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An ongoing discussion about conservatism in New Jersey.
California move could precipitate larger state contributions to pension funds nationally, including New Jersey
Harp Amar  (March 3, 2010, 10:48 pm)

Following up on my last entry about the massive unfunded liabilities deficit facing New Jersey: on Monday, Calpers, the country's largest public pension fund and a national trendsetter, announced that it is exploring reducing the targeted rate of return on its assets from 7.75% (similar to New Jersey's) to as low as 6%.

The rationale for the potential reduction would be to provide a more realistic picture of the funded status of the state's public employee pensions. Unfortunately, even under the rosier assumptions, Calpers is already facing an estimated $16 billion funding deficit -- and that doesn't include an additional $52 billion in health and dental retirement benefits promised to state employees.

Therefore, an immediate consequence of reducing the target to 6% would be an even larger fund deficit -- approximately $30 billion over the next 10 years, according to Wall Street Journal calculations -- which will inevitably be financed in part through additional direct contributions from California state and local governments. The additional billions in direct contributions will wreak further havoc on a state which already faces a massive $20 billion budget deficit, meaning further cuts in state and municipal services. Despite the additional stress on his current budget woes, California Gov. Arnold Schwarzenegger has come out in support of the lower targets as the right long term solution.

Given Calper's and California's reputations as national thought leaders on pension and benefit issues -- and the wider debate around the nation on just how realistic current assumptions -- it's possible that lower return assumptions could also eventually become a reality in New Jersey as well. Despite the seemingly academic nature of actuarial assumptions, they would have real and significant implications for the state's budget in the form of direct contributions which are potentially billions larger than currently expected. In fact a similar reduction in return assumptions from 7.75% to 6% on the state's $67 billion pension fund would mean an additional $22 billion pension deficit for New Jersey.

The numbers are staggering but hardly alarmist.