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
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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