STUMP » Articles » Public Pension Watch: New Jersey Report -- They're Screwed » 28 September 2014, 19:00

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Public Pension Watch: New Jersey Report -- They're Screwed  


28 September 2014, 19:00

I know, it’s a shock, right?

As per a prior post, Gov. Christie of NJ appointed a commission to dig into their public pension problem.

So they have finally produced a report.

Before I get into the reactions to this report, I want to show a key graph:

This is what we’re looking at: the dark blue bars were the statutorily “required” contributions.

The light blue are the contributions actually made.

So you can see just how “required” these contributions were.

Let’s get to the reactions now.

News item:

The panel Governor Christie commissioned to develop solutions to fix the state’s underfunded public employee pension and health benefits systems warned Thursday that changes must be made.

In a preliminary report, the panel detailed the causes of the shortfall but offered no specific recommendations for fixing the problem.

Christie’s office released the report Thursday, which calls the situation “dire” and cites causes that have long been known – elected officials agreeing to increased pension benefits without identifying funding mechanisms and employees not being given enough incentives to forgo the top health benefits package.

The report in part blames politicians for failing to properly fund the pensions and siphoning surpluses during robust years resulting in a $37 billion unfunded liability in the state pension funds.

“While high benefit levels are one driver of unfunded liabilities, the lack of state contributions is a critical contributing factor,” the report states. “Put simply, if the state cannot find the economic means and discipline to consistently fund its pension obligations, the system will fail. The funding decisions over the last twenty years are telling examples of bipartisan contribution to fiscal distress.”

Looking up at the graph… undercontributions? YA DON’T SAY

Actuary John Bury has a few reactions. First post on the report:

As to what this panel will recommend there were two hints:

1. One conspicuous holdover from pre-reform years, however, is the minimal per-year penalty for early retirement. A newly-hired State employee who retires five years early, at age 60, would have his or her State pension benefit cut only 3% a year, or 15%. In contrast, under Social Security, for a person born after 1960, retiring five years early – at 62 instead of 67 – would result in a 30% reduction in benefit. Early retirement has a multiplier effect on both pension and health benefit costs. (PAGE 18)

2.All of of page 21 with examples of what other public pension systems, who all happen to have gone to some sort of hybrid plan, are doing.

Then Bury comments on omissions:

Perhaps some did not possess that knowledge and others who did wimped out but here is what should have been in the report:

Actuaries lie

A 54% funded ratio and $37 billion shortfall for the state portion of the New Jersey pension sounds bad enough but people should be aware that these figures are generated by actuaries whose sole responsibility to their politician clients is to keep contribution amounts low. Ask yourself how a plan returning 16.9% in trust earnings when it is assuming 7.9% worsens their shortfall. It’s primarily because of a flaw in basic actuarial math which is not being adjusted for since getting it right is not what public plan actuaries are paid for when right means higher contributions. Then there is the smoothing canard that the panel completely ignores, quoting the $44 billion actuarial value of assets as real rather than the $39.5 billion market value.

Politicians cheat

$14.9 billion in skipped ARC payments under Christie in cahoots with the legislature who not only get to decide how much they put in but they also get to brag that their selected mini-contributions are the full statutorily required amounts though they get to define what is statutorily required.

Benefits are protected

Hinted at on page 18:
“One of the reasons the reforms described above have had little impact on the unfunded liability is that many of them do not apply to all current employees.”

And the reason many recent reforms are not applied successfully (witness the COLA fiasco) is that Christie Whitman in 1997 exchanged constitutional protection of those benefits for the ability to reduce contributions to a desired level (i.e. nothing). That needs to be admitted and reforms must include either paying for all those promised benefits in full or coming up with some strategy to get public employees to agree to reduce their benefits voluntarily.

Thing is, as I’ve mentioned before, the fact that benefits cannot be cut because they’re “protected” actually makes them even more likely to be cut.

Because look once again at that undercontribution graph (a graph so important it shows up in the NJ Commission report twice) — if the employees and retirees were concerned that benefits might not be paid, they’d actually kick up more of a fuss for those very large undercontributions. But they thought they’d always be made whole… somehow. The taxpayers could be bled for a few more bucks….. somehow. In a state with the second-highest tax levels they’d be able to hike that.


Five things the commission wants you to know:

1. The looming unfunded liability is massive

According to the preliminary report, the combined unfunded liability for both pensions and retiree health benefits is $90 billion — nearly three times the annual state budget.

2. Retiree health care costs are massive (and unpaid for)

The report highlights the state, “like most public and private sector employers,” doesn’t set aside money to pay for health benefits for future retirees. It represents a $53 billion problem “on top of ever-growing cost” of providing benefits to public workers.

“The entire retiree health benefit obligation is left to be paid for by future taxpayers as a pay-as-you-go expense,” it reads.

3. Blame can be spread across the board

New Jersey governors have not paid the statutory annual required contributions to the state’s system since 1996, according to the commission. Actual annual pension contributions have fallen significantly short of what’s required to fund the system – and by state statute.

Former Govs. Christie Whitman, Jim McGreevey and Jon Corzine all failed to make the proper payments. And so did Christie.

4. Failure to fix the problem will cost millions more

Ratings agencies have downgraded New Jersey’s credit rating a record-breaking eight times since Christie first took office. The problem, in part, is due to the state’s repeated unfunded pension liabilities.

The downgrades have the “potential to cost the state millions of dollars going forward in higher interest costs.”

5. The 2011 reforms weren’t enough

It’s pretty simple, the reports says, the historic pension and health benefit reforms did not do enough to fix the problem.

and… Five things they don’t want you to know:

1. The solution – It probably is still in the discussion stage, is politically difficult, will necessitate buy-in from the legislature and its leaders, and is awaiting the propitious moment for a “Grand Announcement.”

2. The NJ court will have a say in the matter – It will likely rule soon that the 2011 union contract is valid and that the State has to continue contributing its share to the pension fund. It has already ruled that retired public workers have a contract right to cost-of-living adjustments.

3. The unions will suffer – In spite of court rulings there will likely be a revised, less costly plan to the state for newly hired government employees.

4. A tax increase at some point will be necessary – Credit rating agencies will only be satisfied when NJ raises its revenue sufficiently to meet its obligations and presents a more structurally balanced budget. To comply with future pension payments a tax increase will be necessary.

5. A bitter pill – The plan will help but will be hard to swallow.

Well, some of those things seem like they will become known in short order.

Again, that tax increase will be an extremely hard sell, given how high taxes in NJ are already.

I will let John Bury have the final say:

1. To annuitize $3.6 billion in annual payments it would take about $40 billion considering the number of J&S forms of benefit and comparatively early retirements

2. Actuarial Value of Assets is a fictional number plugged into the methodology to determine contribution amounts solely to understate those contributions

3. Of the $27 billion in Market Value of Assets there is maybe $7 billion in ‘alternative investments’ that are either illiquid, overstated in value, or both.

4. Accumulated Employee contributions ($10 billion) for those not receiving benefits must be returned to those participants upon annuitization of retiree benefits

Scary Conclusions

1. For retirees there may be about $15 billion to cover $40 billion in liabilities and that’s ONLY for retirees leaving absolutely NOTHING for the 151,669 participants who have not yet started receiving monthly benefits except, for now, the refund of their contributions.

2. There is an equally good chance that Conclusion #1 is overly optimistic

I would have to agree with Bury with respect to #2.

Anyway, good luck with that, NJ.

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