New Jersey’s Division of Pension and Benefits came out with the actuarial report for the state’s public pensions.  Because of record pension contributions from the state and most importantly record investment returns of over 28%, the condition of New Jersey’s pensions improved.  But New Jersey’s pensions are not out of the woods.

First, the actuarial report uses a number of optimistic assumptions, particularly a discount rate of 7% for the plan’s liabilities, and even so, the state’s largest fund, the Teachers Pension and Annuity Fund (TPAF), only has about half of the money set aside that will be necessary to pay the benefits owed.  A later pension system report will use the more conservative and realistic GASB methodology, which will bring down the funding ratio substantially.  This actuarial report uses the state’s assumptions and paints too rosy a picture.

Second, even with record state contributions, as the chart below shows, TPAF is still cashflow negative by -3.75%, which means investment returns must be at least 3.75% for TPAF’s inflows to equal the outflows that pay for pension benefits for current retirees.  If the investment returns do not equal 3.75%, then the state will have to sell pension assets to make up the difference.  This is why TPAF has been and continues to be among the worst 5% of public plans in the nation and bears “a serious defunding risk for the Fund,” according to the actuarial report.  In other words, if – when – investment returns falter, TPAF’s condition will deteriorate. 

The above chart shows that TPAF continues to be structurally unsound.  Its annual cash inflows (including 78% of state lottery proceeds) do not equal its annual cash outflows despite state contributions for the last two years that amounted to 14% of the state budget.  Remember that New Jersey has been flush with federal pandemic relief and record tax revenues for the past two years.  When an economic slowdown or recession hits, will New Jersey continue to contribute 14% of the state budget to public pensions?  

This is why Sunlight has been warning that by throwing over $6 billion a year into an unreformed pension system, Gov. Murphy is throwing good money after bad.  With all the revenue windfalls accruing to New Jersey, Murphy had a chance to reform pensions and make them sustainable for future generations.  He didn’t and instead catered to his public union supporters, particularly the NJEA.  All New Jersey will pay the price.