NJ Pension Bankrupt, WI Reforms a Success

New Jersey's two largest pension funds may be bankrupt within the next decade unless reforms are passed


What Happened?

A recent report from Moody’s finds a significant surge in unfunded liabilities for New Jersey’s two largest public employee pension funds. If the funds becomes bankrupt, the state’s operating budget will have to pay for pensions while creating a shortfall in other public services.

The Warning

Moody’s Investors Service released a report predicting two of New Jersey’s largest public employee pensions will be bankrupt within ten years without reforms. The report explains, based on assumed  investment returns, the New Jersey Public Employees Retirement System and the Teachers’ Pension and Annuity Fund could run out of money and exhaust underlying assets as of 2024 and 2027.

The Governmental Accounting Standards Board recently implemented new accounting regulations that prevent states from over-inflating returns and, instead, use more realistic discount rates to assess pension investment returns. After the rules were imposed, the state of New Jersey reported its unfunded pension liabilities have doubled to $83 billion as of this past June. The new accounting rules have revealed the extent of New Jersey’s unfunded liabilities, which may lead to pension fund bankruptcy, People’s Pundit Daily reported.

According to Moody’s report, New Jersey has little to no time to fix its pension problem, and the responsibility of paying for pensions will likely fall on taxpayers. The state’s operating budget will have to compensate for a lack of pension fund assets, which in turn will create a shortfall in public services while increasing tax burden.

The Numbers

Moody’s report underscores that the new accounting standards will continue to drive up unfunded liabilities and negatively impact New Jersey’s credit rating until reforms are passed. The two New Jersey pension funds reported a total of $4.9 billion in benefits paid out to teachers and public retirees in 2013, while the state contributed $878 million to the fund. The total represents 16 percent of the state’s operating revenues.

Looking to the future, Moody’s predicts taxpayer dollars will have to pay for a $4 billion shortfall once pension plan assets are used up. The state will need to borrow at a higher rate to compensate for the shortfall or be forced to cut non-essential services at the expense of residents.

Consider Wisconsin

While New Jersey has put off much needed pension reform for years, other states such as Wisconsin have maintained close to full funding of its retirement system since 2001, weathering the economic recession. A recent study from the Cato Institute highlighted some of the retirement system’s successful characteristics including:
  • No guarantees of annual retirement benefit increases and cost-of-living adjustments
  • Employee choice in contributing to funds with alternative investment styles
  • Provision of a benefit floor
  • Annual adjustments to benefits above the floor according to investment performance

Furthermore, the system implemented new policies in 2012 to reduce taxpayer costs including:

  • Increased creditable service work hours requirements
  • Introduced a five-year creditable service vesting period for new hires
  • Reduced the benefit-formula factor for certain employees
  • Eliminated contributions by employers of workers’ share of pension contributions

According to the researchers, the Wisconsin Retirement System demonstrates success in sustainable, long-term reforms.

Pensions At The Forefront

Gov1 has kept a close eye on the pension reform debate across the country, as lawmakers try to identify best practices for saving taxpayer money .

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