PENSION BENEFITS REPORT
PETER ANDREYEV
Why the PFRS Actuarial Report is important to us
On Dec . 19 , I attended the PFRS Board of Trustees meeting , where the Board received the Actuarial Valuation Report for the PFRS fund based on financial information as of June 30 , 2017 .
The actuary reported to the Board of Trustees that the State Treasurer lowered the expected rate of return from 7.65 % to 7 %, which dramatically increased both the Unfunded Accrued Liability ( UAL ) and the required employer contributions . What does UAL mean ? The UAL is a
14 NEW JERSEY COPS ■ JANUARY 2018
term that refers to the difference between the actuarial values of assets owned by the plan and the total benefits due to be paid .
In simpler terms , think of it as your checking account : You have so much in the bank , and you are expecting the interest from the checking account to be a certain percentage . The bank sends you a statement that reflects a lower-than-expected interest rate , and now you don ’ t have enough money to pay some bills because you expected a little more interest on the money in your account .
Unfunded liabilities are created when the actual plan investment returns are less than the assumed returns , when other plan assumptions ( such as years spent in retirement , larger-thanexpected salary increases , retroactive salary increases and pension spiking ) are realized , and when the employer fails to make the required contributions , resulting in actual costs exceeding predicted costs . Most plans repay the unfunded amount over a set period of years , increasing the annual cost of the plan during those years , and those additional costs are typically assigned solely to the employer . Our members are statutorily required to pay 10 % of our salary , and the employers are given a recommended percentage amount that they should contribute .
Based upon the lowered assumption rate , the employers are on the hook for an increase in their actuarial suggested contribution . The suggested contribution rate , or normal cost , for local employers went up to 11.21 % from 8.53 %. The accrued liability rates , largely due to past missed contributions , went up to 23.07 % from 17.72 %. If you add those contribution rates up , they equal a 34.28 % rate of contribution by local employers on your behalf .
I should point out that these numbers represent only the local employer contributions , and the PFRS is divided into two categories : state employer and local employer . The state number , based upon the normal contribution rate , is 10.77 % ( up from 7.87 %) and the accrued liability contribution rate is up to 52.46 %, which is an increase from 46.46 %. The total contribution rate is 63.23 %, which the state will never get to because it has reduced its contribution in 2017 to $ 195.2 million dollars from the suggested payment of $ 483.8 million .
In fiscal year 2018 , the State Treasurer reduced the recommended state normal cost and accrued liability from $ 502.9 million to $ 251.4 million . The State Treasurer basically reduced the contribution to 50 % of what was suggested by the actuary and further reduced the contribution by another $ 12 million , because it anticipates the lottery revenue to be inserted into the pension fund . The PFRS will receive 1.2 % of lottery revenue .
What does this mean for the PFRS ? The PFRS is a $ 27 billion asset and is funded , meaning assets to cover liabilities , at a market rate of 62.5 percent , which is down from 64.4 %. On an actuarial valuation basis , which only recognizes gains and losses at 20 % each year , the fund is valued at 64.9 %, down from 70.7 percent .
This is the reason why the legislative bill formerly known as A99 / S3040 is so important to our members enrolled in the PFRS . If we get the legislation passed in the new legislative session , then the PFRS will have the opportunity to govern the system independently and have the ability to replace the underperforming , politically well-connected investment firms with firms that will perform better . In this economy , the pension system should not be losing money on investments but rather receiving some modest gains and not have to pay astronomical fees for poor performance .
On Jan . 16 , Governor-Elect Murphy was sworn in as the next governor of the State of New Jersey . Hopefully he can lead us out of this mess and address that reduced funding is one of the main reasons why we have a pension problem . Then when anyone asks why we have a pension problem , they will know that it ’ s not the police officer or firefighter at fault . People will know that the previous administration ’ s failure to fund it — and its voodoo economics — are the culprit . d