The state of New Jersey has been ‘responsible’ for funding the Teachers’ Pension and Annuity Fund (TPAF) for which the July 1, 2016 actuarial report was just released. Unlike the other plans in the Retirement System for which Buck/Conduent are the actuaries it is Milliman that does the TPAF so their presentation of this fiasco is unique. First the numbers:
Excerpts from Milliman’s TPAF actuarial report:
Actuarial computations under GASB Statements No. 67 and No. 68 are provided in a separate report and are for purposes of assisting TPAF and participating employers in fulfilling their financial accounting requirements. The computations prepared for these two purposes may differ. The calculations in the enclosed report have been made on a basis consistent with our understanding of the N.J. statutes. Determinations for purposes other than these requirements may be significantly different from the results contained in this report. (cover letter pages 1 -2)
GASB reports have to use market value of assets and actuarial assumptions closer to the truth and will likely show the underfunding for this plan to be about $50 billion which is why those numbers may first sneak out as a footnote in the next bond offering.
In compliance with New Jersey statute, this actuarial valuation is based on an investment return assumption of 7.65%, which is 25 basis points lower than the assumption of 7.90% used in the prior valuation. The investment return assumption is specified by the State Treasurer and is considered a prescribed assumption as defined by Actuarial Standard of Practice No. 27 (ASOP 27). Based on Milliman’s capital market outlook model, this assumption is anticipated to be achieved approximately 1/3rd of the time, which is an increase from approximately 1/4th of the time, based on projected annualized 30-year returns. We believe consideration should be given to reducing the investment return assumption further. If the investment return was lowered, the actuarial accrued liability and statutory contributions would increase and the funded ratio would decrease. Determining results at an alternative investment return assumption is outside the scope of our assignment. (cover letter pages 3-4)
Why does it matter how many years come in over 7.65% and how many come in over it? The interest rate for valuing liabilities should be based on what you believe the investments are going to earn as adjusted for the fact that a lot of the money that is supposed in be in the plan earning those returns is not there. For example, if you have $100,000 and believe you will earn 7.65% on it then you predict you will get $7,650 but, as is the case here, if you only have $40,000 in the plan then you will need to earn 19.125% on it to get that same $7,650.
This actuarial valuation is based on the asset valuation method in compliance with New Jersey Statute. This method recognizes 20% of the difference between the market value of assets and the actuarial value of assets. Per Actuarial Standards of Practice (ASOP) No. 44, a reasonable asset valuation method produces values within a sufficiently narrow range around market value or recognizes differences from market value in a sufficiently short period. As of June 30, 2016, the Actuarial Value of Assets is 114.5% of market value. Investment losses have occurred each year since the July 1, 2000 actuarial valuation on an actuarial value of asset basis. Combining an optimistic investment return assumption with a current actuarial value of assets that exceeds the market value of assets, along with an asset smoothing method which recognizes investment losses very slowly over time, will result in upward pressure on actuarially determined contribution requirements in future years.
Translation: we are lying about the real value of trust assets so as to pretend that the plan is a little less underfunded than it really is.
This valuation reflects that the State is expected to appropriate contributions less than those required by Chapter 1, P.L. 2010 for the 2018 fiscal year (50% versus 100%). State contributions have been or are expected to be less than Chapter 1 phase-in contributions since the 2014 fiscal year. Chapter 1 provided for a 7-year phase-in to the full statutory contribution beginning with the 2012 fiscal year. The State anticipates utilizing a 10-year phase-in approach, with fiscal year 2018 being the fifth year of the phase-in. Unless State contributions follow a reasonable pattern to reach full funding of the statutory contribution, continued funding at low levels would put TPAF at significant risk of insolvency within a relatively short period of time. (page 7)
Yes, that line is in bold in the report though nobody seems to have read that far and Milliman conveniently declines to define what that ‘relatively short period of time’ is as such honesty appears to be beyond the scope of their assignment.