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Fair and Balanced?

A Look at the Pension Valuation Report

L. Mason Neely 
By L. Mason Neely
CFO, East Brunswick Township

The Actuaries for the Public Employees Retirement System (PERS) have presented the Valuation Report through June 30, 2012. PERS began operation on January 2, 1955 as established by Chapter 84 P.L. 1954. It was to be a “fair and balanced” system in which the employer and employee would each pay 5 percent in normal retirement contributions.

man balancing on a tall stack of coins

How has this worked out since 1955? Last year employers paid 3.12 percent and employees paid 6.5 percent of base salary as pension contribution. It is obvious the “fair and balanced” system has been shifted—requiring an employee to pay 100 percent more than the employer to fund normal pension contributions. The report states the number of active PERS employees has declined from 319,000 in 2008 to 280,000 in 2012 reflecting a decline of 12.22 percent over the five-year period. Of the 280,000 active members 35 percent are male and 65 percent are female. Based upon market value of assets held for the retirement system the state has funded their full liabilities at the ratio of 43.3 percent. Local employers have funded their overall liabilities at the ratio of 64.5 percent. Of the 280,000 PERS members 164,000 represent local government employees. The average local government employee pay was $41,842.30. Now, for “fair and balanced” let’s look at retirees.

Nothing damages our dignity like stumbling. We have all seen people, dressed to the hilt, stumble and fall to the ground, then look up sheepishly. Their dignity has been compromised as they lay flat on the ground. The State of New Jersey, like Illinois, has been looking to see if the Rating Agencies noticed how far pension funding stumbled. It seems Governor Christie had this scenario in mind when, shortly into his recent budget address, he announced that he had appropriated $1.675 billion for pension payments representing 3/7 of the state’s obligation. He noted proudly that this was the largest single contribution in history. Bravo for the more than 48,995 state employees who are retired and are counting on continued payments. Local Mayors have been paying 100 percent of their obligation.

A report demonstrates 18 months of pension allowances and cost of living adjustment payments by the state. One can see after Chapter 78 P.L. 2011 COLA (pension adjustments) is declining, but the regular allowance is closing the gap because of increasing retirements. The same situation occurs for “Other Than State” or Local PERS. For the same 18 month the report demonstrates the cash flow needed to fund pension allowances for 103,000 retired local government employees. Funding the pension expenditure stream required for state and Local PERS retirees is only part of the story. The expenditure must be offset by revenues received. The primary revenues are from employee and employer contributions. PERS cash flow in Table 1 (see p.71) covers the same time period (18 months) and demonstrates expenditures for pension payments by the state have outstripped revenues by $1,260,231,719.

Table 1
Table 2
Table 3
Table 4

Table 2 (p.71) shows local—“Other Than State,” where employers and employees have paid 100 percent of their required contribution. But expenditures show the amount paid out is greater than the revenue received by $641,044,360. These numbers make working public servants wonder if funding will be available to “finish the course” when they wish to retire.

Before one stumbles over the data presented, let’s complete the picture. The PERS Board of Trustees recently adopted the latest Valuation Report effective June 30, 2012, which reports the financial condition of the pension system and projecting liabilities. Also, the report delineates the sources of revenue. Contributions by employers and employees are not sufficient to cover the annual cash flow requirements for those who have already retired. The state has used payments by locals to fund their stream of payments for years as they failed to meet their obligation.

Funding Levels and Asset Allocation The Division of Investments shows $70.9 billion in total pension fund assets, which have accumulated to fund retirements. Investment of these assets are allocated in four general categories: Fixed Income 32 percent, Domestic Equities 25 percent, International Equities 20 percent and Alternative Investments 23 percent. The fiscal performance since 2000 is recorded in Table 3 which shows that in four of the past 13 years the fund lost value.

The Division of Investment maintains an independent concept that regardless of the state level of funding it seeks to maximize investment strategies thereby producing the highest return on assets. It is such return on investment which is the third piece of the revenue stream required to bring calm instead of fear to those who are currently retired and those who plan to retire. Current practices, if continued, will protect the system. Distribution of investment income for PERS is shown in Table 4.

Investment income proved to be stubborn during the last fiscal year. The overall return was much less than anticipated in the Valuation Report (2.52% vs 7.95%). It shows an assumed return on investment of 7.95 percent. Because the income was below expectations the total expenditures for PERS ending June 30, 2012 were greater than the income received during the same period. For the State of New Jersey the loss was $587,768,500.

The loss for Local-Other Than State was $23,226,800. The end result translates into a lower funding ratio. The state’s funding ratio dropped from 54.3 percent to 49.1 percent. The Local-Other Than State funding ratio dropped from 77.0 percent to 74.5 percent which is respectable and reflects the fact that local governments are paying 100 percent of their obligations while the state is on a seven year phase-in program.

The economic pressures confronting state and local governments can best be illustrated by summary statistics from the latest Valuation Report. The number of non-veteran state employees declined from 85,213 to 83,230, representing an average wage of $57,794.40. The number of Local non-veteran employees declined from 97,222 to 92,868 representing a 4.5 percent decline in employment with an average wage of $35,984.20. This is just a small picture because the total work force is made up of county, school district, authorities, other special district employees and veteran employees. However, the example is relevant across the board.

Finishing the Course The number of retirees for State and Other Than State PERS systems increased from 147,905 to 152,432 from June 30, 2011 to June 30, 2012, representing a greater than 3 percent increase. Parallel with this statistic, the number of active workers has declined and the total annual compensations subject to pension contributions also declined. Local governments have been paying 100 percent of their obligations and the State, for the first three years of the seven years phase-in, appears to be meeting their obligation. The message is to be of good courage, fear not, for the actions which have taken place to date appears to be correcting the stumbling problems.


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