Posted September 16, 2015 by burypensions in OPEB. 5 Comments

With the July 1, 2014 OPEB valuation out showing $81.4 billion as the official unfunded liability the big story (at least in NJWatchdog) is:

Guard your wallets, New Jersey taxpayers! The deficit in state pension and health benefit plans for public employees is fast approaching $200 billion. The unfunded liabilities have reached a staggering $194.5 billion, according to a New Jersey Watchdog analysis of State Treasury records. The shortfall has increased by $19 billion – or roughly 10 percent – in the past year.

Possibly, based on State Treasury records, but in real life that debt is far above $300 billion as of July 1, 2014. The pension debt is in the $166 billion range and though the Aon Hewitt OPEB valuation has some useful information on demographics and plan provisions the $81.4 billion unfunded number is not one of them as the report fails to measure some liabilities and mis-values the rest.

According to the Executive Summary of the OPEB report:

The Program provides medical, prescription drug, and Medicare Part B reimbursement to retirees and their covered dependents. The State of New Jersey pays a portion of the cost for retirees, spouses and dependents. All active employees who retire from the State of New Jersey and meet the eligibility criteria will receive these benefits. Results are shown for both Governmental Activities and Business-Type Activities. For GASB 43 purposes, the Business-Type Activities are generated by the participation in the SHBP by Local Governmental employers. The Division of Pensions and Benefits, in consultation with Aon Hewitt, has determined that the Program is a Cost-Sharing plan for its Business-Type Activities participants. Governmental Activities are detailed by State and Local Education (which is a State responsibility) components.Pursuant to various Public Law enactments over the years, primarily Chapter 126 PL 1992, PERS, ABP and TPAF members who retire from educational enterprises with 25 or more years of service or a disability retirement will have state-paid coverage. These individuals are not required to participate in the SHBP/SEHBP while active to receive retiree benefits.

The official unfunded liabilities are broken down between $65 billion for State employees and $16.4 billion for Local Government employees who participate in the SHBP/SEHBP. But because of the spoils system for insurance contracts at the local level (Union County being a prime example) a lot of Local Government employees do not participate in the State plans though presumably they would also receive benefits upon retirement if eligible just like their brethren who aren’t in localities controlled by an insurance broker.

Then there is the big lie of OPEB liability calculations which was explained in the NJ report in an Executive Summary page:

The GASB statement requires that the discount rate used to determine the retiree health care liabilities be the estimated long-term yield on the “investments that are expected to be used to finance the payments of the benefits”. Since the State does not currently pre-fund the retiree health care liabilities, the discount rate should be based on the portfolio of the State’s “general assets” used to pay these benefits. Historical monthly yields for this portfolio, as provided by the State of New Jersey, could suggest a 4.0% to 5.0% discount rate. Aon Hewitt recommends the mid-point of the range suggested by the portfolio, 4.5%.

Since there is no money in the OPEB fund there will be no money coming in from earnings which makes 0% the appropriate valuation interest rate. That New Jersey might be earning 4.5% on their “general assets” (declining as they may be as any spare change is being spent on propping up depleted trust funds or paying New Hampshire innkeepers for bed and jumbo breakfasts) is irrelevant.

Then again, if the state can always default on these liabilities, it all becomes irrelevant.