As Gov. Murphy proposes to pump another $7 billion of the state budget into New Jersey’s unreformed public pension system, Sunlight thought it would be a good time to highlight this reality check from an Urban Institute report entitled “Addressing and Avoiding Severe Fiscal Stress in Public Pension Plans.”
The authors examine the 2021 data for 202 public pension plans and identify 9 of them as “Deep Red,” that is, in critical condition and declining, and “projected to become insolvent in 20 years.” Among those 9 Deep Red plans is New Jersey’s Teachers’ Pension and Annuity Fund (TPAF). If TPAF becomes insolvent, then the $4.8 billion in annual benefit payments will have to be funded by annual appropriations from the state budget, which would likely bring about a fiscal crisis for the state.
Here are some of the numbers:
- Funded ratio (assets set aside to meet obligations to retirees): 39% — 6th-worst among the 202 plans. Remember that this includes data from 2021, a record year for investment returns. A more recent update by Equable that takes into account part of 2022 has the funded ratio at 37.4%. In other words, there’s only 37 cents set aside for every dollar owed to retirees.
- Ratio of active workers to retirees: 1.45x – 2nd-worst among the 202 plans. This number is now closer to 1.3x as more teachers retired in 2022, and is down from 2.4x in 2001. Fewer actives to fund more retirees means greater stress on the pension plan.
- Ratio of cash flow to assets: -6.97% — 4th-worst out of 202. This ratio measures the non-investment cashflows, which are basically annual contributions less payouts to retirees. On a stand-alone basis, TPAF took in 6.97% less in contributions than it paid out in benefits. To be fair, Murphy’s billions in contributions have brought this ratio to zero, but this still leaves the health of the plan subject to investment returns. In other words, if the stock market is down — like 2022 — TPAF has to sell assets to pay benefits (and its funded ratio will decrease as well).
Yet Murphy continues to pour billions a year into an unreformed TPAF. Rather than doing the hard work of making TPAF sustainable — thereby protecting both current and future retirees — Murphy simply caters to his biggest political supporter, the NJEA. But what happens when all the COVID funds run out and/or a recession hits?
For decades, the NJEA played a leading role in the severe underfunding of TPAF and blocked all efforts at reform. Now it steadfastly refuses to tell teachers the truth about the condition of their pension plan. The NJEA would prefer to keep teachers in the dark and pretend that making the full contribution means that everything is OK. But as the Urban Institute study shows, everything is not OK.
Murphy plans to be long gone when the reckoning comes and his unwillingness to tackle difficult problems means future generations of New Jerseyans will be left to deal with the fallout. In this light, New Jersey looks like a mere stepping-stone for Murphy’s national political ambitions.