NJ Pension Lottery: Reporting Lies

In the maneuvering over another New Jersey sham budget nj.com reported:

But state Senate President Stephen Sweeney(D-Gloucster) and Assembly Speaker Vincent Prieto (D-Hudson) say they’re willing to play ball on what could have been a controversial component in budget talks: Christie’s desire to boost the public pension fund with proceeds from the state lottery.

“The governor wants to get two bills,” Prieto said Thursday. “I may give one of the two. I think that’s a nice average. If it were a baseball player, you’d be Hall of Fame right away.”

A gimmick that will partially mask the depth of the problem while lowering contributions which will lead to an earlier depletion of assets – but you people already knew that. The problem is that people who get their news from the Star Ledger and other mainstream media sources remain in the dark as obvious lies are allowed to to pollute the discussion unchallenged. For example:

NASRA ARC Outlier

The National Association of State Retirement Administrators (NASRA) released an issue brief comparing Actuarially Determined Contributions (ADC) to Annual Required Contributions (ARC), a concept introduced by GASB Statement 25 and defined essentially as the sum of the normal cost (the estimated cost of  benefits earned each year); and an amortization payment. They conclude:

On a weighted average basis, states’ percentage of ARC/ADC paid since FY 2001 ranges from less than 40 percent to more than 100 percent. In the median, state plans received 97.0 percent of their required contributions, and 85.3 percent as a weighted average. The average actuarially determined contribution received for the period was 90 percent, as a few larger plans pulled down the average because they received a relatively lower portion of their ADC.

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And the state that really pulled down the average:

Open Amortization Paper

Number three on the list of actuarial gimmicks for public pension funding (after allowing negative cash flow and asset smoothing) is a perverse method of amortizing unfunded liabilities that is  accepted within the politician/actuary cabal to understate contributions. Independent observers (or those not being bribed for an opinion) decry open amortization and now we have a scholarly work on the subject.

An analysis of state pension plans from across the country finds that the already troubling state of pension finances may be even worse than it first appears because many pension managers are making their plan’s financial condition look better by perpetually putting off payments.

“Imagine having a 30-year mortgage and each year, instead of making your mortgage payments and having 29 years of payments left, you simply re-amortize the remaining liability over another 30-year period,” says Jeff Diebold, an assistant professor of public policy at North Carolina State University and lead author of a paper on the analysis.

“Using this approach, you can manufacture lower amortization payments for yourself, but you will not eliminate the underlying liability,” Diebold explains. “That’s called open-ended amortization, and despite being an unscrupulous accounting practice, it is widespread among state pension plans.”

State officials can adopt open-ended amortization to reduce the amount the state must contribute to the pension system each year or to improve the appearance, but not the reality, of the state’s current funding effort. Regardless of the reason, open-ended amortization exacerbates funding shortfalls, compounding the risk that the state will have insufficient funds to pay its pension obligations to retired state employees.

“Worse still, we find that officials are most likely to adopt open-ended amortization periods when their plan’s financial condition worsens and would otherwise require higher contributions from the state,” Diebold says.

The paper itself requires a $38 investment for the pdf or $6 to be able to read it for 48 hours. I am not sure about copyright issues with this system but I went with the $6 and here are highlights from my reading:

U.S. Pension Crisis

I missed this 2013 book when it came out but my Amazon order came yesterday and here are some excerpts starting with a seminal flaw in the valuation of underfunded plans that I also note:

Truth Behind NJ Lottery Gimmick

New Jersey Treasurer Ford Scudder appeared before lawmakers yesterday to make a pitch for the administration’s proposal to use the revenue-generating state Lottery to help prop up New Jersey’s beleaguered public-employee pension system. As njspotlight reported:

The bill was only put up for discussion yesterday, and several lawmakers praised the proposal, including the bipartisan sponsors of the legislation. But Sen. Jennifer Beck (R-Monmouth) suggested she’s hoping to hear from Wall Street rating agencies before making a final decision on the measure, which the Christie administration is looking to enact by July 1.

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“I don’t really see there being a risk to this. It’s going to improve our funded ratios tremendously, such as our investors are going to see us having improved our fiscal situation,” Scudder said. “At the same time, we’re not impacting programs funded by the Lottery, so I don’t really see negatives to this.”

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Beck, the GOP senator, said she would like one of the major Wall Street rating agencies to weigh in before any final votes on the bill are cast. Scudder said Treasury has been updating the rating agencies on the proposed transfer, but has yet to provide them with a formal presentation.

“I certainly would feel more confident if I knew that those that are doing this on a regular basis, and those that do this kind of analysis for a living, embrace this,” Beck said. “It would be nice to know now, if possible.”

That analysis was done here but I fear:
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If not, here it is:

PPR (3) Real Result

What will the ballyhooed reforms of the Pennsylvania retirement system do for the plans? Based on valuation reports for the Public School Employees’ Retirement System (PSERS) as of June 30, 2016 and the  State Employees’ Retirement System (SERS) as of December 31, 2016 as filtered through US Census data we get these pertinent numbers:

PPR (2) Choices

At 3 pm today the bill will be signed by the governor and, according to the actuarial note on the Pennsylvania Pension Reforms (PPR), the state will save some money on contributions and eventually reduce unfunded liabilities. This will be accomplished by having future participants make larger employee contributions for lower benefits.