Governor Christie reduced the return on asset assumption (ROA) for the NJ pension system during the waning days of his administration. The reduction in the ROA from 7.65% to 7.0% was a dramatic move, as it would significantly increased contribution expenses for the state and municipalities, but it would have begun the process of stabilizing this poorly funded system. As a point of reference, the ROA was 8.25% at Christie’s inauguration for his first term.
Governor Murphy has just announced that he is reversing this move to return the ROA to 7.5%. According to Murphy’s acting state treasurer, Elizabeth Muoio, Christie’s surprise reduction in the pension system’s ROA placed an “undue stress” on the municipalities that would have to find the extra cash. They estimated that the reduction in the ROA to 7.0% would increase local governments’ bills by $422.5 million and the state’s by $390.3 million, according to their actuary.
A spokeswoman for the Department of Treasury, Jennifer Sciortino, said the move from 7.65% to 7.5% will mean an additional $52 million in costs for the state and $91 million for local employers. The rate is forecast to drop to 7.3% for 2021 and 2022 and then to 7% in 2023.
As a reminder, the ROA is a non-calculated number (otherwise it wouldn’t always be a whole #). We often refer to these ROA estimates as Goldilocks numbers for they aren’t too hot or too cold, but seem just right. Instead of messing with the ROA estimate which determines annual contribution expense, NJ should engage in an Asset Exhaustion Test (AET) to determine the actual return needed to ensure that the solvency of the fund. They may just be surprised that the combination of current assets and future contributions may not need as high an annual return as presently forecast to meet future liabilities.
One caveat: determining what future contributions will look like for NJ is often a difficult task given the fact that the annual required contributions (ARC) have not been fully funded since George Washington slept in Trenton!