A small tweak to New Jersey's pension system made by Gov. Chris Christie's administration could create a huge headache for incoming Gov.-elect Phil Murphy, who will find state and local governments' bills for public worker pensions jacked up by hundreds of millions of dollars.

The state treasurer cut how much the state should assume it will make on its pension investments -- which it uses to calculate how much money current and future retirees are owed -- from 7.65 percent to 7 percent. 

The move increases the pension tab for state and local governments by more than $800 million for the fiscal year that begins in July, according to an NJ Advance Media analysis of state actuary reports released Tuesday.

The change was praised by the pension fund actuaries, who say a 7 percent assumed rate of return is in line with other large funds and is a more conservative estimate of what pension investments can achieve over the long term.

In contrast, assuming the investments will earn a high rate makes the pension fund look healthier than it really is and doesn't reflect the reality of the state's investment outcomes, actuaries say. 

The fund returned 13 percent in the fiscal year that ended in June, but lost nearly 1 percent the year before. It returned 4.16 percent and 16.9 percent in the years prior.

A seemingly small change, Treasurer Ford Scudder's decision sends ripples throughout the pension system for 800,000 active and retired state and local government workers.

Local governments, which by law have to pay the full contribution recommended by actuaries, will have to come up with an additional $422.5 million for the fiscal year that begins in July, data show.

Jon Moran, legislative analyst with the New Jersey League of Municipalities, said local officials hadn't yet been alerted to the change.

"It's too early to say what the impact will be in various towns. As always, it depends on your workforce, how many employees they have and their ages and things like that," Moran said. "But it is something we weren't anticipating. And it's sure to be felt."

The state has more flexibility, as contributions are set by the governor and lawmakers and are subject to appropriation.

The state contributes less than what's recommended by actuaries. This year, it's expected to kick in about $2.5 billion, or half of what's recommended, and it is on track to contribute 60 percent next year.

The full hike driven by the cut in assumption rate is $390.3 million. If the state pays in 60 percent of the pension contribution as expected, it will have to come up with an extra $234 million for a total pension contribution of $3.4 billion next year.

Christie leaves office in January, and Murphy, who was elected in November, will deliver next year's budget to the Legislature.

A spokesman for Murphy did not respond to a request for comment.

Christie's administration has been gradually reducing the assumed rate of returns. Just last year Scudder dropped it from 7.9 percent to 7.65 percent, the first revision since it was dropped from 8.25 to 7.9 percent six years ago.

"It is the unmistakable trend in public pension plans across the country," said Willem Rijksen, spokesman for the Treasury Department.

Fund actuaries predict the pension investments were likely to beat the 7.65 percent assumed rate only a third of the time but could beat the new 7 percent rate 45 percent of the time.

Tom Byrne, chairman of the State Investment Council, which oversees pension investments, said he was consulted on the change, which represents a more responsible assumption.

"There's always a range of opinions about returns, but most people think that stocks will have returns in the high single-digits going forward, maybe if we're lucky, and bonds are returning 3 or 4 percent," he said. "So 7 percent seems a reasonable assumption for longer-term returns."

Rijksen argued a more conservative rate is especially warranted given Murphy's promise to divest from private equity and hedge funds, "as they have been and are expected to be a major source of added return."

Lowering the discount rate to 7 percent has the effect of hurting the fund's outlook on paper, increasing its unfunded liabilities by $14.4 billion.

An NJ Advance Media analysis shows the state's portion of the pension debt rose from $36.5 billion to $45.4 billion, and the local portion rose from $17.1 billion to $22.6 billion.

As of July 1, the total fund had assets to cover just 59.3 percent of its $167 billion in liabilities, under state rules for assessing its health. The pension debt is much higher when measured under national accounting standards.

These higher liabilities demand higher contributions from employers.

"The change in discount rate does not ultimately change the cost of the system. It's just how is the cost allocated to each year in the future," said Aaron Shapiro, an actuary with Conduent HR Consulting told the Public Employees' Retirement System Board of Trustees on Tuesday. "... It just says we expect to earn less, and therefore we need to start thinking about making higher contributions."

Without the assumption change, the pension fund would have shown big improvement, thanks to Christie's plan to shift proceeds from lottery ticket sales into the fund that immediately shaved about $13 billion off the debt. But moving to 7 percent added back billions in new liabilities.

The numbers "give the impression that we're headed toward economic calamity here, when in fact, we're not. We're improving," said Tom Bruno, chairman of the PERS Board of Trustees.

In addition to lottery revenues flowing into the fund, the state has begun making contributions into the system quarterly, protecting the payment from last-minute budget cuts.

New Jersey's pension system is considered among the worst funded in the country, and Christie has called for sweeping reforms to reduce the burden of pension and health benefits on the $35 billion state budget. 

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