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Moody’s: New Jersey’s Pension Funds Could Run Dry in Just 10 Years

Bond-rating agency cites NJ Treasury admission in bond prospectus that puts unfunded liability at $83 billion under new federal standards

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If the state government doesn’t start properly funding its pension system, New Jersey’s two largest pension funds will run out of money in 10 to 13 years, creating a budgetary nightmare, Moody’s Financial Services warns.

Based on the state’s failure to make required pension contributions over the past five years, including Gov. Chris Christie’s most recent $2.4 billion in pension cuts, the state Treasury Department reported in a recent bond prospectus that the Public Employees Retirement System (PERS) and the Teachers Pension and Annuity Fund (TPAF) “could fully expend their assets as soon as 2024 and 2027, respectively, even assuming the funds meet assumed investment returns.”

“Once plan assets are depleted, the state will have to fund pension benefits directly from its operating budget, driving its annual retiree benefit expenses significantly higher,” Moody’s warned. “For example, benefit payments from TPAF and the state portion of PERS amounted to approximately $4.9 billion in fiscal 2013 (equivalent to about 16 percent of the state's operating revenues), according to plan actuarial valuations. In comparison, combined state contributions to these plans were approximately $878 million that year.”

Moody’s said the new projection “indicates New Jersey’s limited time to identify structural solutions to its pension liabilities” -- a task Christie handed off in August to a blue-ribbon Pension and Health Benefits Study Commission, whose recommendations are expected to be released sometime over the next month.

The Treasury Department’s dire projection that the state’s two largest pension systems could begin to run out of money just a decade from now was contained in a New Jersey Transportation Trust Fund bond prospectus issued last week that contained a significant element of sticker shock.

With states now required to apply more conservative accounting rules adopted by the national Government Accounting Standards Board in assessing pension fund assets and liabilities, the New Jersey state government’s unfunded liability for teacher and state employee pensions jumped from $37.3 billion as of June 30, 2013, to $83 billion as of June 30, 2014.

The jump in the state’s unfunded pension liability was not unexpected: New Jersey Spotlight reported two-and-a-half years ago that the expected adoption of GASB Statement 67: Financial Reporting for Pension Plans would double New Jersey’s unfunded pension liability.

Treasury’s latest projection of an $83 billion liability based on the new GASB is a lot closer to Moody’s calculation of the state’s unfunded pension liability on June 30, 2013, than Treasury’s $37.3 billion estimate at the time, Moody’s noted.

“While the updated disclosure highlights the severity of credit stress from unfunded state pension liabilities, Moody’s calculated New Jersey's adjusted net pension liability (ANPL) to be $77 billion as of the fiscal 2013 plan valuations, which is in line with the state's updated pension liability information,” the bond rating agency pointed out.

Under the new GASB standards, the Treasury Department is required to “incorporate employer contribution assumptions that give weight to actual funding in the past five years” -- a period in which Christie underfunded the ever-increasing actuarially required contribution to the pension system needed to cover future liabilities by $14.9 billion, as Christie’s own pension commission noted in its interim report.

In 2010 and 2011, during Christie’s first two years in office, the state enacted legislation to solve New Jersey’s pension crisis that suspended cost-of-living increases for retirees, required public employees to pay more towards their pensions, raised the retirement age, and set out a seven-year schedule to ramp up to the full actuarially required funding level required to pay off the state’s unfunded pension liability over a 30-year period.

However, while the state made the first two pension payments in FY2012 and FY2013, Christie unilaterally cancelled the already-budgeted third-year payment of $1.6 billion last year and the fourth-year payment of $2.25 billion this year when state income tax revenues plummeted last spring. Declaring that he would no longer hold himself responsible for paying off “the sins of the past,” Christie announced he would only pay $694 million in FY2014 and $681 million in FY2015 -- the minimum required to cover current pension costs.

Christie’s abandonment of the promised pension payment schedule -- which is the subject of an ongoing court challenge, along with the other 2011 cuts -- led Standard & Poor to follow Fitch Ratings, Inc., in cutting New Jersey’s credit ratings again. In all, Moody’s, S&P, and Fitch have cut New Jersey’s bond rating a record eight times under Christie’s governorship, which not only adds to the state’s borrowing costs for bond issues, but also sends out a red flag to corporations and investors.

Moody’s, however, is bullish on New Jersey’s counties and municipalities. The ratings agency issued a second report entitled “New Jersey Cities and Counties Remain Resilient Despite State’s Credit Challenges.” Moody’s findings bolstered the recent assertions of the New Jersey State League of Municipalities and the New Jersey Association of Counties that their pension systems are fiscally sound because they have made virtually all of their required contributions over the past 15 years, while Democratic and Republican governors and legislatures have been routinely skipping their payments.

“New Jersey local governments have a median rating of Aa3, the same as the national median,” Moody’s noted. “In contrast, the state's A1 is well below the national Aa1 median for states and falls just shy of last place, before Illinois (A3 negative).”

New Jersey’s local government portion of the Public Employees Retirement System (PERS) is 74 percent funded, and the Police and Firefighters Retirement System (PFRS) is even better at 77 percent. Local governments are already funding about 90 percent of the actuarially required contribution for their pension systems, while the state this year funded only about 15 percent of its obligation.

While New Jersey’s municipalities and counties suffer from the same slow economic growth as the state, local governments rely primarily on property taxes, which are a less volatile revenue base than the income tax -- whose unexpected revenue plunge last spring forced Christie’s pension cuts.

Local governments also are not overly reliant on state aid, Moody’s pointed out, and New Jersey’s Department of Community Affairs has one of the six strictest monitoring programs for local government finances, which prevents local governments from getting into the dire fiscal straits that forced Detroit into bankruptcy.

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