Fitch Raises Concerns Over NJ’s Unfunded Liabilities

(September 21, 2012) — New Jersey’s $36.3 billion in unfunded public pension liabilities and heavy debt burden “remain the key challenges” for the state, according to Fitch Ratings, which just released a statement about the “notable downside risk” in New Jersey’s revenue budget for the upcoming year. 

“While we believe the need to address revenue underperformance is important, we expect the state’s significant and growing unfunded pension and employee benefit liabilities, combined with its above-average debt burden, to for New Jersey,” Fitch asserted. “Despite passage of pension and benefits reform legislation that will restrain future growth, continued pension funding level deterioration is projected, as full funding of the actuarially required contributions is phased in over several years.” 

Fitch placed the pension system at 60.8%-funded on an aggregate basis, as of June 30, 2011. 

The $70.1 billion fund is the eleventh-largest public fund in the United States. Net assets increased by 9.7% in the 2011 fiscal year, owning to contributions totaling $7.4 billion and $12 billion in investment income (returns of 18%). State legislators passed a pension reform bill in June 2011, suspending the cost-of-living adjustment. This move decreased New Jersey’s unfunded liabilities, but Fitch forecasts the reform will not keep liabilities from outpacing assets in the long term. 

Still, investment income continues to buoy the system, at least in the short term. 

“The last three months have been great for returns,” CIO Tim Walsh told aiCIO earlier this week. “For the fiscal year 2012, we’ll be in the upper 15% of state plans.” But no matter how well Walsh and his investment team do, he’s acutely aware they can’t bring the system to full funding on their own. 

“There was a 10- to 12-year contribution holiday. You can get good returns, but without contributions for that long…” he said, trailing off. 

Fitch, however, didn’t mince words: “While New Jersey’s economy remains wealthy and diverse, to the extent that economic and revenue recovery falters, addressing these liabilities becomes even more challenging.”