For the first time in over a decade, public-worker pension plans across the country are projected to be more than 80% funded, thanks largely to increased employer contributions and a booming stock market.
New Jersey’s public-worker pension system, however, is still nowhere near that 80%-funded benchmark because of two decades of state underfunding. But the state does get credit in a new national study of public retirement funds for being one of the states where annual pension-contribution increases have easily outpaced overall revenue growth over the last decade amid efforts to manage sizable funding gaps.
“State retirement systems are in a stronger financial position than at any time since the 2007-09 recession,” according to the report published on Tuesday by The Pew Charitable Trusts.
“Illinois, Kentucky, New Jersey, and Pennsylvania led this trend in increasing contributions, with an average growth in scheduled pension payments of 16% each year from 2009 to 2019,” the report said.
But not all the news was rosy. Despite recent record-setting investment gains, the report details how long-term projections suggest returns will soon sag below many of the assumed rates that have been set for public pension plans, including in New Jersey.
That scenario would put more pressure on taxpayers to make up the difference even as they are also being relied on to fund record contributions.
Years of chronic underfunding
“For states already paying down large pension debts — retirement system costs in some states eat up more than 15% of state revenue — further contribution increases may be difficult to fund without cutting essential services and programs or raising taxes,” the report said.
New Jersey’s public-worker pension fund supports the retirements of roughly 800,000 current and retired members. For years it has been one of the nation’s worst-funded state retirement plans, due to chronic underfunding by governors and lawmakers from both major political parties.
While the underfunding has not created any interruptions in the flow of benefits to retirees, it has contributed to a series of credit-rating downgrades that led to increased borrowing costs ultimately paid by taxpayers.
But in recent years, New Jersey has been slowly ramping up its annual pension contributions and, amid a brightening fiscal outlook, a new annual budget enacted by Murphy earlier this year funded New Jersey’s first “full” pension payment as determined by state actuaries in more than two decades.
A bull market delivers
The pension fund has also benefited from the recent bull market on Wall Street, and earlier this year preliminary investment returns for the 2021 fiscal year were on course to set a new annual record. A close review of the latest returns is planned for later this month, according to Department of Treasury officials.
Public pension plans throughout the country have also benefited from that same booming market, according to the Pew report.
“On average, plans earned investment returns of over 25% for fiscal 2021, which translates into gains above expectations of more than half a trillion dollars,” the report said.
But also playing a role in the improved stability of state pension plans has been the increased employer contributions made in states like New Jersey.
Under a pension-funding ramp-up plan launched by former Gov. Chris Christie, New Jersey went from making a less than $500 million state pension contribution during the 2012 fiscal year to nearly $7 billion that’s been budgeted for the current fiscal year, according to figures compiled by Treasury.
Changes and challenges
The Pew report also highlighted other state policy changes that have impacted the health of public pension plans, such as those enacted by Christie in 2011 that forced New Jersey’s public employees to contribute more toward their pensions.
But the report also detailed the challenges that many pension plans will face as long-term investment returns are expected to average roughly 6% coming out of the coronavirus pandemic. That’s well below New Jersey’s assumed rate of return, which is currently set at 7.3%.
“To continue to pay promised benefits while reducing pension debt, state policymakers must employ strategies to keep up with scheduled contributions — which is easier to accomplish with a plan to address future uncertainty,” the report said.