Posts Tagged ‘unit’

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.

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