Dear Mayor:

The State’s actuarial consultants recently released it Annual Valuation Report to boards of trustees of the various pension funds.  The valuation reports on the financial health of PERS, PFRS and TPAF as of July 1, 2006.

As reported by the press, property taxpayers are faced with paying the significant costs for increasing unfunded liabilities. However, we believe a more detailed explanation is warranted to show that the unfunded liability for local government is in much better condition than the State’s and will be fully funded within a few years.

Very truly yours,

                                                                        William G. Dressel, Jr.
                                                                        Executive Director

Analysis of the 2006 Valuation Report for PERS, PFRS and TPAF Pension Systems
Prepared by L. Mason Neely, Chairman of League’s Pension Study Committee

The various Boards of Trustees for the pension systems have been receiving Valuation reports by the Actuaries.  The press has covered the release of the increasing unfunded liability that state and local governments confront.  The picture portrayed in the newspaper does not always provide a full explanation.   The attached tables deal specifically with the PERS (state and local elements), TPAF and PFRS systems.  

For state employees in the PERS system, the required state contribution for Fiscal Year 2008 is, according to Chapter 108 Public Law of 2003 to be at 100%.  This means the state should pay $459,915,171 in their next fiscal year budget or $4,927.30 per active employee.  The Local Contribution is 80% based on the phase-in requirement.  The Local Government Contribution is $393,314,364, or $1,837 per active employee.  

When one compares Assets to Liabilities the Unfunded Liability for the State is $4,129,390,284, which is a cost of $44,200 per active employee.  The Local Governments Unfunded Liability is $3,574,152,668, which represents $16,600 per active employee.   Local obligations for PERS employees will pale once we report the amount owed by local governments for the police and fire systems (PFRS).  

The Teachers Pension Annuity Fund (TPAF) is in poorer condition than that of both state and local elements of PERS.  The State agreed to fully fund TPAF.  The contribution required by the State for next year, subject to their appropriation, is $1,286,147,106,  or $8,357 per active employee.  The Unfunded Liability for TPAF is $10,016,478,627, which represents a liability of $65,000 per active employee.  

When the press reports property taxpayers are confronted with a significant cost for pensions, they are correct.  However, the liability for local government is manageable and will be brought to balance because in 2009 local government will be paying 100% of the Normal and Accrued Liability.  Within a few years the local Unfunded Liability will be fully funded.  But the State has not been making their appropriation as required.  They have only been contributing a percentage of the amount required based upon the Valuation reports and their problem continues to deepen.  Therefore, when the Legislatures and newspapers talk about this “terrible pension problem” for “public employees” they are rolling local governments into the mix.  It would be appropriate for us to remind everyone that local government has been more responsive and has stepped up to their obligations.  The Unfunded Liability for the Public Employees Retirement System on the local level is not what one would consider to be extreme.  Yes, there is a $3.5 billion unfunded liability which has resulted from the stock market taking a major tumble in March 2000 and 50% of the assets being lost.  During the same period of time the State declared a holiday (no payment by employees) and for the better part of seven years State and Local employers made no contribution.  The majority of stocks and bonds have recovered but the lack of employer payment must be made up.

In 2003, the Legislature passed what they called “phasing legislation” which was designed to  temper the impact of pension bills on property taxes.   It only delayed the inevitable and exacerbated the situation.  It is similar to making minimum payments on a credit card balance. The amount not paid became part of the Unfunded Liabilities and grew at 8 1/4%.  If one looks at the attached table*, one will see the accrued liability for local governments now equals the normal annual contributions.
Had local government stepped up to the plate in 2003 the amount of money that would have been saved by eliminating the rapidly growing unfunded accrued liability would have been significant. But then that may not have been popular with the elected office holders.  Therefore the phasing legislation resulted.  Savings have not been realized as candidates were re-elected.  

The Valuation report for the Police and Fire System (PFRS) and the attached tables provide the same level of detail.  The data indicates the Unfunded Liability for the Police and Fire Retirement System (PFRS) is $5,625,453,619, or $125,499 per active employee. The required contribution for 2008 will be $639,755,622 which is $17,716 per employee.   The payments are subject to the State paying their share based upon the actual valuation.  But the major cost falls on Local Government.  In fact 17.3% of employees require 56.5% of the property tax payment.

In summary, the per-employee cost for next year will be as follows:

Medical Benefits Costs

The figures and cost data shared up to this point only reflect the cost associated with pension liabilities.  The Health Care Costs which are an obligation for the State is not fully reported.  The State has only released its best estimate. According to the latest negotiations between the Teacher’s Union and the Administration, the Governor has promised to continue to fully fund the cost of post retirement health benefits for all retired teachers.  Also, the State is taking on a major commitment for funding of post retirement health benefits for retired state employees and many others associated with state government.  Such unfunded liabilities, when applying the standards of GASB Statement 45 total $78 billion.  

 Local governments, on the other hand, are not confronted with such a magnitude of unfunded medical liabilities.  Many communities have dealt with this through the collective bargaining process.  Moreover, approximately 50% of local governments have withdrawn from the State Health Benefits System primarily because state law precluded those who participate in State Health Benefit System from negotiating benefits.  

The provisions of GASB Statement 45 became effective for all New Jersey municipalities as of December 2006 and theoretically the future financial statements for local governments will be reporting on the unfunded accrued medical liabilities.  At that point, one may be able to collectively determine the liability that will be confronting local governments.  

Please see the table below on a break out of the $89 billion cost for medical benefits.

STATE HEALTH BENEFITS SYSTEM
Active and Post Retirement Medical Benefits ---Costs Reported in Billions

                                        Active                       Post Retirement                       Total         
State Employees       $17,300,000,000           $7,200,000,000                  $24,500,000,000

Teachers & PERS     $37,400,000,000           $16,2000,000,000              $53,600,000,000
School Employees

Local Government     $6,800,000,000             $4,100,000,000                  $10,900,000,000
Part of SHBP
                                       $61,500,000,000           $27,500,000,000           ,000,000              $53,600,000,000
School Employees

Local Government     $6,800,000,000             $4,100,000,000                  $10,900,000,000
Part of SHBP
                                       $61,500,000,000           $27,500,000,000                $89,000,000,000