Silver as an investment

93 S&P Confirms That NJ Plan To Pay 50% Of Required Pension Contributions Is Bad; Maintains Negative Outlook

zerohedge.com / by Tyler Durden / Mar 17, 2017 6:10 PM

Standard and Poor’s credit rating analysts for the state of New Jersey, David Hitchcock and John Sugden, apparently think that funding only half of your state’s annual actuarially determined contributions is a bad thing…who knew?  So, just to make sure we achieve crystal clarity here, S&P believes that adding to NJ’s $66 billion pension underfunded liability, which would be much higher but for a ridiculous assumption the state makes in setting its return on assets at an artificially high rate of 7.65%, each and every year by contributing less to the fund than what is paid out in benefits, is a bad thing?

Of course, as S&P notes, NJ’s pension problems won’t bankrupt the state until sometime “down the road” so an “A-” rating is still reasonable for now.

 Short term, the proposed budget leaves the state in similar financial condition to where it started 2017, with slim, but adequate reserves, and some vulnerability to potential revenue shortfalls. However, down the road, because New Jersey plans to only partially fund its actuarially determined contributions (ADC), the picture looks much worse, as reflected in our current ‘A-‘ general obligation rating and a negative outlook on the state.

 The governor’s budget proposal follows his multi-year plan to gradually ramp up to full funding of the state pension ADC over 10 years. New Jersey would fund only 50% of the ADC in fiscal 2018, after funding 40% in fiscal 2017. Underfunding in any year ratchets up future state liabilities, in effect pushing back the tide, as New Jersey comes closer to the day when it will be left with no choice but to confront its very significant retirement obligations. The term-limited governor’s successor will face tough funding decisions as early as fiscal 2019. The planned 50% ADC contribution in fiscal 2018 in itself represents a record payment of $2.5 billion, boosted in part by the state’s decision to lower the assumed rate of return to a somewhat less aggressive 7.65% from 7.90%. We calculate the budget proposal, if enacted, would leave New Jersey with a sizable structural budget gap of about 9% of proposed 2018 appropriations–2% attributable to various one-time budget items in fiscal 2018, and 7% representing pension funding below ADC–a similar structural budget gap to last year, despite the increased pension contribution in 2018.

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