The Pew Charitable Trusts (Pew) released their 2013 update* on the funding gap of 238 selected state pension plans, pegging it at $968 billion, based on those quaint numbers they claim to have taken from official actuarial reports and CAFRs. A lot of people are going to accept Pew’s figures as fact, but are they? I looked at the reports from which New Jersey’s numbers were supposed to have been taken as well as checking over the numbers for all the states for reasonableness and found several troubling inconsistencies.
As of June 30, 2013 Pew said the New Jersey plans had $137.147 billion in Liabilities and $86.122 billion in Actuarial Assets resulting in Unfunded Liabilities of $51.025 billion. But go to the tables in the actuarial reports that list these numbers, put them in a spreadsheet, and you find that the real official numbers are $135.868 billion in Liabilities and $86.643 billion in Actuarial Assets resulting in Unfunded Liabilities of $49.225 billion.
On the ARC payment for 2013 Pew had New Jersey’s ‘required’ contribution at $5.669 billion of which 47% (2.664 billion) was made. But go to the tables in the actuarial reports, put them in a spreadsheet, and the ARC comes to $5.135 billion of which 50% ($2.566 billion) was made.
Granted the differences are relatively minor but the point is there are differences. Where did Pew get their numbers if not from these reports?
However the most disturbing aspect of this summary requires some common sense and two bits of actuarial knowledge:
- The ARC is made up of a Normal Cost (value of benefits accrued during that year); and
- An amortization of the Unfunded Liabilities usually over 30 years
Now let’s look at Pew’s liability and ARC numbers and see if we can estimate what part of the ARC is the Normal Cost and what part is the amortization of the Unfunded Liabilities.
New Jersey uses a 7.9% interest rate which means the 30-year amortization factor is 11.365. Divide New Jersey’s Unfunded Liability ($51.025 billion) by that 11.365 factor and you come up with an annual payment of $4.490 billion and when you subtract that from the total ARC ($5.669 billion) you get a Normal Cost of $1.179 billion which is suspiciously low on a per capita basis ($2,358 assuming 500,000 accruing participants) but not ridiculous.
You get to ridiculous when you look at all the states combined where the total Unfunded Liabilities come to $968.385 billion but the ARC is only $91.941 billion. If you use the same procedure we used for New Jersey for all the states with the same 11.365 amortization factor that spreadsheet has the total Normal Cost coming to $6.733 billion (about $540 per participant assuming 12.5 million participants) with 24 states even making money (negative Normal Costs) off of their public workers accruing benefits.
* Which may also be the final one with GASB rules coming in for 2014 which do not require calculation of the ARC and force lower interest rates to be used thus throwing off any year-to-year comparisons.