By Steven Malanga

New Jersey residents have absorbed so much bad news about our state government pension fund that they don't need much more to convince them the situation has become critical.

But a new report applying stricter standards to all state pension accounting is sobering nonetheless, because it now estimates that New Jersey has the nation's worst problem, with average debt per resident that's highest among states, and a funding level below every state but one.

Indeed, our funding status in the new study by S&P Global is now below the point some experts believe is even possible for a pension system to recover from.

The study applies new benchmarks recommended by the Government Standards Accounting Board for evaluating the health of pension funds. GASB developed those benchmarks in response to criticisms that many states were using unrealistically optimistic assumptions that made their pension funds seem healthier than they may actually be.

One especially important change requires a retirement system to use a more conservative (and expensive) standard to estimate its future obligations if the system is so deeply in debt that it could become insolvent sometime in the near future.

Under that new, more rigorous benchmark, New Jersey's future liabilities soar and its funding level falls to just 38 percent of the money necessary to pay its obligations. By contrast, using the old standards the state estimated in 2013 that it had 65 percent of the money it needed -- not good, but still significantly above current calculations.

New Jersey residents, the report estimates, now owe a whopping $10,648 per person in pension debt alone. The median among all 50 states, by contrast, is only $806 per resident. But the situation may be even worse.

The state's total pension obligations that have yet to be funded, estimated at $48 billion in 2013 using the old standards, are now about $135 billion, according to state data just released. That would put the per capita debt above $15,000.

There can be no doubt that the retirement system has reached critical status by generally accepted standards. In August of 2015, for instance, the chief investment officer of the nation's largest government pension fund, the California Public Employees' Retirement System, warned his board that if its portfolio of investments drop below 50 percent of the amount owed for pensions, even with significant additional increases from taxpayers, "catching up becomes nearly impossible," according to the Los Angeles Times.

Jersey is obviously well below that 50 percent level already.

New Jersey's pension math no longer works because about two-thirds of the retirement money that states are promising workers is supposed to come from investment gains. But when a system is short $135 billion, it gets nothing in market returns on that missing cash.

The only way to make up for investments that don't exist is with additional government and worker contributions, but the amount necessary to make up the difference has become staggering.

With the imminent arrival of the new GASB standards in mind, the bi-partisan New Jersey Pension and Health Benefits Commission recommended in early 2015 a radical revamp of the state's retirement system. That plan involved freezing the current deeply indebted system so that it did not continue building up obligations at unsustainable levels and creating a new hybrid pension system known as a cash balance plan, which combined some aspects of individual accounts common in the private sector with a traditional defined benefit plan.

The plan also involved reforming the way the state delivers and pays for health care for its workers and retirees, and applying those savings to pay off the pension debt.

The reform efforts of the pension commission have stalled in part because of fierce resistance from government workers and some legislators who are skeptical because they were promised that previous pension reforms, passed in 2011, would solve the state's problems. That didn't happen, though, in part because those reforms were based on the overly optimistic assumptions that helped get New Jersey into this pension mess in the first place, and which underestimated the cost of a fix.

One response from government worker unions to the current crisis is to push for a constitutional amendment which would require the state to make its pension payments. But without reform, the cost of those payments, especially under new, tougher accounting standards, would overwhelm the state budget.

Simply put, there is no easy way either to invest or pay our way out of the current problem as it is now measured.

Ultimately, the state will still need a political solution that involves negotiations and compromise among a host of different interests. But that solution must confront the inescapable math, too. The newest pension report emphasizes just how challenging a task the state faces.

Steven Malanga is the George M. Yeager Fellow at the conservative think-tank Manhattan Institute for Policy Research and senior editor at City Journal. He lives in West Orange.

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