Financial markets are in turmoil. Most world economies are barely growing. Interests rates can not go lower. Real estate is comatose. Public pension funds everywhere are awakening to the fact that their actuarial profiles are way too optimistic and do not reflect the real world. However, the corrections also fall short. To quote the comments of NYC Mayor Bloomberg published in the NYT on Memorial Day: “The actuary is supposedly going to lower the assumed reinvestment rate from an absolutely hysterical, laughable 8 percent to a totally indefensible 7 or 7.5 percent.” New Jersey currently expects 8.25% in its investment returns. It is absurd. But it allows the state government to contribute less, passing the shortfall to future administrations.
With the rosy actuarial projections the Christie administration claims, the funds are some $44 billion short. But here, back on Planet Earth, if we plug in realistic numbers, say 6.0% return, the deficit of the pension systems blows up to over $100 billion – I am being cautious here.
The problem is that government, in New Jersey particularly, can not afford to be realistic, as we saw very well with the projection of growth made by Governor Christie when he launched the “New Jersey Comeback” in January 2012. The economic and fiscal doctrines of the Christie administration resemble voodoo. But they are dictated by politics.
There are seven public pension funds in New Jersey: They cover some 800,000 employees and retirees. Many of these have dependents so we may be talking about as many as 25% of the N.J. population which could be directly affected by pension problems. Then we must add all the businesses which derive income from these people. Even if we leave aside all legal obligations, this is a New Jersey issue.
The seven plans are: Public Employees Retirement System (PERS); Teachers Pension and Annuity Fund (TPAF); Police and Firemen Retirement System (PFRS); State Police Retirement System (SPRS); Judicial Retirement System (JRS); Consolidated Police and Firemen Pension Fund (CPFPF); and Prison Officers Pension Fund (POPF).
The main plans are the first two: PERS and TPAF.
Most if not all the N.J. funds were healthy (PERS and TPAF where actually over-funded in the early 1990’s) when Governor Florio, facing $1 billion shortfall in his budget, changed the plans assets from book value to full market value and increased the assumed rate of investment return from 7% to a whopping 8.75%. A higher nominal return led to lower governmental contributions to the systems. But experience shows that financial markets are too fluid and uncertain. The numbers above were a stretch.
Then came Governor Whitman in 1993. She changed the actuarial valuation method from Entry Age Normal (EAN) to Projected Unit Credit (PUC) which, although acceptable, is like a balloon mortgage: PUC lowers the liabilities at first but then they explode in later years(1).
Whitman, among other damaging measures, also issued Pension Obligation Bonds for a total of $2.7 billion, through the New Jersey Economic Development Authority, NJEDA. She also included the bond returns in the total valuation of the Pension Systems. The bonds returns were the only government contribution to the funds. But the bonds were offered at a rate of 7.5% and the actuarial expected return of the Pensions was 8.75% at the time. She also allowed local government to take pension holidays: That is to say: not contributing. Nonetheless, property taxes still skyrocketed during Whitman and the following administrations. Of course those NJEDA bonds will come due at maturity one day if they have not done so already.
The following Governors – Di Francesco, McGreevey, Codey, and to a lesser degree, Corzine – were also reckless and overall disastrous for the N.J. Pensions Systems. What Christie has now done with the Pensions and Benefits Reform Law is to essentially refinance the liability accrued and pass it onto the workers.
In the bigger picture, unless New Jersey experiences significant economic growth, the government will not be able to keep pace with the increasing contributions set by the Pension and Benefits Reform Law of 2011. But in the economic growth area, Christie has failed. Therefore, to achieve that growth, we must have a change not only of government but of the structure of government in New Jersey.
We must also bring the actuarial analysis of the New Jersey Pension System(s) to normalcy. The actuaries should be independent, shielded from political influence.
(1) State and Local Pension Fund Management, Jun Peng, CRC Press, pp 154, 155