COVID Hits NJ Pensions: Investments Earn 1.2%, Teachers’ Pension Funding Likely Down to 25%

The Star-Ledger reported that NJ’s pension investments earned 1.2% for the fiscal year ended June 30, 2020.  This is far below the 7.5% assumed return and given that NJ pensions are cash-flow negative, it is highly likely that assets had to be used to pay out pension benefits.  It is also highly likely that as assets fell, liabilities grew, so the funded ratio (assets divided by liabilities) also fell.

NJ should be focusing on the Teachers’ Pension and Annuity Fund (TPAF), which is the biggest state pension fund but also one of the very worst in the nation.  Prior to COVID, it had a 27% funded ration and an -8.1% negative cash flow.  This means that the fund’s investment must earn 8.1% or assets will be depleted further.  Last year, the investments earned 6.2% and assets decreased by $294 million.

Sunlight Policy estimates that a 1.2% return probably means that TPAF’s investment returns dropped by more than $1 billion from last year.  Taking into account Gov. Murphy’s increased pension contribution, and keeping teacher contributions and benefit payouts on their historical trajectories, Sunlight Policy estimates that TPAF saw its assets decline by $800-900 million.  With liabilities trending upward, we believe it’s likely that TPAF’s funded ratio will fall below 25%.  That’s less than 25 cents set aside for every dollar owed.  (There are a lot of moving parts, so we will not know for sure until the state puts out its financial reports).

The Center for Retirement Research (CRR) at Boston College projects that TPAF will run out of money in 2027.  If TPAF runs out of money, the $4.5 billion-plus of annual benefits will have to be paid out of the state budget, which would be a disaster for NJ.  Sunlight Policy can say that the 1.2% return likely confirms that TPAF is going along the downward trajectory that CRR is projecting.

Gov. Murphy’s putting $4.7 billion into a broken and unreformed pension system is throwing good money after bad.   Borrowing $4.5 billion to do so is even worse.  The bottom line is that TPAF is a looming disaster for the state and needs to be reformed before it’s too late.  

NJ teachers need to wake up to this reality and demand reforms before they are forced on them by a crisis.