Calculating What’s Expedient – Politically

Joshua Rauh, GASB, and Moody’s would all like to see public pension plans report the value of their liabilities using an interest assumption in the 4% range instead of the 8% most use but the cost of doing all this extra work has been cited as a barrier to providing that information.

Last week New Jersey announced what localities would need to pay into PERS and PFRS for 2014 per a DLGS email blast:

On April 15, 2013, the Christie Administration issued a press release regarding Fiscal Year 2014 pension bills for local governments across the state.  These bills, which provide the formal actuarial assessment of  pension costs to each local government with employees in the Public Employee Retirement System (PERS) and the Police and Firemen’s Retirement System (PFRS), are accompanied by actuarial projections that demonstrate that pension costs are $540 million – or 25 percent – lower for the coming fiscal year than they would have been without pension reform.  More information is available to view online at http://www.state.nj.us/treasury/pensions/2014-employer-billing.shtml.

A comprehensive spreadsheet comparing the Fiscal Year 2014 pension contribution amounts against last year’s actual bills and against the pre-reform baseline of projected pension costs for every local government unit in New Jersey can also be found at http://www.state.nj.us/treasury/pensions/pdf/financial/2014-pers-pfrs-ch78-compare.pdf.

That’s right, they reran the valuations with cost-of-living-adjustments (COLAs) on benefits reinserted so they could brag about the 25% savings in contributions (or possibly warn of the added cost if COLAs get reinstated retroactively by the courts) but they can’t change a 7.9 to a 3.85 and wait the 20 seconds.

14 responses to this post.

  1. Posted by Tough Love on April 22, 2013 at 3:42 pm

    A re-calc using a different interest rate should be trivial (unless they don’t use computers). I’d like to see the figures using 4% and the 5.5% that Moody’s will be using (and whats close to what Private Sector Plans use)..

    Reply

    • Posted by Al Moncrief on April 22, 2013 at 6:57 pm

      TL, in the most recent federal “Highway Bill’ Congress approved the use of return assumptions for PRIVATE sector defined benefit plans that average 7.5 percent, in the same neighborhood as most public sector pension plans. Al

      Reply

      • Posted by Tough Love on April 22, 2013 at 7:43 pm

        Al you need to educate yourself. First, the Plan “funding ratio” is Assets divided by the Present Value of Plan liabilities. While yes, that’s the expected investment return assumption, it’s NOT the interest rate assumption used to discount Private Sector Plan liabilities to the valuation date. For that purpose Private Sector Plans are REQUIRED to use a MUCH more conservative rate consistent with long-term high-quality Cooperate Bonds…. about 5.5%.

        Unlike in Private Sector Pension Plan valuations, Gov’t Plans (under GASB rules …. which are changing) discount Plan liabilities using the SAME assumption that they come up with for investment returns about 7.5%. VERY few financially educated people believe that it is appropriate to discount a supposedly “guaranteed” investment at a rate such as 7.5% in the current environment.

        Reply

        • Posted by Anonymous on April 23, 2013 at 12:49 pm

          the good news for the private sector is that that a company is not held accountable if they default on pension promises. They merely go bankrupt and start a new company. Private companies are much more honorable than the government.

          Reply

          • Posted by Tough Love on April 23, 2013 at 1:29 pm

            While there are pension abuses in the Private Sector, most are from quite a ways back, with changes to laws/regs. to prevent further abuses (mainly related to mergers and acquisitions). However, the abuses in the Private Sector don’t hols a candle to those in the Public Sector.

            While I’m sure you consider “abuse” to be the act of not fully funding a promised pension benefit no matter how generous, the Taxpayers not riding this gravy train go back a step in the process, and find the “abuse” to be the granting of these grossly excessive pensions in the first place.

            “Funding” wouldn’t be a problem if the generosity of Public Sector pension Plans was equal to that typically granted Private Sector workers by their employers.

        • Posted by Al Moncrief on April 23, 2013 at 3:24 pm

          Hey TL, you should read “Retirement Heist” to learn about pension abuses in the private sector (arguably much more egregious than any abuse in the public sector pension arena. My prior post reads: “in the most recent federal “Highway Bill’ Congress approved the use of return assumptions for PRIVATE sector defined benefit plans that average 7.5 percent, in the same neighborhood as most public sector pension plans.” I do not see anything in this statement that is incorrect. Al

          Reply

          • Posted by Tough Love on April 23, 2013 at 4:55 pm

            Oh please … clearly the implication was that was Public Sector pension valuation practices are comparable to Private Sector practices.

            They are not. So far apart in fact that Private Sector Plans using Public Sector methods and assumptions would be civilly (and perhaps criminally) penalized.

  2. Posted by Javagold on April 23, 2013 at 12:16 am

    They should be multiplied by ZERO.

    Reply

  3. Posted by eatingdogfood on April 23, 2013 at 2:08 pm

    If The Democrats Didn’t Give ” Sweetheart Deals ” To Your Public Service Union.
    Goon Employees To Get Reelected; You Would Have Plenty Of Money and The.
    Taxpayer would have Some Spare Change in His Pockets! Democratic Hustler
    Politicians + Corrupt Union Goons = BANKRUPTCY BABY! Time To Bring.
    RICO Conspiracy Charges Against The Hustler Corrupt Democrats and the.
    Criminal Unions!

    Reply

  4. Posted by George on April 24, 2013 at 9:08 pm

    Here is something interesting to ponder. The difference between the 8% and the 4% interest assumption has no short term practical implication unless someone tries to leave the pension scheme.

    The small but wealthy community of Canyon Lake Ca is attempting to terminate their participation in the California pension scheme Calpers. In effect they are saying they believe the number is 4% not 8%, and are willing to put actual money behind their opinion by demanding a buyout.

    From what I read Canyon Lake will be able to hire retired police and fire from other cities without paying health benefits as the retired police already have lifetime health benefits.

    Calpers Receives Termination Letter From CA City
    http://www.valuewalk.com/2013/04/calpers-receives-termination-letter-from-ca-city/

    So John would you recommend Union Co exit its pension plans if they can get an interest assumption of 8% on their final liability payment?

    Reply

  5. By paying the employer contribution of teachers’ pensions on behalf of school districts, the state essentially is paying for spending decisions over which it has no control. These individuals are not state employees, and the state should not pay these pension costs. The body of government that approved these costs – the school districts – should be held accountable and responsible for these spending decisions. While the state should continue to pay for the unfunded pension liabilities of years past, local school districts should pay for the normal pension costs of their employees moving forward. It is both fair and fiscally responsible for costs to be paid where they are incurred.

    Reply

  6. Lawmakers in both parties are worried that shifting pension costs to downstate school districts will result either in higher property taxes or cuts in school programs.

    Reply

  7. Three cities in the state — Mammoth Lakes, Stockton and San Bernardino – are going through municipal bankruptcy, largely because of unsustainable pension costs. An ongoing court challenge will determine if those obligations can be reduced to help those cities, or others in the future, climb out of the hole.

    Reply

  8. Posted by bpaterson on June 3, 2013 at 5:22 pm

    Looking back even the politicians for the last 10 years had by actions admit that the pension structure was unaffordable and unworkable, that’s why they only minimally funded it over that time. As residents over this same time we were completely clueless to this malfeasance and paid our taxes as if everything was going smoothly. In the last few years at least bloggers like Mr Bury and the news media have started to point this out. But note the residents and taxpayers did not take any risk, it was the politicians ignoring their responsibility, and the employee collective bargaining units controllers that were ignoring the red flags. The residents and the employees are clean in all this. If there is a debt where will it come from? As a resident who at least has some heart, I say sell the NJ turnpike as the last resort and use that money to cover all unfunded pension liabilities. Then readjust pension numbers to be more sane. Accountability for this malfeasance by the higher authorities will still need to be assessed of course.

    Reply

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