Posts Tagged ‘pension’
Today: “no one in their right mind would say that what we did in ’11 totally fixed a problem that is in the 30-40 billion dollar range”
but they did:
New Jersey Governor Chris Christie is going to defer most of a $1.6 billion pension payment due next month into the next fiscal year to balance the budget for the current year. The announcement will be made this coming week and, to deflect from this fiscal chicanery, he will call out the legislature to get New Jersey public employees into 401(k) plans. The campaign kicked off this past week at the Peterson economic summit with a criticism of the “insanity of a defined benefit pension system”:
and continues with an article planted in the Wall Street Journal.
But going to a Defined Contribution (DC) system does not guarantee any savings to taxpayers since DC plans can be structured to be just as expensive as the current DB system.
Though what it would provide is transparency. The cabal currently manipulating costs downward will be out of business and there would be no surprises – for taxpayers having to pay for the underfundings of the past or retirees losing their COLAs.
The other advantage (or disadvantage to some) will be the elimination of those games played to pump up benefits without having them paid for. For example:
The July 1, 2013 actuarial reports for the New Jersey pension plans are coming out and if you are of a mind to explain to your teacher friends why they will soon be seeing Detroit-type ‘adjustments’ to their pensions just point them to page 8 of the Milliman report for the Teachers Plan – TPAF – (Buck does the valuations for the other 6 plans in the system) titled ‘Risk Measures.’ Search the Buck reports and you won’t even find the word ‘risk’ mentioned but Milliman beginning with their July 1, 2009 report thought it a good idea to mention that…..
In theory if you are putting away enough to cover benefits accrued during the year and paying off any past liabilities over some period of time (30 years in NJ) then your unfunded liability should be going down and your funded ratio going up. That’s not the case for New Jersey pension plans and it will not be the case when the July 1, 2013 valuation reports are released this coming week.
As of July 1, 2012 the unfunded was reported to have increased to $47.2 billion from $41.7 billion as of July 1, 2011 with the funded ration dropping from 67.5% to 64.5%. This year those numbers will likely be $52 billion (as already leaked) and around 61%. Is this an anomaly?
No, it is by design. Public pension funding is all about getting the contribution as low as possible and a primary tool is the funding method (per the valuation report):
The Projected Unit Credit Method was used as required by Chapter 62, P.L. 1994 as modified by Chapters 115, P.L. 1997 and 133, P.L. 2001.
Logically straight Unit Credit should be used since that values benefits accrued during the year but PUC has the advantage of developing much lower current-year contribution (if interested here is a brief powerpoint explanation) but in the case of New Jersey it also develops some bizarre Normal Costs.
The New York Times reported today that a “blue-ribbon panel of the Society of Actuaries — the entity responsible for education, testing and licensing in the profession — says that more precise, meaningful information about the health of all public pension funds would give citizens the facts they need to make informed decisions.”
Basically the report made four very sensible recommendations that most citizens would be amazed had to even be recommended. Anyone without ulterior motives should have no problem agreeing with three of them:
- a plan’s funding goal should always be 100 percent
- disclosure of a “standardized plan contribution” that would be calculated by all plans using the same discount rate and funding methodology
- not using funding instruments that delay cash contributions (i.e. Pension Obligation Bonds)
Then there is the tricky, though no less valid, recommendation:
According to a story in the Detroit Free Press:
Orr proposed 34% cuts to the pension checks of general city retirees and 10% to police and fire retirees.
But those cuts would be reduced to 26% and 4%, respectively, if the city’s two independently controlled pension boards agree to support the plan of adjustment.
The difference is probably because retirees in the General City plan likely get Social Security benefits.
The bottom line:
- Benefit accruals under the current formulas cease as of June 30, 2014
- GRS benefits cut 34% for retirees and beneficiaries with the July, 2014 check, 34% (and maybe more) for those still working, and no mention of vested terminees
- PFRS benefits cut 10% for retirees and beneficiaries with the July, 2014 check, 10% (and maybe more) for those still working, and no mention of vested terminees
- Hybrid plans to be set up for workers to accrue benefits after July 1, 2014 as part of a “hybrid program that will contain rules to shift funding risk to participants in the event of underfunding of hybrid pensions”
- A bizarre carrot allowing for an undefined “restoration payment” in 2023 if a plan is 80% funded but requiring the interest rate used for valuing liabilities to be 6.25% for GRS and 6.5% for PFRS.
The full text of the plan is out and here are the excerpts relevant to the Detroit GRS and PFRS:
The Public Broadcasting Service (PBS) has recently been doing a series on public pensions in peril which seems to have kicked off around the time that Fox Business began their Pension Crisis: The Gathering Storm series. PBS put up an infographic, looked at a global perspective, and focused on Illinois and California providing valuable coverage of the next major bust (which will be on a scale that will dwarf the predatory lending fiasco of the last decade). However the series will end because the funder has been linked to an agenda (which presumably anyone who funds or advertises on public media needs to be devoid of).
Now that the bubble has burst perhaps New Jersey Governor Christie will listen to some unbiased advice.
Click here to see a slideshow on a wordpress.org site* of the six things that Christie, in his humbled state, can now be told about his policies that maybe he might be inclined to consider, if not act upon.
* This is primarily to test how slideshows would look but pictobrowser doesn’t work with wordpress.com so I had to link to a .org site. Slide the mouse over the word Notes below the pictures to get the full text.