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It wasn’t that Reggie Miller hadn’t ever hit two shots consecutively. It was the rapidity and deftness of execution combined with the game situation that astounded.

So it was today when Governor Christie talked pensions in his budget address:
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Politicians lie all the time but rarely have two whoppers been shot off so quickly with so little time left.

1) New Jersey pensions on a “sound long-term track” after reforms that got rid of promised cost-of-living-adjustments!!!  Reforms that are being challenged and will likely be overturned once they come across the desk of a judge with some common sense not beholden to political insiders*.

2) Pleading for the legislature to make a $1.06 billion state contribution!!!  An amount that, by law, is 2/7ths of the $3.74 billion the actuaries came up with as a ‘required’ contribution and about 1/10th of what it should be if honest actuarial assumptions were applied.

Knick fans were left in stunned disbelief by Reggie Miller’s bombs that night.  To anyone remotely aware of the real situation with the New Jersey state pension, it’s deja vu.

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* Admittedly in New Jersey this might take some time.

Among the first actions the Union County freeholders take each year is to appoint their personnel lawyers. At the 2011 Reorganization meeting they passed these resolutions:

2011-18 CHAIRMAN SCANLON, awarding a contract to Bauch, Zucker, Hatfield, Springfield, New Jersey to serve as labor and personnel counsel from January 1, 2011 through December 31, 2011, in an amount not to exceed $75,000.
2011-19 CHAIRMAN SCANLON, awarding a contract to DeCotiis, FitzPatrick, & Cole, Teaneck, New Jersey to serve as personnel counsel from January 1, 2011 through December 31, 2011, in an amount not to exceed $35,000.
2011-20 CHAIRMAN SCANLON, awarding a contract to Ruderman and Glickman, Springfield, New Jersey to serve as personnel counsel from January 1, 2011 through December 31, 2011, in an amount not to exceed $75,000.
2011-21 CHAIRMAN SCANLON, awarding a contract to Roth D’Aquanni, Springfield, New Jersey to serve as personnel counsel from January 1, 2011 through December 31, 2011 in an amount not to exceed $75,000.

$260,000 for outside personnel lawyers? Granted, it’s a fraction of  the $889,801.48 spent in 2011 on outside legal services by Union County, but what are we getting for this money?

Recently we have had civil lawsuits filed by county employees emanating from the most trivial of offenses (emailing at work and posting a flyer) that could have been handled easily by your typical middle-school vice principal but accelerated primarily due to an inadequate or inept reaction from the county hierarchy which was under obligation to reward campaign donors.

The system the county has in place to handle personnel issues is simply not working ( for taxpayers or the personnel, that is.  It works quite well for the outside counsel).  It’s as if one third-grader were to slap a ‘kick-me’ sign on the back of another third-grader* and it wound up costing the school district $100,000 in fees after both kids are put through a battery of counselors and attorneys looking to resolve a situation interpreted into a ‘problem’ for their own personal benefit.

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* Obviously this is not an entirely apt example.  If county employees were to place ‘kick me’ signs on each other (what with the blatant incitement to violence and the associated complications including possible criminal charges) it would be a disaster for taxpayers and a boondoggle for outside counsel that could easily gross seven figures for specialized legal services per incident.  I could have used an example of someone mailing out nazi-tinged attacks against a private citizen or calling someone a fucking asshole in the freeholder meeting room within 20 feet of all the freeholders but, apparently, in Union County those actions are OK.

The problem  is this is a pension plan with liabilities to cover and those liabilities have doubled over 15 years to $124 billion officially*.  Benefit payouts that were $2 billion are now $8 billion annually. There was a 9% bump-up in benefits in 2001 and another 250,000 participants entered the plans.

Plans that started out with no money and no liabilities gradually built up and, if an the asset chart were to go back to 1955 it would start at $0 and show a diagonal line going up until it hit 1998 where it plateaued.  But plateaus end and when they do:

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Which is about where New Jersey is headed

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* Though I put the real liabilities at $232 billion.

There are rumors of layoffs in Union County and last night a representative of an employee union with about 50 foot soldiers in tow made this plea:

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At this same meeting hundreds of thousands of dollars were allocated for vanity projects and unnecessary spending that created, in essence, kickbacks to connected law firms and contractors.

In my last blog I looked at the political contributions made to the Union County Democratic Committee for the years 2010, 2009, and 2008 as well as the Republican Committee for 2010, 2009, and 2008.  The main categories of contributors were high-ranking county employees (E), county vendors (V), other politicians wheeling money (P), and Unions (U).  Though the party out of power (Republicans here) did not get any E or V money, they did get U money.

The Unions must be aware of all the E, V, and P money that is corrupting government finances but rather than adding their substantial political weight to fixing, or even exposing, this perverse system they dutifully play the supplicant in line for their share somehow confident that there will always be more.

To run a jail and a nursing home, take care of the parks, fund the Prosecutors Office, provide social services, keep track of land records, and run elections they will need about $400 million.  The other $100 million will go to repay campaign contributors.

The easiest way to see it is by categorizing who contributed to the Union County Democratic Committee for the years 2010, 2009, and 2008 as either:

G Givers backing a favorite or friend

I Individuals looking to become Vendors.

V Vendors to the county

E Employees of the county

U Unions representing public employees

P Politicians wheeling*

The Republican Committee, not being in power, got absolutely nothing from E and V sources for 2010, 2009, and 2008 but enough from U and P sources to rustle up some signs and make these races close despite being outspent 10-to-1 .

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* The transfer of money between political organizations in order to skirt campaign funding laws. For example, the single largest beneficiary of Union County taxpayers is the law firm of DeCotiis, Fitzpatrick and Cole, LLP which gets about $1 million annually as counsel to the Union County Improvement Authority and another million dollars recently advising the Union County Utilities Authority plus a few hundred thousand from the county directly for advising on golf operations or as special counsel in some lawsuit. Check the NJELEC site and you will find that DeCotiis and their employees have made 1,825 separate political contributions over the years. One of them was made on June 6, 2008 to the campaign of state senator Raymond J. Lesniak in the amount of $3,000. Among the contributions to the UC Democratic Committee during 2010 was $10,000 made on 10/18/10 from the campaign fund of Ray Lesniak.

Ivory tower concepts like believing the sponsor will be put in what they’re told to put in don’t work in states like New Jersey.   But, beyond that, presuming that you will earn 8% on phantom assets could require you to earn 16.67% on what you actually have.  Taking the most basic example:

Let’s say you want to receive $1,000 per year for five years and you have 5 years to put in your money.  Assuming you get 8% interest then $681 is your contribution number per this spreadsheet.

But what if after year 3 you expect to have $2,388 but actually have $1,500 (63% funded)?  Will you still get your $5,000 in total payouts?  No.  According to this spreadsheet you would only get $3,625 assuming you continue to make 8% earnings from year 4 on.

In order to get that $1,000 annual payout you would need to start getting 16.67% trust earnings which is essentially what a plan as badly funded as New Jersey’s is assuming when they predict everyone will get paid out.

However, the ‘starve-the-beast’ tactic that New Jersey politicians continue to use is making things much worse as political machines are thinking up projects that will fall into the debt-exception so that favored donors can keep getting their contracts and cronies can keep their jobs.  Here is a particularly clumsy example of how it works.

Oakwood Park is a nice little recreation area in the city of New Providence that Union County, for some reason, wanted to make improvements to so on July 13, 2009 they bought it for $1, despite qualms from the locals,  and on October 8, 2009 they passed an ordinance allowing them to bond for up to $4 million to make the improvements.  New Providence residents strongly objected and voted down the deal on November 2, 2010.

However, in the interim, Union County included $1.8 million for ‘Improvements to Oakwood Park’  (next to last item of this summary of BANs) in a July, 2010 $183 million Bond Anticipation Note sale that nobody at the county seems to be aware of:
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Conclusion
Rather than cutting waste and allowing taxes to reduce naturally as a result, governments in New Jersey who want to maintain their money-power bases are seeking out unnecessary projects whose main virtue for their purposes is that they fall outside the tax-increase cap.  Thus we get a system where politicians are driving around their districts looking for more Oakwood Parks (and Plazas).

You might be seeing numbers tossed at you regarding deficits in the state pension of $40 billion and a funded ratio of 67%.  They’re way off.  Based on actuarial reports for the three largest plans I put the real deficit now at $162 billion and the real current funded ratio at 30%. Let’s take this in stages as we replace official figures with real-world ones for the three largest plans.

OFFICIAL NUMBERS @ 6/30/11 (in billions)
……………………………TPAF………..PERS……..PFRS……………TOTAL
Actuarial Assets………32.2…………29.1………23.2……………..84.5
Liabilities……………….49.9…………43.3……….30.9…………..124.1
Deficit………………….-17.7…………-14.2……….-7.7……………-39.6
Funded Ratio………..64.5%………67.2%…….75.1%………….68.1%

The funds did not really have $84.5 billion in assets at June 30, 2011. The ‘actuarial value’ in this case means an average of the the asset values over the last five years which in the private sector is used to ‘smooth’ valuations but in the public sector is used to distort. Just because the plan held Lehman stock that was worth something in three of the last five years they get to pretend they really have more money now. Here are the figures when we use market value of assets:

OFFICIAL NUMBERS WITH ASSETS AT MARKET @ 6/30/11 (in billions)
……………………………TPAF………..PERS……..PFRS……………TOTAL
Market Assets…………27.4…………25.7………21.3……………..74.4
Liabilities……………….49.9…………43.3……….30.9…………..124.1
Deficit………………….-22.5…………-17.6…….. -9.6……………-49.7
Funded Ratio………..54.9%………59.4%…….68.9%………….60.0%

Next, we turn to the liability side of the ledger. As I detailed previously on TPAF the underlying assumptions upon which the value of these promised benefits are based (primarily the 8.25% interest assumption in a plan that now demands liquidity) understate the true benefit costs. Here are the figures using realistic liability valuations:

BURY NUMBERS WITH MARKET VALUE @ 6/30/11 (in billions)
……………………………TPAF………..PERS……..PFRS……………TOTAL
Market Assets…………27.4…………25.7………21.3……………..74.4
Bury Liabilities…………75.0…………65.0……….46.0…………..186.0
Deficit………………….-47.6…………-39.3……. -24.7…………..-111.6
Funded Ratio………..36.5%………39.5%…….46.3%………….40.0%

Next we turn to the COLA theft.  2010 liability numbers were adjusted for the plans to take into account the elimination of all future Cost-of-living adjustments that public employees were promised - in writing.  Were that reinstated the respective adjustments that artificially lowered liabilities will need to be reinstated to the tune of 17% (TPAF), 12% (PERS), and 16% (PFRS) giving us:

BURY NUMBERS WITH MARKET VALUE AND COLA (in billions)
……………………………TPAF………..PERS……..PFRS……………TOTAL
Market Assets…………27.4…………25.7………21.3……………..74.4
Bury/COLA Liab………87.7…………72.8……….53.4…………..213.9
Deficit………………….-60.3…………-47.1……. -32.1…………..-139.5
Funded Ratio………..31.2%………35.3%…….39.9%………….34.8%

Now remember these numbers were as of June 30, 2011. The latest report from the Division of Investments shows assets at $69.6 billion and we can add another year of accruals to the liability side:

BURY/COLA WITH MARKET VALUE @ NOW (in billions)
……………………………TPAF………..PERS……..PFRS……………TOTAL
Market Assets…………25.6…………24.0………20.0……………..69.6
Bury/COLA Liab………95.0…………79.0……….58.0…………..232.0
Deficit………………….-69.4…………-55.0……. -38.0…………..-162.4
Funded Ratio………..26.9%………30.4%…….34.5%………….30.0%

For the year ended June 30, 2011 there was about $7.6 billion paid out in benefits from these three funds. With early retirement incentives, the return of cost-of-living adjustments, longer life expectancies, and baby-boomer retirements this payout number should exceed $10 billion in three years by which time the fund will be depleted (after returning the interest-adjusted contributions made by employees) unless, of course, New Jersey politicians step up and do the honorable thing. There’s a debate as to whether you can put a number on that happening.

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* This is an update of pieces I did on April, 2009 and February, 2010 , and February, 2011 with minor changes in the text.

Public sector pensions: they got a few things right (precious little), but a whole lot wrong. I do think that 401(k) plans are badly-designed as retirement instruments, though I wouldn’t call them a “scam”. They were created during a boom time in the market, and the designers obviously weren’t thinking about periods of down-cycle equities markets. But even with that, they may be safer than traditional pension plans, simply because pensions (public and private) may prove to be completely unsustainable. At least you own the money in your 401(k); it’s an asset that has a present value, and can be used as (say) collateral for a loan. Just try getting a loan against a future pension payment or Social Security check. A pension payout is just a promise made to you by people who have every motivation to lie.

Of course Monty refers to public pension plans.  There is no motivation for private sector employers to overstate the funded status of their plans since, in the case of an underfunding, it is the company owners who take the hit and PBGC protection is basically a viable option only for bankrupt companies.  A Defined Benefit Plan in the private sector* demands full funding or penalties will be exacted upon those who decide to underfund it.  However, in the public sector, practically everyone has a motivation to lie about how much these benefits really cost:

1. Politicians when they trade salary increases for deferred promises
2. Public Employees who get promises of generous benefits
3. Unions who bargain for these benefits
4. Taxpayers who get lower taxes up front
5. Actuaries who pocket massive fees to come up with creative ways to keep costs down
6. Groups like the NPPC that put a veneer of respectability on the whims of the above

In that order.

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* Not counting multiemployer (union) plans who have their own motivations for lying about their funded status.

“The vast majority of statewide plans are in good financial shape.”

Hank H. Kim, Esq. Executive Director and Counsel National Conference on Public Employee Retirement Systems

So says a lawyer and purported expert in this field to a bunch of reporters. NCPERS averaged 216 responders to a survey who happened to have a funded ratio of 76.1% and Fitch ratings says 70% or above is adequate. 
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Who’s to argue?
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Mr. Kim is full of shit and if he were speaking in front of a group not made up of glorified stenographers he would have been called out.

1) There are thousands of state and local plans.  Sending out questionnaires and drawing conclusions from the 216 who get back to you is beyond silly.  Did Prichard, AL or Central Falls, RI return their surveys?

2) 70% is an abysmal funded ratio especially when you are using actuarial assumptions that understate liabilities and ‘smoothing’ methods that overstate assets.  Plans in the private sector under current funding rules would be required to limit benefits and develop a plan to return to solvency.   The Fitch 70% reference likely came from this article where

“Fitch noted the systems that pose the greatest risks are those with significant unfunded liabilities for which the government’s annual payments have been significantly less than an actuarially-determined ARC over multiple years. Plans with relatively low funded ratios prior to the market downturn — below 70% — will likely be in a weak position as market losses are fully reflected.”

so if below 70% is ‘relatively low’ then 70% or above is not ‘relatively low’ which some can interpret to be ‘adequate’ should it suit the purposes of the sponsors who pay their salaries.