Will New Accounting Rules Force NJ to Put Billions More Into Pension Payments?

The national Government Accounting Standards Board is poised to approve new rules requiring pension systems to calculate their return on investment more conservatively. The change will require New Jersey to more than double its current $40 billion-plus net pension liability on official balance sheets and could force the state to increase pension contributions in future budgets.

"If New Jersey's pension contributions have to comply with the new GASB standards, the state would have to put $5 billion into the system in Fiscal Year 2016, not $3 billion," said Frank J. Abella Jr., chief executive officer of Investment Partners Asset Management Inc., indicated to state Treasury officials after last month's State Investment Council meeting.

State Treasury spokesman Andrew Pratt discounted the impact of the new accounting system scheduled to be adopted by GASB on June 25, asserting that the agency's decision to require states and cities to assume a 3.5 percent Treasury discount rate as its official return on investment conflicts with New Jersey's 14-year record of earning a 6.3 percent return since 1998.

Pratt said the state would comply with GASB reporting requirements, but that the amount of money the state will put into the pension system in future years will be determined, as always, by the state treasurer.

"This is a dispute over actuarial accounting methods, and reasonable people can disagree," he said. "What nobody can dispute is that the problem would be $20 billion worse if we had not enacted historic pension changes last year."

The GASB vote on the new accounting system that will double New Jersey's official pension liabilities will come just five days before the constitutional deadline for New Jersey to adopt its budget for the upcoming fiscal year. It will come as the Democratic-controlled Legislature wrestles over whether to approve the income tax cut that Christie wants, even though state revenues are coming in $700 million to $1.4 billion below projections after a year in which the state's economy actually shrank.

While the new GASB system will not go into effect until next June, pension expert Eileen Norcross, senior research fellow at the Mercatus Center at George Mason University, predicted that "most states will begin complying with the new GASB standards because the new accounting standards will inspire confidence with the bond-rating agencies, and that will put pressure on the others to do the same."

She said Abella's estimate of the amount of money New Jersey should be putting into its pension system in future years is "well in the ballpark." Even after enactment of New Jersey's pension law requiring public employees to contribute more toward their pensions, "New Jersey and Illinois are the states with the most massive liabilities relative to their budgets," she said yesterday.

"The state reports that its pension systems are underfunded by $44.7 billion, when liabilities are discounted at the 8.25 percent annual return that New Jersey predicts it can achieve on funds' investment portfolios," Norcross and Andrew Biggs wrote in The Crisis in Public Sector Pension Plans: A Blueprint for Reform In New Jersey, a working paper published by the Mercatus Center in 2010.

"When plan liabilities are calculated in a manner consistent with private sector accounting requirements," Norcross and Biggs wrote, "methods that economists almost universally agree are more appropriate, New Jersey's unfunded benefit obligation rises to $173.9 billion. This amount is equivalent to 44 percent of the state's current GDP and 328 percent of its current explicit government debt."

Even after the pension changes adopted last year, New Jersey’s pension deficit was pegged at $41.8 billion as of Dec. 31. Furthermore, the “asset smoothing” method used by actuaries that spreads gains and losses across multiple years persistently overstates pension plan assets and underestimates liabilities, Norcross wrote in an analysis published last week. The study, entitled “Actuarial Camouflage” showed how the use of asset smoothing enabled the New Jersey Public Employees Retirement System to show assets of $30 billion in 2009 when the actual market value of the assets was $21 billion.

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