The state should ensure that excessive resources are not committed to funding teachers' pension systems.
As of June 30, 2010, the most recent date for which an actuarial valuation is available, New Jersey's pension system for teachers is 57.6 percent funded and has an amortization period of over 30 years. This means that if the plan earns its assumed rate of return and maintains current contribution rates, it would take the state over 30 years to pay off its unfunded liabilities. Neither the state's funding ratio nor its amortization period meets conventional standards, and the state's system is not financially sustainable according to actuarial benchmarks.
However, New Jersey does not commit excessive resources toward its teachers' retirement system. In fact, the employer and state contributions are excessively low. The most recent total employer contribution was only 1.85 percent of the actuarially determined annual required contribution. Statute effective May 21, 2010, requires the state to make its full pension contribution, defined as one-seventh of the required amount, beginning in fiscal year 2012. The mandatory employee contribution rate of 6.5 percent is reasonable. Over the next seven years, the employee rate is set to increase to 7.5, which is still reasonable, but close to excessive in light of the fact that teachers must also contribute 6.2 percent to Social Security.
State of New Jersey Teachers' Pension and Annuity Fund, Financial Statements and Schedules, June 30, 2010 and 2009 http://www.state.nj.us/treasury/pensions/audit-rpts-2010/tpaf-10.pdf
Ensure that the pension system is financially sustainable.
The state would be better off if its system was over 95 percent funded and had an amortization period of 30 years or less to allow more protection during financial downturns. Further, New Jersey needs to make the required contributions to its pension system.
New Jersey was helpful in providing NCTQ with facts that enhanced this analysis. The state contended that the actual method used to amortize the plan's unfunded actuarial accrued liability utilizes an open-ended amortization period not to exceed 30 years, with each payment expressed as a level percent of pay.
New Jersey further noted as a result of recently enacted pension and health benefit reform legislation (Chapter 78), the July 1, 2010 TPAF actuarial report is in the process of being revised to incorporate Chapter 78's new provisions, which includes a change in the methodology for amortizing the plan's unfunded actuarial accrued liability (UAAL). The UAAL will be amortized for each plan over an open-ended 30 year period and paid in level dollars. Beginning with the July 1, 2019 actuarial valuation, the UAAL will be amortized over a closed 30 year period until the remaining period reaches 20 years, when the amortization period will revert to an open-ended 20 year period. Chapter 78's change is also anticipated to increase the plan's reported funded level. The revised report will be posted to the Division of Pensions and Benefits website once completed and approved by the TPAF Board of Trustees.
The state added that Chapter 78, which became effective on June 28, 2011, included increasing employee contributions, suspending automatic cost-of-living adjustments, altering plan designs and modifications to the method used to amortize the plans' UAAL. The fundamental reforms were designed to secure the long-term solvency of the pension systems, while at the same time, provide critical savings to state and local governments. The changes are projected to meet these objectives by attaining an aggregate funded level of 88 percent after 30 years, while decreasing state and local employer pension costs by $120 billion over this period.
The method used to calculate the fund's unfunded liability does use a 30-year amortization period; however, New Jersey is not making its necessary annual required contributions to meet the 30-year period. In fact, as discussed in the analysis, its contributions are far below the actuarially-determined amount. The new accounting method does decrease the required annual contribution, but does not change the fact that New Jersey is not currently making it. Further changes included in the new legislation are reviewed in Goals 4-G and 4-I.