"New Jersey’s once-broken pension system is now solvent."
13th District GOP slate on Friday, May 31st, 2013 in A primary election campaign mailer
GOP mailer claims New Jersey's pension system is solvent
When it comes to reducing the size and scope of government, three New Jersey Republicans claim they’re on the right path to accomplishing that goal.
Assembly members Declan O’Scanlon and Amy Handlin, and state Sen. Joe Kyrillos, representing the 13th District, touted those reforms and others in a campaign flyer sent out for last week’s primary election. The flyer highlighted less spending, less government, more prosperity and standing up to the Internal Revenue Service as evidence of their efforts. The trio won their primaries Tuesday.
But one claim under the heading of less government intrigued us: "New Jersey’s once-broken pension system is now solvent."
The underfunded pension system that set off a political firestorm two years ago when Gov. Chris Christie and the Legislature ordered higher employee contributions and suspended Cost Of Living Adjustments for beneficiaries is solvent?
In pension terminology, the part of the claim is correct. But the state pension system was once broken? That’s debatable.
Let’s explain, starting with solvency.
Some dictionaries define solvency as the ability to pay debts – and O’Scanlon and others say New Jersey has enough money in its pension funds to cut checks every month for retirees and have those checks clear.
New Jersey’s pension reforms also will help keep the system more sustainable, O’Scanlon said.
In addition to the temporary suspension of COLAs and increased employee contributions, New Jersey has increased the pension eligibility requirement for new hires and increased the salary timeframe on which retirement benefits are based. An improving stock market, as well as the state ramping up annual payments into the system until reaching full contributions starting in 2018 will help, he said.
Two pensions experts we spoke with agreed with O’Scanlon’s assessment of solvency and emphasis on the state’s pension reforms.
"If you have enough money to pay benefits in the short term or in the foreseeable future, to the extent that plans have enough cash on hand to pay benefits for the next 10 or 13 years, it’s solvent," said Jean-Pierre Aubry, assistant director for State and Local Research at the Boston College Center for Retirement Research.
"A pension fund is solvent if it is able to honor its obligations," said Keith Brainard, research director for the National Association of State Retirement Administrators in Washington, D.C. "If they can pay their pension liabilities they would be considered solvent."
New Jersey is able to pay its pension obligations, so it’s solvent. But was it once broken, as the mailer claims?
"We would define broken as unquestionably heading on the path to insolvency," O’Scanlon said.
"You couldn’t continue on the path we were going and end up with a sustainable system," he added. Either we were going to have bankruptcy or we were going to have massive tax increases to cover the obligation. With the reforms we did we now brought it in to solvency. It’s on a completely different path since the reforms."
But O’Scanlon also admitted that the state has always been able to pay its pension obligations. If that’s the case, the system was never broken.
Now let’s look at pension funding levels.
Each of the state’s five open pension accounts is funded well below 80 percent, which Aubry said is a threshold that has come to mean "adequate." The state's total underfunded liability was $47.2 billion as of July 1, 2012, according to an annual report on the state's pension fund.
The state’s Public Employees Retirement System account was at 49.1 percent funding as of July 1, 2012; teachers, 59.3 percent; police and firefighters, 51.5 percent; state police, 71.2 percent; judiciary, 46 percent.
Aubry and Brainard both said 80 percent funding is an oft-cited threshold of whether pension accounts are "healthy."
"Eighty percent has come to be recognized by practitioners as an adequate funding level," Aubry said. "The notion may be that at 80 percent funded you do have enough money in the pension fund to pay benefits for the foreseeable future, but the underfundedness basically helps battle the push for increase of benefits."
Brainard said looking at funding ratios is just one metric of determining the health of a pension fund, "but it’s not the be-all, end-all."
"The objective should be to reach full funding but there’s nothing necessarily wrong with being underfunded," Brainard added. "The issue is whether funding the plan is causing fiscal stress for the plan sponsor -- making the contributions to ensure that the benefits can be paid."
Bill Quinn, a state Treasury Department spokesman, said New Jersey’s underfunded liabilities will flatten out and stop growing as the state puts more money into the pension fund each year as required by the reforms.
A primary campaign flyer from Assembly members Declan O’Scanlon and Amy Handlin, and state Sen. Joe Kyrillos last week claimed, "New Jersey’s once-broken pension system is now solvent."
O’Scanlon said ‘once broken’ refers to the state’s pension system being on a path to insolvency or bankruptcy without major reforms – but admits the state has always been able to pay its pension bills. If the system was once broken, those bills wouldn’t have been paid. Furthermore, O’Scanlon and experts told us that a pension system being able to pay its obligations means the system is solvent. We rate this claim Half True.
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