When and if New Jersey actually funds its pension system on an actuarial basis is a more important question than what the system's investment assumptions are, analysts said.
Acting State Treasurer Elizabeth Maher Muoio announced Thursday that the state will increase the assumed rate of investment returns for the state’s five pension funds to 7.5% from 7%, before lowering it again in phases.
Raising the assumed return on investments has the effect of reducing the amount state and local government employers are required to contribute to the underfunded system.
Former Treasurer Ford Scudder had cut the discount rate to 7% from 7.65% in November during the final days of former Gov. Chris Christie’s administration.
“We do not see the slower implementation in and of itself as having major credit implications,” said S&P Global Ratings analyst David Hitchcock in a report Monday. “New Jersey's poorly funded pension systems will be more influenced by how closely annual state funding approaches the state's full actuarial annually determined contribution.”
Municipal Market Analytics analyst Lisa Washburn said she hoped to see an increased focus in new Gov. Phil Murphy’s first budget address slated for March 13 on bringing New Jersey back to a full pension funding level.
She said the sharp drop in the assumed investment returns instituted under Christie was too drastic of a move that left the state with little fiscal wiggle room.
“Lower is better, but that much of a hit without much warning would have been very hard to absorb for a state like New Jersey,” said Washburn. “It was a significant drop that would have had a significant budgetary impact.”
Moody’s Investors Service analyst Tom Aaron said Monday that a higher pension return assumption is typically a negative for states. Aaron noted that New Jersey’s assumption rate is now higher than figures used by many other large public pension funds and the state has the fifth highest unfunded pension burden based on a recent Moody’s survey.
“Higher pension return assumptions are negative for states and municipalities because they carry greater long-term risk that unaffordable unfunded liabilities will accumulate,” said Aaron in a statement.
Muoio, who was appointed to the treasurer post by new Gov. Phil Murphy and is still awaiting state Senate confirmation, outlined an incremental plan that establishes and investment return assumption of 7.5% in the 2019 fiscal year, which Hitchcock said is a “typical” level for states. The return assumption would then fall to 7.3% in fiscal years 2021 and 2022 before reverting to 7% in 2023.
“The slower implementation of the reduction in the return assumption will lower the calculated actuarial [annually determined contribution] and moderate the increase in the state's and local governments' near-term annual pension contributions,” said Hitchcock, who noted that an immediate implementation of the 7% level would have been manageable for 2019. “At the same time, we believe funding the full actuarial ADC is of more importance to state credit quality.”
Hitchcock noted that New Jersey has had a poor track record, paying between 0% to 58% of ADC in each of the past 20 years. The state budgeted to pay 50% of ADC in 2018 and in recent years has increased its pension funding in 10% increments. Christie signed a 2010 law that required full actuarially pension funding levels by 2018 before the Republican governor switched the payment schedule around in 2014 in response to a budget deficit.
“The new five-year phase-in of lower return assumptions will match the previous administration's planned five-year phase-in of a move to 100% annual funding of the ADC,” said Hitchcock. “It remains to be seen whether the state will actually reach 100% funding of its ADC in five years.”