Fitch: New Jersey's GASB 67 Pension Figures Paint a Weaker Position, But Not Surprising

NEW YORK--()--The significantly weaker pension figures released by the state of New Jersey today in a supplemental bond sale disclosure are not a surprise, in Fitch's view. The state is the first to disclose materially weaker pension metrics following its conversion to new accounting requirements under GASB statement 67. In the aggregate, the seven systems covering retired state employees and teachers have assets sufficient to cover only 32.6% of projected liabilities as of June 30, 2014, and all of New Jersey's large plans show significantly lower ratios of assets to liabilities under the new standards. For the two largest plans, covering state public employees and teachers, the new disclosure reports that assets equaled only 27.9% of liabilities for state public employees, and only 34.1% of liabilities for teachers. In contrast, as of July 1, 2012, the last valuation date, the funded ratios for the state employees and teachers plans were 49.1% and 59.3%, respectively.

Moreover, six of the seven state plans under the new GASB reporting disclose specific depletion dates for when assets set aside to fund benefits are expected to run out. The state employees and teachers plans forecast depletion dates in 2024 and 2027, respectively. Plan liabilities payable after the depletion dates are discounted at a 4.29% muni bond index rate, rather than the 7.9% rate assumed for investment returns, elevating the reported liability.

Fitch's rating on New Jersey's GO bonds, at 'A' with a Negative Outlook, is the second lowest for a U.S. state and reflects in part the severe pension challenges the state faces. For more than a decade, the state has severely underfunded the actuarially calculated contributions needed to progress toward full actuarial funding, even following extensive plan reforms, and the state cut its already insufficient contributions for fiscal years 2014 and 2015 to address unexpected structural budget weakness. The governor has convened a special pension taskforce to propose options for additional pension reform and is expected to make a proposal to the legislature in early 2015. Fitch's Negative Outlook at the current rating level reflects the concern that state corrective action to address its budgetary and pension challenges will be difficult to achieve and sustain over time, particularly given its narrow liquidity, limited fiscal flexibility, and the risk that litigation may defer or dilute pension reforms.

Fitch continues to believe that the new GASB pension standards represent a step forward in improving pension transparency. For example, the requirement to calculate total pension liabilities under the more conservative entry age normal cost method, rather than the multiple options allowable under the old standards, will increase the comparability of governments' pension liabilities. Although most large public plans already used entry age normal, New Jersey did not, and the materially higher total pension liabilities that it disclosed under the GASB 67 standard reflect in part this switch.

Fitch expects few surprises as both GASB statements 67 and 68 are implemented over the next year, although some plans, like New Jersey's, will report materially worse figures. These include plans that have very weak actuarial funded ratios and less conservative calculation methodologies under the old standards, and plans with significant histories of contribution underfunding; New Jersey's plans have grappled with all of these issues.

For the vast majority of other plans, the transition to GASB 67 is less likely to result in major shifts in disclosed pension funding information. As noted, most public defined benefit plans already use the entry age normal cost methodology, and many plans have built up some unrecognized asset gains in recent years under the old standards that will be incorporated into the ratio of assets to liabilities under the new standards. Moreover, most states have stronger contribution funding practices which limit the likelihood that they will report depletion dates and discount their liabilities using a blended rate, as in New Jersey, and most have begun to take steps to improve the sustainability of their pension obligations through reforms to contributions and benefits.

For more information on Fitch's rating on New Jersey, see Fitch Research "Fitch Rates New Jersey's $525MM GO Bonds 'A'; Outlook Negative," dated Nov. 24, 2014, and "Comparing California, New Jersey and Illinois: How the Only U.S. States Rated in the 'A' Category Compare -- And Where They Are Headed," dated Nov. 3, 2014, available at www.fitchratings.com.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Pension Pressures Continue: 2014 State Pension Update' (May 2014);

--'U.S. State OPEB Liabilities' (June 2014);

--'U.S. State Government Tax-Supported Rating Criteria' (Aug. 2012).

Applicable Criteria and Related Research:

U.S. State Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686033

U.S. State OPEB Liabilities (Liability Limited for Most; Uncertain Assumptions Drive Calculations)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749317

Pension Pressures Continue (2014 State Pension Update)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=747605

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Contacts

Fitch Ratings
Douglas Offerman, +1-212-908-0889
Senior Director
Fitch Ratings, Inc.
33 Whitehall St
New York, NY 10004
or
Marcy Block, +1-212-908-0239
Senior Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Douglas Offerman, +1-212-908-0889
Senior Director
Fitch Ratings, Inc.
33 Whitehall St
New York, NY 10004
or
Marcy Block, +1-212-908-0239
Senior Director
or
Elizabeth Fogerty, +1-212-908-0526
Media Relations, New York
elizabeth.fogerty@fitchratings.com