Impeachable Offense?

We have a law in New Jersey that the pension contribution for the fiscal year 7/1/14 – 6/30/15 will be the ARC multiplied by 4/7ths.  The ARC is calculated by added an amortization portion of the unfunded liability to the Annual Cost of benefits accrued in a year and reduced by Employee Contributions up to the percentages deposited prior to the 2011 law change that raised employee contributions.  Those additional contributions are not included in the formula so they can help reduce the underfunding.

This calculated state contribution was set to be $2.4 billion based on July 1, 2012 valuation reports.  Governor Christie in his budget address of February 25, 2014 promised to included the full pension contribution of $2.25 billion without explaining where that reduced figure came from.  The actuarial reports for July 1, 2013 were presented on February 27, 2014 and we now know.

According to  a story in NJSpotlight:

 Christie complained during his annual Budget Message on February 25 that the rising costs of pensions, retiree health benefits, and debt service were crowding out other budget priorities. The governor threatened to take unilateral action unless the Democratic-controlled Legislature took further steps to reduce the state’s retiree liabilities, presumably by requiring public employees to pay more toward their pensions.

What Christie didn’t tell the Legislature or the public that day was that his Treasury Department had already instructed the actuaries responsible for calculating the state’s required pension payment to change the formula not only to cut the state’s pension payment for the upcoming year, but to do so retroactively for the current year.

Christie’s decision to change the pension calculation formulas came as a surprise to Democratic legislative analysts, who wondered why Christie was putting only $2.25 billion — instead of the expected $2.4 billion into the pension system in the Fiscal Year 2015 budget. The change in the funding formula was buried in the actuarial reports on the state’s pension systems that were issued on February 27 — two days after Christie’s speech.

On page 5 of the PERS report prepared by Buck Consultants the change is explained:

Effective with the July 1, 2012 actuarial valuation, the determination of the State and Local Employers’ normal cost contributions have been revised to reflect the use of all member contributions as an offset to the gross normal cost. This was the methodology used to determine the State and Local employers’ normal cost contribution prior to the enactment of Chapter 78, P.L. 2011 and is consistent with the methodology typically used by contributory public-sector retirement systems to calculate the employer’s normal cost contribution. The July 1, 2012 results, which are shown for comparison purposes in this report, reflect this change in method. Appendix H develops the revised results of sections presented in the Annual Report of the Actuary Prepared as of July 1, 2012, which was published February 15, 2013, affected by the change in method.

For the Teachers plan report prepared by Milliman it’s on  page 10:

The State portion of the normal cost is reduced by expected member contributions during the upcoming year. Chapter 78, P.L. 2011 increased the employee contribution rate from 5.5% to 6.5% effective October 1, 2011 and by 1/7 of 1% each following July 1 over the next 7 years until 7.5% is attained effective July 1, 2018. Typically, all member contributions are used as an offset in developing an employer’s normal cost.

When Chapter 78 was passed, it was our understanding that the additional member contributions in excess of 5.5% would serve to reduce the unfunded actuarial accrued liability rather than serve as a direct offset to the State’s Normal Contribution. This valuation reflects a change in the treatment of the contributions in excess of 5.5% to now serve as a direct offset to the State’s Normal Contribution for the fiscal year ending June 30, 2015. This change was also applied retroactive to the 2012 valuation for determining the State’s Normal Contribution for the fiscal year ending June 30, 2014.

This report contains the modified results of the 2012 valuation incorporating this change. The change in this treatment reduced the State’s Normal Contribution by $132.6 million for the fiscal year ending June 30, 2015 and by $115.6 million for the fiscal year ending June 30, 2014.

 

The actuary understood that under Chapter 78, a law, the “additional member contributions in excess of 5.5% would serve to reduce the unfunded” yet a change was made.  According the NJSpotlight story:

“This year, however, Milliman was instructed by the Division of Pension and Benefits to change the formula.”

Which is where the impeachable offense comes in.  The actuaries understood the law but chose to ignore its provisions at the  behest of the Division of Pension and Benefits which could have just as easily ordered them to reduce the calculated contribution amount by some arbitrary percentage and report that to the public as their ‘recommended’ contribution.  What then is the role of the actuary for the New Jersey pension plans beyond shill?  Shouldn’t they be impeached?

 

25 responses to this post.

  1. Posted by Tough Love on March 26, 2014 at 12:16 am

    It would seem that Buck and Milliman have some serious explaining to do. How can they violate a law (that is relevant to their work) just because an involved party tells them to do so?

    Reply

  2. Posted by Anonymous on March 26, 2014 at 12:30 am

    TL. why are you against putting less money in the pension fund, that move is right up your alley. You want it to fail the faster the better.

    Reply

    • Posted by Tough Love on March 26, 2014 at 1:23 am

      You’re twisting my goal …. a fully funded pension system, but with promised Public Sector pensions EQUAL in value to that typically promised Private Sector workers making the SAME pay, retiring at the SAME age, and with the SAME years of Service.

      Do you have a problem with EQUAL ?

      Reply

  3. Posted by Anonymous on March 26, 2014 at 1:33 am

    WAKEE UP YOU WONT GET WHAT YOU WANT UNTIL IT FAILS. HAVENT YOU BEEN WATCHING. NOBODY IS GOING TO CHANGE A THING OTHERWISE.

    Reply

  4. Posted by MJ on March 26, 2014 at 6:53 am

    I have trouble believing that the budget would be able to accommodate a huge pension payment without crowding out all of the other debt obligations, etc.

    Reply

    • Posted by Jomama on March 26, 2014 at 11:12 am

      You mean like the 2+ billion in corporate tax breaks he provided while creating no jobs?

      http://www.nj.com/politics/index.ssf/2013/09/christie_signs_bill_to_expand_corporate_tax_breaks_in_nj.html

      Reply

      • Posted by MJ on March 26, 2014 at 12:05 pm

        Probably has to be some incentive as businesses are moving to tax friendlier states. NJ is at the bottom of the list as a business friendly state. Guess they need more private sector low pay jobs to help fund the oncoming avalanche. Did you note that Fitch has downgraded NJ debt outlook to negative. Most of that is due to the massive pension obligations which of course will never get paid. Let’s see is Sweeney shuts down the state government. Most won’t even notice

        Reply

        • Posted by Tough Love on March 26, 2014 at 1:03 pm

          New Jersey state Senate President Stephen Sweeney is the general vice president for the Iron Workers International. In that position he realizes that what is good for PUBLIC Sector Unions … HIGHER taxes to support their high pay and grossly excessive pensions and benefits………. PRIVATE Sector Unions benefit from keeping taxes as LOW as possible to support business investment and job growth (including work for those in Sweeney’s PRIVATE Sector Union).

          Sweeney realized this when he supported the Public Sector pension changes two years ago. Now, with his sights on NJ’s Governorship in 2 years, I fear he too will succumb to the demands of the Greedy Public Sector Unions ….. just to get their votes and financial support for his campaign.

          Reply

  5. Posted by haz on March 26, 2014 at 7:57 am

    I understand TL what you mean its not equal to Private sector but, they had the same equal opportunity we had. That is why i choose Public NOT Private. Pretty simple.

    Reply

    • Posted by Tough Love on March 26, 2014 at 11:19 am

      So, if you understand that Public & Private Sector pensions are not “equal” …….. and lets be clear, Public Pensions are ALWAYS multiples greater in value at retirement ….. then you should understand why this is unjust to the Taxpayers who are called upon to pay for all but the VERY SMALL share (typically 10-20% of total Plan costs) that Public Sector workers actually pay for themselves.

      And ………. why strong Taxpayer advocacy to change it is both necessary and appropriate.

      Reply

  6. The law, as far as I’ve been able ascertain from a quick review, does not specify that the increased employee contributions will be used in any particular way in the funding policy.

    It is not the place of the actuaries to determine the funding policy. They should serve to advise and can find some practices to be unacceptable, but deciding whether the increased employee contributions will be used in the normal cost offset or expected to flow through as gains is not really within their scope.

    Milliman in particular seems to have made the change abundantly clear in their narrative, including the source of the policy change.

    So the real question is “who” had the intent of the extra payments to not be normal cost offsets? Was it the executive or the legislative? And were there any other safeguards, other language, or even gentlemens agreements?

    Reply

  7. Posted by MJ on March 26, 2014 at 3:05 pm

    Isn’t the Iron Workers union in Phila involved in some sort of scandal or illegal dealings. Sweeney was asked to oversee it or something. I remember reading about it a few weeks ago. There aren’t any strong Rs so I guess Sweeney has it in the bag

    Reply

    • Posted by bdinicola on March 26, 2014 at 5:52 pm

      That would be my take, and why I had the sense of urgency to get my house sold and family out of NJ before Christie (who could at least veto the crazy shenanigans originating from the marxocrats in Trenton) leaves office.

      Without the line item veto in the hands of a governor who has no need to pander to low information voters and psts, the taxpayers of NJ are the walking dead and don’t even realize it yet.

      Reply

  8. Posted by bpaterson on March 26, 2014 at 3:11 pm

    my town during this years budget session had a decrease in pension obligation from last year based on the states calc 1 month ago. Now for the budget introduction this month, the finance committee noted that there was an additional savings to the pension budget obligation over what they had taken as a credit already. What the heck is going on. Of course, our taxes are scheduled to still go up though, just not as much.

    Reply

    • Posted by Tough Love on March 26, 2014 at 4:01 pm

      Be careful how you use the term “pension obligation”.

      The “obligation” is the BENEFITS promised .. WHATEVER they cost, for which total costs in excess of worker contributions (and investment earnings thereon) is ALL the responsibility of the Taxpayers.

      How/when the taxpayers pay for that “obligation” is simply accounting and the time value of money. …. that is, until the taxpayers finally understand the magnitude of the financially “mugging” perpetrated upon them by the collusion between the Public Sector Unions and our bought-off elected officials, and refuse to pay for these grossly excessive pension & benefit promises.

      Reply

      • Posted by Tough Love on March 26, 2014 at 4:23 pm

        And for those who question my claims of Elected Official/Union collusion …..

        Walter Russell Mead, the James Clarke Chace Professor of Foreign Affairs and the Humanities at Bard College. said* ………. There is a kind of a conspiracy between government officials, politicians, and Union leaders ….

        * http://pensiontsunami.com/blog/?p=163

        Reply

        • Posted by MJ on March 26, 2014 at 9:59 pm

          They are all in on it. Don’t need an expert to explain this to us. That’s why it is so out if control. publics should be demanding reforms all around but I suppose they are afraid of upsetting the apple cart

          Reply

          • Posted by Brian on April 6, 2014 at 2:47 pm

            I just read an article regarding Detroit’s bankruptcy. It renewed my interest in the Constitutional “barriers” being cited by the unions against efforts to alter state pension promises.

            The author of that article noted:

            “The federal Contract Clause only bans laws impairing the obligation of contracts, and a decision [by a municipality] to file for bankruptcy isn’t a law. (For example, states don’t violate the Contract Clause by merely breaching contracts).”

            When the inevitable failure to pay so-called contractually promised benefits happens because the money is all gone, I think it will be nothing more than a “breach” of the promise. Stated another way, the law may “require” funding of the pension promises to public sector ticks but failure to do so, and subsequent failure to honor the promises, does NOT violate a constitutional ban (State or Federal) on impairing a contract.

            It seems at least an implicit promise by the State of NJ (or a subdivision) to “fully fund” the pensions, but Iess clear to me about the ratio of taxpayer $$ to worker contributions? Is the “contract” is defined with such granularity as to require a particular formula or ratio between state/employee contributions to maintain full funding status?

            Also, at what point does recognition set in that on the present course, the system will not have enough money to meet the promises? Other than by the author of this Blog, of course.

            Summarizing, when the account balance does approach zero, and no effort is made to pass any law to fix the problems that exist today, I believe the legislature will not and need need to pass a law impairing a contract. They will simply throw up their hands, say “We’re sorry” and default without any lawmaking whatsoever.

            If that were to happen (or if some modification by lawmaking were made) I presume, the Union lawyers would seek a “writ of mandamus” to compel the state to act (i.e., provide the funding needed to sustain the benefits originally promised). This is consistent with their current approach anyway.

            Assuming the union(s) can show a substantial impairment to a contractual promise by failure to fund the pension promises, I believe the state/municipalities win under federal law, at least, so long as they can show a significant public policy interest behind the failure/modification:

            To survive Contract Clause review, a legislative enactment that constitutes a substantial impairment of a contractual relationship must have a “significant and legitimate public purpose.” Energy Reserves Grp., 459 U.S. at 411 (citation omitted); accord Flanigan’s Enterprises, Inc. v. Fulton County, 242 F.3d 976, 989 (11th Cir. 2001)34 (considering whether the enactment is “necessary to meet an important government interest”); Davken v. City of Daytona Beach Shores, Fla., 366 Fed. App’x 40, 41 (11th Cir. 2010) (“A regulation does not violate the Contract Clause so long as it serves a `significant and legitimate public purpose’. . . .” (citing Energy Reserves Grp., 459 U.S. at 411-12)). The significant and legitimate public purpose may include “the remedying of a broad and general social or economic problem.” Energy Reserves Grp., 459 U.S. at 412. However, “the public purpose need not be addressed to an emergency or temporary situation.” Id.

            In TAYLOR v. CITY OF GADSDEN, (N. D. Alabama, 2013) the Court found that under the U.S. and Alabama constitutions, an Alabama municipality did not have to raise taxes to the point of forcing a greater exodus AND crowding out other expenses will serve a legitimate public purpose.

            The only question becomes whether the above analysis applies under the NJ state constitution, as well.

            .Anyway, it sure looks like the unions are assuming that if they show a contractual promise, their work is done. Yet, this is not true at all. They still fail if the State can demonstrate why the changes/actions it takes are in furtherance of a legitmate state interest. Clearly, when marxocrat legislatures take actions which essentially pi$$ all over the very sector whose votes they have been buying for so many years, things have reached the point where the existence of such an interest is beyond “legitimate” and actually “compelling”.

          • Posted by Brian on April 6, 2014 at 3:08 pm

            By the way, the recent Arizona case had a separate amendment to their State Constitution specifically relating to pensions as a contractual promise, above and beyond the impairment of contracts clause already there.

            So, I don’t think it is at all inconsistent to say that NJ, which has no separate clause in its Constitution relating to pension promises, would give the Supreme Court Justices (or lower court appellate judge) any problem determining a legitimate state interest.

            So, as to the most recent COLA business, I believe the lower court judge will be affirmed – a contrarian view?

          • Posted by Brian on April 6, 2014 at 8:12 pm

            One last point (beating a dead horse). To show how easy it is to amend the NJ Constutution to take away a so-called guaranteed promise to a public worker, recall this overwhelmingly approved question on the 2012 ballot:

            “The New Jersey Judicial Salary and Benefits Amendment, also known as Public Question 2, was on the November 6, 2012 ballot in the state of New Jersey as a legislatively-referred constitutional amendment, where it was approved. The measure amended the New Jersey Constitution to mandate that more contributions from judges’ and justices’ salaries be given for judicial pensions and health care in the state.”

            Heaven forbid that, when all else fails, a question gets on the ballot to put the public sector workers in their rightful place. Not saying NJ is there yet, but the point is that the PST’s are destined to fail.

      • Posted by MJ on March 26, 2014 at 9:57 pm

        Just read something where towns and municipalities have not been paying their contracted share if PILOT and counties are going after them. More costs to the towns so less for pensions. What a joke!

        Reply

  9. […] taking $1.5 million from capital improvements and $2.2 million from a pension gimmick (explained here) was the big news (though there was a suspicious line item dealing with interest on Bond […]

    Reply

  10. […] million in capital improvements and a $2.2 million reduction in the pension contribution due to an underhanded gimmick imposed last month by Governor Christie for all pension contributions so he could retroactively reduce the pension […]

    Reply

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