I was in Pennsyvania last Friday for a business/pleasure excursion to my friend’s sprawling estate and, on the way home, picked up the local paper drawn by the lead story:
Scranton council passes commuter tax
By Jim Lockwood
Published: August 1, 2014
For the first time since 1994, Scranton will again impose a commuter tax, this time to shore up the strapped city’s severely underfunded pension system.
City council on Thursday adopted a 0.75 percent earned-income tax on nonresident workers to raise an estimated $5.1 million a year. Council voted 4-1, with President Bob McGoff and councilmen Pat Rogan, Joe Wechsler and Wayne Evans in favor and Councilman Bill Gaughan opposed, to adopt an ordinance authorizing the Act 205 earned-income tax on nonresidents who work in the city.
Despite pending changes to Act 205 that would require the city to levy the same tax on residents, Mr. Rogan and Mayor Bill Courtright insisted residents would not see a wage-tax hike.
I follow pensiontsunami and other public-pension-crisis sites regularly and I was aware that Scranton was considering bankruptcy but only when I happened upon this story did I realize that Scranton really is on the precipice with their pension system and I suspect they got there because they were allowed to do what had been expedient for them as corroborated, if not dictated, by the advice they bought at the time.
Scranton’s story, as pieced together from local-paper articles and working backwards, is instructive….and likely typical.
This started out as a quickie blog to get a simple point across about the underlying precept of New Jersey Governor Christie’s initiative to reduce public pension benefits, namely that the benefits New Jersey provides are overly generous. Is that true?
Policypedia has a good compilation of official data from various sources but because there are no set standards among plans there is no easy way to compare benefits among state plans by only using asset and liability numbers. You have to find the website where each state keeps their actuarial reports, go to the Summary of Benefits section of either the actuarial report or the CAFR, and see how those benefit formulas compare with what New Jersey’s is providing to most of its public employees (from page 44 of the PERS report: about 1.82% of pay times year of service at retirement age 60).
So I did and here are all the links to where the reports are by state and plan. Actuarial reports all have a section that describes the benefit formula and after a review of a few plans I found….
‘Kentucky Fried Pensions: A Culture of Cover-up and Corruption‘ by Chris Tobe primarily focuses on the killings nefarious elements in the exotic-investment industry made by selling snake oil to severely underfunded public pension plans desperate to find ways to pay those promised pensions by any means except the obvious one – making contributions.
The focus is on Kentucky and Illinois but with New Jersey moving towards having 38% of their remaining trust assets in alternative investments the lessons of Arrowhawk and Record Currency Management will likely be visited upon us (assuming they haven’t already been and no one with any sense of public duty has found out as yet).
Among the thought-provoking excerpts from the book:
401(k) plans, a disaster for retirement security in the private sector, are creeping into public plans with New Jersey likely to announce some ill-thought-out hybrid system later this month to forestall another debt-ratings downgrade.
James W. Russell in Social Insecurity: 401(k)s and the Retirement Crisis lays blame on Milton Friedman, Jose Pinera in Chile, the World Bank, conservative think tanks, and the financial services industry for the demise of the defined benefit system in the private sector and warns that a similar cabal is coming for the public plan system. That all may be true but his diagnosis of the real situation with public plans, especially in the sub-chapter TARGETING PUBLIC EMPLOYEES AND THEIR PENSIONS, is naively dangerous. For example….
Professor Amy B. Monahan of the University of Minnesota authored a valuable well-documented research paper on the Public Pension crisis that diagnosed the problem amazingly well for an academic before slipping up when it came to the obvious solution – and there is one though someone not in the political trenches might be excused for missing it.
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.
“This session is not being recorded but you may be quoted in John Bury’s blog”
Lance Weiss kicking off Session 704 – Public Employee Retirement Systems Workshop – today at the Enrolled Actuaries meeting at which this interesting tidbit came out.