Politics trumps pension reform in New Jersey….again

The headlines blare:

N.J towns to save $267M in pension costs thanks to new law

when they should blare:

N.J. towns get another way to avoid paying pension costs thanks to a bunch of idiots making pension policy and a bigger bunch of idiots who take them seriously

Pension costs for 2012 are calculated based on the July 1, 2010 valuation which gives municipalities the advantage of knowing their costs early for planning purposes.  Those costs were supposed to total $869 million for the Public Employee Plan (PERS) and $1,104 million for the Police and Fire Plan (PFRS).  Thanks to a 2011 law change those costs are reduced by $43 million for PERS and $224 million for PFRS.

The $43 million figure is easy.  They multiplied the original contribution amount by .9505 for some reason.  The $224 million reduction for PFRS is not so obvious.  They say it’s due to higher employee contributions but based on the latest valuation report for PFRS adding an extra 1.5% (from 8.5% to 10%) in employee contributions on a payroll of $3.8 billion would only net an additional $57 million and the chart has some towns (Pemberton, Frenchtown, Belvidere) somehow paying more.

In the private-sector actuarial world you are not supposed to consider what happened after the valuation date because if you recognize one factor you would need to recognize them all and basically redo the valuation.  So there might be an extra $57 million coming in from employee contributions but what about the worse-than-expected investment gains/(losses) or the flood of new retirees or the pension padding that continues apace?  All these factors are ignored in the public-sector actuarial world where political expediency trumps sound funding policy….again.

22 responses to this post.

  1. Posted by Javagold on October 6, 2011 at 2:41 pm

    so AFTER the fact and they able to cherry pick the numbers that help their cause and not use the numbers that hurt their results…..it must be nice to work backwards to get the results you want…..DAMN FRAUDS !!!


  2. Posted by Tough Love on October 6, 2011 at 6:02 pm

    More kicking the can down the road … INCREASING the probability these Plans will go bust.

    Greed has consequences.


    • Posted by muni-man on October 6, 2011 at 6:50 pm

      Did my own analysis on my town’s recently retired top cop. Based on his pension of just over $120K, his remaining life expectancy, his likely contributions over his career to his pension (I was mucho generous and it’s likely he never contributed as much as I assumed since contribution rates were a lot less or non-existant for many years of his career), I came up with a contribution multiple of a MERE $7.1-to-$1 taxpayer-to-chief ratio to fund this dude’s pension. In net taxpayer dollars it’s $1.086M (total PV lump-sum needed to fund the pension, less FV of his contributions + earnings on those contributions over his career). These plans will implode within the decade and there’s not a damn thing the publics are gonna be able to do about it, much as they’d like to think otherwise. Legal K-rap won’t trump economic reality!! They’re gonna get screwed.


      • Posted by Tough Love on October 6, 2011 at 8:16 pm

        Muni-man, If you’re looking for the taxpayer-paid-for cost of his pension, it’s simply (as of the date of his retirement) the cost to purchase his promised benefits less the accumulated value of his contributions (using for the latter a rate consistent with investment earning during his career).

        So the reader understands the HUGE cost of such a COLA-adjusted pension, assuming he retired at age 55 or a few years later, for each $1 of initial year payout the cost to fund is roughly $22 (which will vary with the assumed interest rate and mortality table). Hence the total cost of a pension starting at $120K annually is $120,000 x 22 = $2.64 Million. If you PROPERLY calculated the accumulated value at retirement of his contributions it will likely be about $400K, leaving $2.24 Million paid for by (or at least the responsibility of, even if not yet paid-for) the taxpayers.

        To put this in perspective, this is the cost of a pension to a corporate executive easily making more than $500K at retirement. Why should taxpayers fund such an excessive pension ?

        ANSWER: Collusion between the Public Sector Unions and Our Elected Officials whereby in exchange for campaign contributions and election support, our elected representatives favorably vote for better pay, pensions, and benefits.

        There is MORE THAN enough justification for Taxpayers to refuse to fund Plans fraudulently garnered in this manner.


        • Posted by Javagold on October 6, 2011 at 8:38 pm

          and if he gets hit by a bus tomorrow ???…..its never a good idea to be worth more dead than alive


          • Posted by Tough Love on October 6, 2011 at 9:01 pm

            Many Public Sector Plans are “joint and 100% survivor” … and often without the appropriate “actuarial reduction” (of about 15%) for an annuity payout period that ends upon the 2-nd death.

        • Posted by muni-man on October 7, 2011 at 11:15 am

          I use my own spreadsheet, not actuarial tables. The nominal value of the pension may be $2.64M over 22 years less your assumed $400K contributions w/ earnings or ~ $2.24M, but the PV (real cost) of his annuity is $1.551M, at 5% over my 21-year assumption with the UNCOLA, less $448K est. contributions w/earnings ($155K actual out-of-pocket contributions and this is where I was generous since I doubt the guy coughed up that much). ($1.551M – $448K = $1.103M) actual cost to the taxpayer. $1.103M/$155K out-of-pocket expense = 7.11 to 1 TP to employee funding ratio. With a 2% COLA, the PV of the annuity becomes ($1.839M – $448K = $1.391M) actual TP cost and the funding ratio increases almost 2% to 8.96 to 1. If you used the fantasyland 8% return figures the plans use, the funding ratios above would shrink from 7.11 to 1.68, and 8.96 to 2.95 respectively for UNCOLA and COLA scenarios which is exactly why the plans want to continue using the 8% ROI. It ain’t gonna work; the plans are gonna crash and no legal jive is gonna bail them out.


          • Posted by Javagold on October 7, 2011 at 11:35 am

            the sheep have no idea how really fraudulent and devastating using the 8% ROI really is

          • Posted by Tough Love on October 7, 2011 at 12:15 pm

            Your Cost #s are too low …. you mentioned the 5%, but did you ignor mortality by just using a 21 year payout period (assumed to be his life expectancy)?

            This isn’t really the correct way to do these calculations. Also, I you didn’t mention his age, but assuming he retired in the mid-late 50’s, his life expectancy is to the early 80’s … quite a bit more than 21 years.

            Additionally inflation has historically been between 3 and 3.5% over long periods. The 2% inflation assumption is too low unless it’s capped (in the Plan) at 2% (or the first 1% of inflation is ignored).

          • Posted by muni-man on October 7, 2011 at 12:58 pm

            I’m not gonna quibble with you. Maybe his life expectancy is a year or so longer
            than 21 according to the tables (he’s 59, so I figured 80 since current male life expectancy is about 77.5). They’ll be lucky to get 2% max. though if COLA’s are reinstated. And I don’t know if he has an old lady or not, what her age might be etc. for a survivor annuity. Other than that, I stand by my figures. They’re accurate enough.

          • Posted by Tough Love on October 7, 2011 at 1:47 pm

            Classic error…. Male life expectancy of 77.5 is for someone now age zero. For each you survive it get older (and that’s even without mortality improvement over time). Should be pretty obvious, for some age 90, they obviously have a positive live expectancy of a probably 3-5 years.

            But you’re correct …. the pensions are ridiculously costly BECAUSE the Plan design is too generous….and ROUTINELY multiples of what the Pension of a comparably-paid Private Sector worker would be.

          • Posted by muni-man on October 7, 2011 at 2:38 pm

            I’m well aware of what you say about life spans increasing as you get older but, absent the tables, I just figured 80 was reasonable for him. There’s one thing I mentioned to JB on this awhile back, and it’s a HUGE wildcard. I am firmly of the opinion that life expectancies for Gen X, Y, Z (if there is one out there) will DECREASE in the years to come. This is purely my anecdotal gut feeling. The younger crowd today might as well be termed Gen ‘S’ as in ‘stressed out of their ever-lovin’ minds’. It’s gonna wreak havoc with their health and overall life spans. They are on the scummiest economic treadmill this country has seen in 60 years, and I really don’t see any improvement even faintly on the horizon, in fact, I see it getting a lot worse (the Wall St. sit-ins might be just a small prelude of things to come). With their e-wired 24/7 lifestyle, the relentless population/economic pressures ahead, shrinking access to affordable healthcare almost a given, mix & shake well and VOILA! – you’ve got shortening life spans in my opinion. Besides, there’s an absolute average life span limit which we’re starting to seriously bump up against. Life expectancy has increased maybe 1 full year?? or so over the last 25 years. This thinking might not play well in medical circles, but that’s the reality of things as I see it.

        • Posted by briandin on October 7, 2011 at 11:42 am

          And the “elites” in the public sector ought to be the “millionaires and billionaires” the so-called President of all of us vilifies daily! As I have said in the past, tax these benefits based on their net present value to the employee. In the private sector, they refer to this as “the total value of employment” – a term our HR dept has always used to justify lower or no salary increases and higher h/c contributions.


          • Posted by muni-man on October 7, 2011 at 12:06 pm

            Not to worry. Economics is gonna do them in, and that’s the real bullet they absolutely can’t dodge. There’s a perfect economic storm brewing in the US and it’s gonna last years – might even be a generational thing. Virtually no economic growth, very high continued unemployment, declining tax bases all over the country, and really pukey market returns in response to all this. They’ll BS about legal protections for pensions ad nauseam etc., but that’s like trying to square a circle – it’s gonna be impossible to fund many of these plans period in the future and they’ll either be liquidated or collapse.

  3. Posted by Eric on October 7, 2011 at 3:08 pm

    I agree with you that the plans do not have a promising outlook, but neither does the US or the US dollar for that matter. If this were a plan crash, we are all on the plane with the pensioners sitting in first class which is meaningless to the final event. The Fed is relentlessly printing money to assist the doomed European banks from also crashing leaving us with a devalued and a depreciated currency.


    • Posted by briandin on October 7, 2011 at 3:33 pm

      I have bought farmland in a more hospitable area, populated by a more freedom-loving populace than NJ. But I concede that the writing on the wall is unequivocally bad for anyone with savings. It is of no consolation whatsoever that the public sector workers are in the same septic tank as those depending upon social security for their retirement.

      Long term food storage, and items of tangible value are the best place to put one’s money. And of course, a few guns don’t hurt as insurance…..


  4. Posted by Eric on October 7, 2011 at 3:19 pm

    Sorry for my typo above. I meant to say on the second line plane crash not plan crash. I wonder why my fingers did that?


  5. Posted by Anonymous on October 7, 2011 at 8:41 pm

    Bunch of losers praying for the end of the world. Get a freakin’ life already.


  6. Pension Reform Should not be used by a Politician for a Hot Button Election Issue like the Mayor Race in Modesto, CA



  7. So do you think the pension fund invested any of its money in ex guv Jonny boy’s new company? Hope not! We’re about to have a Corzine moment! And he’s supposed to be secretary of the treasury in Obama’s second term. Way to go Jonny boy!



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