STUMP » Articles » Public Pensions (and more) Watch: Feathering Nests » 22 April 2014, 05:21

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Public Pensions (and more) Watch: Feathering Nests  


22 April 2014, 05:21

Oh, I love happy stories.

Like how New Jersey connected people get a little nest-feathering at the end of their public careers:

Larry Chatzidakis needed a favor from Gov. Chris Christie’s administration.

Nearing his 62nd birthday, the former New Jersey assemblyman never held a full-time public-sector job.

Based on his 11 years as a legislator, plus other part-time government posts, Chatzidakis might qualify for a modest state pension of roughly $19,000 a year.

Then a new executive position was created at the Motor Vehicle Commission — in the face of Christie’s vow to cut the state’s workforce.

Chatzidakis was hired by MVC in May 2011 at a salary of $95,000 a year. It also was an opportunity to double his annual pension to $38,630 by the time he retired this year.

Some guys have all the luck, huh?

John Bury details another case, and explains what’s problematic about these little final salary boosts

Citing a desire to spend more time with her family, Freeholder Deborah P. Scanlon announced on March 1, 2012 she will retire at the end of the year, ending her fifth term in office. Obviously reassessing that family-thing it was later reported that “former Freeholder Deborah Scanlon was only out of office for a month before the county created a position for her in the Human Services department.” How would this impact her pension assuming retirement after those three years of higher salaries are on the books:

Impact on Pension:
Participant: Deborah Scanlon
Date of Birth (est): 1/1/53
Date of Hire: 1/1/98
Assumed Retirement Date: 1/1/2016 – age 63
Annual Benefit accrued through 1/1/13: $8,182 = $30,000 × 15/55
Projected Benefit accrued through 1/1/16 as a freeholder: $9,818 = $30,000 × 18/55
Projected Benefit accrued with 3 years in Human Services: $24,545 = $75,000 × 18/55

The difference using state actuarial assumptions comes to an additional $150,000 in benefit values accrued over those three years (though it’s closer to $210,000 using real-world factors) with the contributions to fund that additional pension determined, according to the NJ website, based on salaries:

“Under the current funding method, the normal contribution and accrued liability are derived by taking the second quarter (calendar) report of contributions salaries from 2 years prior, which are annualized (example: for the bills due 4-1-2008, the calculation utilized the 2nd Quarter ROC Report of Salaries from 3-31-06). The annualized salaries are then multiplied by the applicable annual rates determined by an independent actuary.”

Assuming Union County is typical and using a contribution rate that has lately been around 11% overall this would mean that $24,750 ($75,000 x .11 × 3) will be contributed over three years to fund an additional $150,000 in benefit accruals and this is considered actuarially sound.

As Bury notes, if they had to realistically contribute for the pension accrued, these contributions would be much higher (basically, they’d have to pay almost the full $150,000 in benefits as it’s so close to retirement) and such little deals wouldn’t occur because their extra expense would be obvious.

This sort of benefit-boosting is not a New Jersey-only behavior.

Let’s check out what the beleaguered San Diego County city managers have eked out:

One city manager is guaranteed to earn 15 percent more than his second-highest paid employee. Another was granted up to $2,500 in public funds to pay for lawyers or other experts to advise him on his employment contract.

San Diego County city manager salaries average more than $200,000, and on top of that, many of them get cars and personal computers paid for. They receive life insurance plans and extra money to pay housing, cellphone and professional membership bills.

Most top city administrators collect tens of thousands a year in retirement benefits above their base salaries and many accrue weeks of leave time that can be converted to more cash.
With retirement sweeteners and paid time off factored in, annual compensation for top administrators can climb much higher than the base.

In Escondido, City Manager Clay Phillips was paid $359,000 last year, even though his annual base salary is $234,700.

The city also provides him four weeks of executive leave on top of sick days, vacation and holidays. Phillips also gets a 7 percent deferred compensation benefit, a contract clause that translates to more than $16,000.

The issue is partly whether these people are worth the amount of money they are being paid, but mainly the issue with pensions in particular is that the amount they are being paid in that benefit is opaque.

Sure, there are the statutorily required contributions (which some entities, like Chicago and Illinois, rarely pay), but many of us think that they understate the benefit value due to sunny assumption sets (the prime one being the discount rate).

IF the benefit is ultimately paid in full, which has been the assumption until fairly recently, then hidden costs become apparent costs over time, and people who never benefited from the original service are paying for it decades later because not enough was charged for the benefits at the time they were earned.

This concept is called intergenerational equity — I see they don’t cover public pensions in there, but it’s a big source of a lack of intergenerational equity.

And the biggest problem with dumping a bunch of liabilities on later generations who never benefited from the service that was performed is not that it’s unfair (I am not arguing this point one way or another), but that it’s politically fragile for those represented by those liabilities. Current generations will not feel all that responsible for the expense. They prefer to pay for current services, rather than services provided 30+ years ago.

And when they realize the games played that boosted those liabilities…. they really won’t be all that interested in making sure those nests stay warm and cozy.

All this time, public employee unions and politicians also getting public pensions have told themselves that the pensions will always get paid in full. They are starting to see that this is not the case.

So those who promote these “little perks” for themselves and buddies should rethink these sweeteners, because they make a public pensions an even more popular cost-cutting target. Don’t think you will be the last to be cut.

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