STUMP » Articles » New Jersey's Pension Non-Solution: Giving the Fund Management to the Unions » 28 March 2018, 05:44

So a bill [labeled as S5] passed in New Jersey recently. Here is a news item on the matter:

Senate approves police and fire pension bill

The Senate approved legislation Monday that would authorize the police and firefighter unions to manage their own pension funds.

The bill, authored by Senate President Steve Sweeney, would transfer management of the Police and Firemen’s Retirement System (PFRS) from the Division of Pensions and Benefits in the Department of the Treasury to the Board of Trustees of the Police and Firemen’s Retirement System.

The Senate vote was 34-2.

“This will give the unions the ability to make the best investment decisions for their members,” Sweeney said in a written statement. “It has worked effectively with private-sector unions and with public sector unions in other states where the investment returns under union management have outperformed public boards.”

Wait, what? These private sector union-run pensions?

The bill gives more management responsibilities for the investments made under the PFRS to employees and union members. The board would act exclusively on behalf of the contributing employers, active members of the retirement system, and retired members as the fiduciary of the system. The primary obligation of the board would be to direct policies and investments to achieve and maintain the full funding and continuation of the retirement system for the exclusive benefit of its members.

Wait, what? Full funding? Is there any New Jersey pension fund getting full funding?

The bill would require the 12-member PFRS investment board to include three active police officers and three active firefighters. The Governor would appoint four trustees who either hold, or have held, an elective public office or have been employed by a municipal or county government as an administrator, manager, or chief financial officer to represent the interests of local government employers. The board would also include one retired police officer or firefighter and a high-ranking state employee to represent state government.

A “super majority” vote of at least eight members would be required to take any actions increasing or reducing member benefits — including cost-of-living increases — or employer contributions if they are not consistent with actuarial recommendations, according to the bill.

This last bit is important. I will come back to that.

This is being promulgated as the solution to this pension’s problem.

We’ve seen earlier what New Jersey is seen as a ‘solution’ to very expensive pensions:

NEW JERSEY INCREASES DISCOUNT RATE

Yes, I said increases. Because, just by doing that, the pensions magically become cheaper! And look better-funded!
…..
I don’t care that the qualifying phrase “in the near term” is tacked onto the “saving”. This is like underpaying your credit cards, so that the balance increases, but saying that by underpaying you’re “saving” money.

I am thoroughly disgusted.

I will admit that there is a problem being “solved” by this bill, but it’s not the problem of making sure the pension is fully-funded.

And unions: this is not about solving your problems – whether actively working or retired.

Who passed the bill? Those are the people with a problem that they just solved. I will talk about that at the end of this post.

BURY COVERS NEW JERSEY PENSION STUPID IDEAS

The best coverage of the technical aspects is at John Bury’s blog. Here is a list of important posts on the matter: (there are more than these, but I found these ones particularly important)

• 27 Feb 2018: S5 To Get “Reasonable” Changes
• 24 Feb 2018:S5 and COLAs
• 23 Mar 2018:Unions To Run PFRS in NJ
• 25 Mar 2018:Precedents for Union Takeover of Public Plans
• 26 Mar 2018:Russian Roulette with NJ Pensions
• 27 Mar 2018:What the PFRS Board Is Getting

There’s a lot of good stuff in there, digging into some of the details.

Let me pull from that last post:

Data on participants in the New Jersey Retirement System have been updated through 2017 on the state website and isolating those participants in the Police and Firemen’s Retirement System (PFRS) gives us an idea of the status of that plan now that the unions will be in charge.

There are 45,212 retirees getting total payouts of $2,483,120,081 annually and 40,223 active participants with total annual salaries of $3,699,736,327.
….
Under the best scenario for PFRS new deposits would be $1.5 billion annually (10% of salaries from participants and maybe 30% from taxpayers) offset by $2.5 billion in annual payouts. That payout amount will rise steadily (especially if COLAs return). The deposit amount may also – but not without a lot of pain for the people who already pay the highest property taxes in the nation.

So first, the retiree payouts average about $54,000 per year. Average salaries of active employees are about $92,000 per year.

Keep that in mind.

PUBLIC PLAN DATABASE ON NEW JERSEY

Here is the Public Plans Database page for New Jersey Police & Fire.

Here is the key graph from that page:

So, for the whole history seen here, full payments have never been paid. It’s been at about 75% of “required” contributions.

This is not unique to this plan – here are all three New Jersey plans that are in the database:

If the union wants full contributions now, moving the percentage from 75% to 100%, that would mean at least a 33% increase in contributions…. but the reason I say “at least” is because of the ramping up of the ARC level.

Separately, are the funds underperforming? Let’s see:

That’s pretty much in line with other pension funds for long-term averages. It’s not the investment management necessarily that is letting down the union here.

WATCH THE MONEY RUN OUT

Let me try my lovely cashflow projection spreadsheet.

Here are the stats and my assumptions for projection:

This is how the fund runs out:

And here are how the cash flows go:

These are based on very simplistic assumptions, but you can see that the fund definitely needs higher contributions.

Much higher contributions.

COMMENTARY

You want to figure out the problem being solved? Look at these comments:

New Jersey Police and Firefighters Aggravate Pensions Mess

The New Jersey Legislature on Monday passed a bill allowing the police and firefighters to control “how their retirement funds are invested and their levels of contributions and benefits,” according to NJ.com. It passed the Senate by 34-2 and the Assembly by 67-2, giving it broad bipartisan support, and now goes to Governor Phil Murphy, a Democrat, for his signature.

The state hasn’t done a particularly good job running public pensions. According to S&P Global Ratings, New Jersey’s pension funding ratio is the worst in the nation, having saved enough to cover about 31 percent of the benefits that have been promised. The police and fire system is relatively strong by comparison, with about 65 cents for every dollar it’s on the hook for down the road, according to NJ.com.

…..
The Senate Budget and Appropriations Committee said that the bill “may increase employer pension costs because it allows the board to reinstate cost of living adjustments for retirees and to alter any benefit set forth in statute for the Police and Firemen’s Retirement System.”

…..
The big risk of benefit increases is that they’re promises that don’t go away, even if the projections that once made them look affordable don’t pan out. States and municipalities from coast to coast are now living with the consequences of the 1990s tech boom, which brought public pension funding levels to 100 percent and allowed politicians to sweeten the pot for union members.

…..
Keeping pension funds healthy and solvent drives up taxes and crowds out spending for everything else, including education and infrastructure. Allowing beneficiaries to determine their own benefits can only make things worse.

And this one: Murphy has a chance to tell unions no. He should take it. | Editorial

Politically-greased risks taken with taxpayer money are common in Trenton, but now we are about to learn whether Gov. Murphy is willing to be the adult in the room.

The Legislature will likely pass a toxic bill today that transfers control of the Police and Firemen’s Retirement System (PFRS) to the unions, essentially allowing them to increase their own benefits whenever the mood strikes.

Recent indications are that the governor is not inclined to go along with this plan, which is good, because this bill is a double-barreled lesson in screwy fiduciary obligation.

Specifically, it contains two provisions that will cause most taxpayers to drive their heads into a concrete wall.

One allows a new Board of Trustees – one comprised of 12 members, with 7 union appointees – the authority to raise the cost of living adjustment with a simple 7-5 majority.

And while our laws generally prohibit increasing member benefits in any of our state’s six pension systems until it is funded at 80 percent, this bill erases that requirement for PFRS – which is funded at only 64 percent.

ARGH 80 PERCENT. But let us ignore that for now.

Essentially, it is a power grab – the equivalent of “handing PFRS a blank check,” as Gov. Christie snarled in his own veto message last May – because if union members unilaterally vote to boost their benefits, taxpayers get stuck with the bulk of the bill.

And that absurd board imbalance is something we’ll have to live with, even though taxpayers fund 73 percent of PFRS.

Sponsors may amend the bill before the vote, and require an 8-5 supermajority to change the COLA, but the governor shouldn’t be fooled. The fatal flaw in the bill is the elimination of the 80-percent funding level requirement, says Assemblyman Ned Thomson, R-Monmouth, an actuary who has administered more than 500 pension plans over 35 years.

“The supermajority means nothing. Funding is everything,” Thomson said. “People seem to think that 80 is a magic number – no, 100 is a magic number. Remember, we were at 116 percent for all pension systems in 2001, and we dropped to 92 in one year in a $60 billion fund. Bad things happen in a hurry. I challenge any actuary to put his name on this bill.”

Ooooh, a new 100% pension funding hero!

Yes, police and fire fighters should take over stewardship of their pension fund. But as the bipartisan Byrne-Healey Pension Commission pointed out, the union must be responsible on both the asset and liability side, so taxpayers would have no obligation beyond their annual contributions.

This bill puts that at risk. If the union-heavy PFRS board liquidates hedge fund investments and bets it all on stocks and gets clobbered, that cannot be on the taxpayers. It’s that kind of nightmare that should compel governors to protect the people who elect them.

Liquidating hedge fund investments may actually be a good idea. I don’t know what they’re holding, though.

John Bury, in his posts linked above does question what assets the pension fund will get — pro rata shares can be difficult, especially for alternative assets like private equity or hedge fund holdings. Will the left-over fund shove all its junk in the bag for the police & fire fund? That’s a key issue — union guys, make sure you get a fair valuation of those assets.

THE PROBLEM BEING SOLVED: BLAME

Finally, here’s the problem being “solved”: the political problem of getting the blame for needing higher contributions.

Remember: Chris Christie crowed about getting laws passed to make full contributions to the New Jersey pensions.

Full contributions that were never made, each time the budget came up. They’re just too expensive, you see. Sure, we’ll just keep on making 75% of the payment (or lower, for some of the other plans). We’ll pay more later, yeah.

via GIPHY

Okay, so now the union can force full contributions.

via GIPHY

Not that the contributions are all that more affordable now.

So here’s the deal: when localities get the bill… it will be because of the unions. Not state legislators. The unions will get the blame for the increasing burdens on the localities. (And when some file for bankruptcy…. but let me not get ahead of myself)

Unions, the politicians are not being your friends by passing this. They just solved their political problem — after all, your board could vote for lower benefits. That’s what it says.

If you’re asking for a 33%+ increase in contributions, then that’s because you unions are greedy, you see. You could simply have had all the union member benefits dropped 25% (or more) to fill the gap!

Obviously, the problem grew because the state legislature had made contribution levels way too low for decades. But they just dropped it on you. So now it’s your problem, not theirs. They can just throw up their hands — hey, we thought the unions would fix this!

via GIPHY

Okay, let’s say you don’t increase contributions, but you put COLAs back in. Then your fund runs out even faster. Again, your fault. Not the state legislature’s fault….no, no, we gave it to the union and it’s their problem now.

via GIPHY

See how that works? [note: I’m not putting the fault on the unions – I am explaining how the general public will likely see it.]

Unions, you are being set up. I hope you understand that not one thing has been fixed about your pensions with this move.

You may think you are now in control, but you have just been made a target. The problem that was solved was the huge target on the governor and legislature with respect to your specific union’s needs.

Thing is, that’s far from New Jersey’s worst pension problem. It’s small compared to the teachers pension and the general public employees pensions. Perhaps those unions are not such suckers to think that taking over their fund is going to fix things.