Alicia H. Munnell, director of the Center for Retirement Research at Boston College, in a WSJ blog believes that benefit cuts for New Jersey retirees should not be considered in part because “New Jersey benefits for current employees are now significantly below the national average and employees pay most of the costs.”
This statement strikes one as odd since the latest valuation reports show employee contributions at $1.93 billion while government contributions are at $2.98 billion but Ms. Munnell is obviously referring to the annual accrual of benefits known as the Normal Cost which, according to the July 1, 2013 actuarial reports, does show employee contributions covering 65% of that Normal Cost for the five largest plans ($1,874,252,148 out of $2,897,259,254 in this spreadsheet). But there is a reason for that.
At another of New Jersey governor Chris Christie’s town hall meeting on Tuesday it was reported:
Christie compared New Jersey to bankrupt Detroit, saying for the first time the state will be spending more on benefits for retirees than for current employees.
“We are paying more for people who are doing nothing than people doing something,” he said.
Christie said he plans to introduce a plan to address the pension system but did not elaborate.
“We have to worry about the greater good. And wishing it away is not going to make it go away,” he said. “We are going to have this conversation. I am going to force the conversation.”
Two points demand to be made.
The current issue of the New Yorker magazine leads off with 12 pages of a searing attack on New Jersey Governor Chris Christie that portrays him as a back-stabbing opportunist unqualified for the positions he wheedled or bullied himself into though it does include a couple of obligatory sentences about the ‘good’ things he has done:
Before the bridge scandal, Christie was known as a governor who transcended New Jersey’s reputation for toxic politics and toxic dumps. He took on the exploding costs of the state’s pension system, reformed property taxes, and worked with his opponents in the legislature, and he provided decisive leadership after the devastation of Hurricane Sandy.
If all that were true then this might be more funny than disturbing:
It’s not on all counts.*
Dean Baker on Fox Business makes two excellent points about the public pension crisis (not the one where he denies there is one) when he explains why retirees need to be protected and the dangers of hedge funds:
In a wide-ranging and often insightful interview on Fox Business economist Dean Baker argues the theme that there is no pension crises though when the topic of New Jersey is broached:
Look through the recently released July 1, 2013 valuation reports for the New Jersey pension plans that Buck Consultants prepared and you will find an additional Appendix at the very end of each titled “Revised Results of the July 1, 2012 Actuarial Valuation” which, for the State Police Plan for example, starts off:
Chapter 78, P.L. 2011 increased member contributions from 7.50% to 9.00% of salary. Effective with the July 1, 2012 actuarial valuation, the determination of the State’s normal cost contributions have been revised to reflect the use of all member contributions as an offset to the gross normal cost. This was the methodology used to determine the State’s normal cost contribution prior to the enactment of Chapter 78, P.L. 2011 and is consistent with the methodology typically used by contributory public-sector retirement systems to calculate the employer’s normal cost contribution.
No argument that this methodology is generally used for public plans but one of the selling points of the 2011 pension reforms in New Jersey was that the additional contributions that public workers were told to make would go to reduce the deficits the plans had run up, hence the variance in the methodology.
The move has been called devious and disturbing and worse:
We have a law in New Jersey that the pension contribution for the fiscal year 7/1/14 – 6/30/15 will be the ARC multiplied by 4/7ths. The ARC is calculated by added an amortization portion of the unfunded liability to the Annual Cost of benefits accrued in a year and reduced by Employee Contributions up to the percentages deposited prior to the 2011 law change that raised employee contributions. Those additional contributions are not included in the formula so they can help reduce the underfunding.
This calculated state contribution was set to be $2.4 billion based on July 1, 2012 valuation reports. Governor Christie in his budget address of February 25, 2014 promised to included the full pension contribution of $2.25 billion without explaining where that reduced figure came from. The actuarial reports for July 1, 2013 were presented on February 27, 2014 and we now know.
Governor Chris Christie is back on the horse doing his town hall meetings. I have not attended one yet but what strikes me based on the coverage:
- Nobody cares to ask a question about what ‘extreme measures‘ would be necessary in regard to state pensions; and
- Fatter than ever
Mark Magyar at NJSpotlight reported on how the New Jersey legislature is responding to Governor Christie’s threat to take “emergency measures” on state pensions:
“With the governor threatening to unilaterally make changes to the pension system but not explaining how or what he intends to do, the Office of Legislative Services engaged in extensive discussions and review of state laws to determine any possible way the governor could act by Executive Order,” according to a Senate Democratic memo issued by Sweeney and Executive Director Kevin Drennan on March 13 that was obtained by NJ Spotlight, along with an accompanying OLS report.
“OLS’s conclusion is that he does not have any power to unilaterally make any changes because the state’s pension laws are all set by statute, including the reforms that continue to restore financial stability to the pension system,” the memo continued.
“The governor can’t try to claim that the pension system’s finances are in such dire straits to constitute an emergency because OLS believes that the pension system is not in any state of emergency,” the memo said.
So if the OLS could be convinced that the New Jersey pension system were in “any state of emergency” then their position would be that benefits could be cut unilaterally by 70% (approximately what it would take to make the plans actuarially sound considering what is being contributed)? Here are the arguments:
- The plans are $50 billion short of being able to annuitize only (yes, ONLY) benefits for retirees.
- Governor Christie claims over his 5 budgets to have put more into pensions ($5.4 billion) than any other governor in New Jersey history but because of deferrals and an arbitrary factor applied to the ARC he has also shortchanged the pensions ($12.9 billion*) more than any other governor in New Jersey history.
- According to the 7/1/13 valuations there was $8.7 billion paid out to retirees with $4.9 billion contributed in. These plans are not being funded but drained.
Pension Contributions (in billions)