New Jersey’s pension fund for government workers remains the most severely underfunded in the nation even though the state is pumping more and more money into the system each year, a new survey says.
For the fiscal year that ended June 30, 2018, the most-recent year for which records are available, the public pension fund had enough money to cover just 38.4 percent of what it needs to provide retirement benefits to some 800,000 current and future retired workers, according to the S&P Global Ratings comparison of public pension liabilities.
That funded ratio, as it’s called, reflected improvement in the health of the pension system. That year, the system’s unfunded liabilities dropped by nearly $12 billion to $130.7 billion. The ratio of assets to liabilities increased nearly three percentage points.
New Jersey governors and lawmakers for decades contributed less than the amount recommended by actuaries or nothing at all. But the system has been on a path to full funding. This year, the state is contributing 70 percent of what the actuaries recommend and should hit the full contribution, nearly $6.6 billion, in 2023.
The Wall Street rating agency compared states on their reported assets and liabilities as measured under national accounting standards. Calculated this way, the public pension system had $81.5 billion in assets and $212.2 billion in liabilities. That leaves a $130.7 billion unfunded liability — a daunting funding gap the state will grapple with for decades to come.
The low ratio of assets to liabilities ranks dead last among U.S. states. Illinois is almost as bad, with its 38.98 percent funded ratio.
To be sure, New Jersey’s pension system is much worse off than the typical state. The average funded ratio was 72.5 percent. New York’s pension system is nearly 99 percent funded and Wisconsin’s assets are about 103 percent of its liabilities.
Many states’ pension systems are still clawing back from the Great Recession, when they reduced contributions to free up cash for operations. New Jersey was no exception, as former Gov. Chris Christie famously slashed promised pension payments by nearly $2.5 billion to close budget gaps.
The average pension ratio in 2007 was 83 percent, the report’s authors said.
And while New Jersey’s pension fund has been gaining ground, according to S&P it is lagging behind most other states in improving its standing.
New Jersey’s funded ratio would look better but for changes made to reduce the pension system assumes it will earn on investments over the long term. A high assumed rate of return can make a pension system appear healthier than it really is and make the plan more vulnerable to swings in the market.
“In recent years, many states have made conservative changes to actuarial methods and assumptions that, while hindering actuarial funded ratios, show a more realistic assessment of market risk tolerance for states, thus better enabling them to make funding progress,” S&P said.
Shortly before leaving office, Gov. Chris Christie lowered this assumed rate of return from 7.65 percent to 7 percent. Gov. Phil Murphy reversed course, citing the hardship that placed on the state and local governments, which would have had to come up with another $700 million in pension contributions. Murphy set the assumed rate of return at 7.5 percent, putting in place a plan to gradually reduce it to 7.0 percent in 2023.
The median assumed rate of return for states was 7.25 percent, where as S&P pegs a more “sustainable discount rate" at 6.5 percent.
In the fiscal year that wrapped up this June, the median return on pension fund investments was 6.79 percent, according to S&P. State officials revealed earlier this week New Jersey’s pension fund returned 6.27 percent, below the median.