New Jersey's Pension Crisis: Unfunded Liabilities Soar to $173.9B

Unveiling New Jersey's Pension Challenge

A Surprising Reality Check on Public Sector Retirement Plans

The pension plans of New Jersey state employees, often considered a model for other states, are facing an alarming shortfall that might be even larger than previously estimated. Let's delve into the details.

The Unseen Liabilities

Current accounting methods allow pension plans to assume high investment returns without any risk. However, when liabilities are calculated using private sector accounting methods, New Jersey's unfunded benefit obligation soars to an astounding $173.9 billion—more than four times the official figure.

The True Extent of Underfunding

This staggering figure represents 44% of the state's current GDP and 328% of its current explicit government debt, a clear indication that New Jersey's pension system is on shaky ground. If returns average just 8%, the state will run out of funds to meet pension obligations by 2019.

The Pension Plans in Question

New Jersey operates five defined benefit plans for state employees, including Teacher's Pension Annuity Fund (TPAF), Public Employees Retirement Fund (PERS), and the Police and Firemen’s Retirement System (PFRS). The situation is further complicated by two existing defined benefit plans closed to current workers.

The Reform Proposal

The New Jersey Senate has unanimously passed legislation that would require the state to begin making its full annual payment to the pension system, aiming to eliminate the unfunded liability by 2018 and beyond. However, the question remains whether this reform will be enough to address the crisis at hand.

Portfolio Implications

Investors holding assets such as Treasury bonds (TIP), General Electric (GS), United States Natural Gas (UNG), or Bank of America Corporation (BAC) should be aware of potential risks associated with state pension crises, given their exposure to government debt and overall market performance.

A Call for Action

The unfunded liability in New Jersey's pension system underscores the urgent need for reform. Investors should closely monitor the situation and consider adjusting their portfolios accordingly to mitigate risks and maximize returns in this challenging environment.