In one sense, state pension funds got lucky that new accounting standards kicked in when they did. A change to the way the funds account for the value of their assets now requires them to report the market value of their holdings – at a time when the stock market is near record highs.
However, the new rules will also mean that the reported funding levels of state pension funds will become far more volatile than they’ve been in the past, when fund managers were allowed to “smooth” growth by strategically timing the recognition of gains and losses.
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The new rules also requires pension funds to forecast a “depletion date” indicating when they will run out of money to pay benefits. In theory, a fully funded pension fund should have no depletion date. Yet many current and future retirees in states like New Jersey and Kentucky are learning that their state funds are going to run out of cash in the relatively near future.
Two of New Jersey’s funds, for example, are due to run dry in 2014 and 2017, respectively. They are currently funded at 27.9 percent and 28.5 percent of the levels they would require to have no depletion date.
This is bad news for N.J. Governor Chris Christie, who styled himself as the savior of his state’s public pension funds, while simultaneously suspending some contributions to them in order to balance the state budget. Unfortunately, according to the Fitch report, that has left several of the state’s pension systems in serious trouble. “Underfunding … has long been a source of budget relief in New Jersey, resulting in the progressive deterioration of the plans’ funding condition,” it found.
“Six of the seven New Jersey state pension systems have disclosed depletion dates as of their June 30, 2014 valuation, with the two largest, covering retired state employees and teachers, reporting depletion dates in 2024 and 2027, respectively,” the report finds.
Related: New Jersey Says It Does Not Have to Make Pension Contributions
The actuaries responsible for the N.J. funds used assumptions that made the funds look far more secure than the new calculations show them to be, Fitch reports. “The results are much higher calculated liabilities and much lower ratios of assets to liabilities in fiscal 2014, at 27.9 percent for state employees and 28.5 percent for teachers. Their funded ratios a year ago were 49.1 percent and 51.5 percent, respectively, under the old GASB standards.”
The Garden State is not the only one in trouble, though.
“Kentucky’s Employee Retirement System (KERS) covering nonhazardous employees has reported an exceptionally low ratio of assets to liabilities,” the Fitch report noted. “Kentucky, like New Jersey, is one of a handful of states whose sizable retiree obligations and history of inadequate contributions have led to credit downgrades in recent years.”
The road forward for many of these state plans is unclear.
The level of investment needed to bring them up to a level approaching long-term solvency will be a heavy lift for many state legislatures. And for some governors, like Christie, there is going to be some explaining to do.
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