Americans for Prosperity was pleased last week to have hosted a tele-conference with our friends at Mercatus regarding the state of New Jersey's pension system.

Eileen Norcross, senior research fellow at Mercatus, was our special guest and shared with us the insights of Mercatus' report: The Crisis in Public Sector Pension Plans: A Blueprint for Reform in New Jersey (Visit Mercatus' website to read more here)

Quite simply, New Jersey's pension system is in deep crisis -- or as Ms. Norcross put it -- to the "point of catastrophe."

While some have pegged the pension system's liability at $45B, the reality is the true number is closer to a staggering $173B.

The $173B figure arrived at by Mercatus is the result of a more realistic application of actuarial standards, the same way the private sector would assess pension systems.

Currently, New Jersey projects a rate of return on investemts of 8.25%. This assumption is way too optimistic and, according to Norcross leads to a higher risk strategy. She notes that the pension investments should be valued at a "lower rate of return to reflect a low-risk nature of payment."

Norcross said that "immediate and drastic action" is needed to address the pension crisis. The reforms put in place earlier this year by Governor Christie and the Legislature (e.g., a 1.5% contribution to health plans, capping the amount of sick leave payouts) are "not enough" to resolve the problem.

Norcross proposed the following solutions:

• Closing the defined benefit system to new hires and moving to a defined contribution plan; and
• Freezing COLA (cost of living adjustments)

At the end of the day, she said there are "very few choices left."

Regarding a proposal to amend the constitution - SCR-1 - Norcross did not believe it was "the right fix" and would be "setting [the state] up for bigger problems" down the road. (See AFP's analysis of SCR-1 here)

The pension system currently has about $66B in assets, is scheduled to pay out roughly $6B in benefits but is only taking in about $1.2B. Governor Christie's budget, which passed yesterday, punts on a $3B pension contribution thereby adding more debt.

A new report indicates that New Jersey's pension system could be insolvent as soon as 2019.

The Mercatus report will be archived in our Liberty Library where you will find numerous other scholarly reports on New Jersey's fiscal condition.