will be depleted in 10 years vs 5 years should discount liabilities at different rates in the 5-10 year-out window, and in the extreme, leads to situations like the “extreme” example I described in my comment above.


    • The reason localities look better is GASB;s projection of future contributions based on the last 5 years of deposits. NJ localities (except in 2009 for those who chose to skip 1/2 of their ARC) put in the full ARC without any phase-ins or outright repudiations that the state did. Hence they got later depletion dates and lower liabilities.


  5. Posted by Javagold on December 4, 2014 at 6:35 pm



    • Posted by Tough Love on December 4, 2014 at 6:55 pm

      In another comment elsewhere, (believing it to be an appropriate retort to Pension reformers being called “haters”), I called a Public Sector retiree (with comments typical of both active and retired Public Sector workers aggressively opposing even the most minor of pension reforms), a “moocher”.

      On the opposite end of Pension reformers being called “haters”, I believe “moochers” represents the attitude and mindset of Public Sector workers/retirees even better than “takers”.

      I suggest when you would have otherwise used “takers” in a comment, consider “moochers” instead.


      • Posted by Tough Love on December 4, 2014 at 6:58 pm

        P.S., I just looked up “moocher” on urbandictionary.com, and the following definition appeared:

        “Someone who always asks for things and favors constantly and will never leave you alone. They will ask for money, rides to places, for you to do simple tasks they could do easily but they think the whole world should cater to them, basically just a leech to everyone around them, a parasite to the community. ”
        BOY, does that fit the mindset of Public Sector worker/retirees PERFECTLY !


  6. Posted by George on December 5, 2014 at 3:10 pm

    So when does it become impossible to hide? For example when does the pension have to start selling assets? Or substantial tax increases? Or a bailout with the Fed buying illiquid assets at or above book value?


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