Did New Jersey Actuaries Break the Law?

Look through the recently released July 1, 2013 valuation reports for the New Jersey pension plans that Buck Consultants prepared and you will find an additional Appendix at the very end of each titled “Revised Results of the July 1, 2012 Actuarial Valuation” which, for the State Police Plan for example, starts off:

Chapter 78, P.L. 2011 increased member contributions from 7.50% to 9.00% of salary. Effective with the July 1, 2012 actuarial valuation, the determination of the State’s 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’s 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.

No argument that this methodology is generally used for public plans but one of the selling points of the 2011 pension reforms in New Jersey was that the additional contributions that public workers were told to make would go to reduce the deficits the plans had run up, hence the variance in the methodology.

The move has been called devious and disturbing and worse:

“This is the crowning act of gimmickry to make the budget look balanced and to undermine the soundness of the pension system,” said Bart Mosley, co-president at Trident Municipal Research in New York.

Christie’s need to “retroactively recalculate the amounts indicates that the state’s financial position is weaker than expected and that more typical budget-balancing solutions have already been exhausted,” [Moody’s Vice President Baye] Larsen wrote.

“The state continues to use one-time fixes that indicate above-average financial weakness,” Larsen wrote last week.

To which the governor’s office responds:

Chris Santarelli, a spokesman for state Treasurer Andrew Sidamon-Eristoff, said the revision follows “standard actuarial practice in using employee contributions to offset employer contributions to the pension system.” The change was analyzed by actuarial consultants and accepted by members of the public pension boards, he said in an e-mail March 25.

The change broke a law and the actuaries admitted as much by essentially putting in their actuarial reports:

We know a law was enacted in 2011 changing the way we are to calculate contributions.  At the behest of our client who wanted lower contributions we ignored that law.

For an actuary in the private sector such an admission would mean losing your job and possibly your freedom.  For an actuary in the public sector (in New Jersey at least) it’s a prerequisite for keeping your job.

18 responses to this post.

  1. Posted by Anonymous on April 1, 2014 at 1:11 am

    even if they did break the law, can the politicians just change the law. i thought that was how is normally done.

    Reply

  2. Posted by Tough Love on April 1, 2014 at 1:19 am

    John, I was curious as to how clear the wording was in Chapter 78, P.L. 2011, but at 124 pages and no index to help find this item particular item, I abandoned that search.

    Can you direct us to the exact section of Chapter 78, P.L. 2011 that states that the incremental employee contributions cannot not be used to reduce the taxpayer contributions.?

    Clearly, the actuarial consultants and members of the public pension boards have no right to violate an unambiguous law.

    Reply

    • I”m in the same boat you are. I couldn’t find it but I put up the blog since the actuaries clearly believed it was in there. It could be a case where there was a “gentleman’s” agreement at the time of passage that this would be done and it was never memorialized but I’ll keep looking.

      If the actuaries have the power to change an assumption or methodology since it’s not the reasonable or the norm then why can’t they use a reasonable valuation interest rate when they explicitly admit that rate in the law is unreasonable to them?

      Reply

  3. What’s the difference between New Jersey and NYC?

    In New Jersey the actuaries lie to cover up taxpayer underfunding of pensions promised as part of terms of employment, even after the employees were forced to give up many of their ill gotten gains through retroactive pension enhancements.

    In NYC, the actuaries (and Comptrollers) lie to cover up the cost of retroactive pension increases for unions demanding raises on top of them.

    In other words, those with power abuse it. And the ruse of having “truth telling” professions such as actuaries to at least force them to fess up to his has become a farce in the era of Generation Greed. With younger and future generations, whether taxpayers, public employees, public service recipients or all three on the losing end every time.

    Reply

  4. Posted by Javagold on April 3, 2014 at 3:44 pm

    Let it collapse. Or it will collapse.

    Reply

  5. Posted by Anonymous on May 25, 2014 at 6:11 pm

    John, do you know anything of the history of the actuaries the systems use? Is it a New Jersey cocktail hour deal or are they using the best the market has to offer? What’s the process for the contracts?

    Reply

    • As far as I know it’s always been Buck and Milliman though I heard that at one time Buck did the Teachers and Milliman did the rest but then some trustees raised issues so they switched.

      I don’t know if there’s an RFP process for actuarial services though, as elsewhere in NJ with professional services, there is a lot of discretion provided to those who make the decisions.

      Reply

      • Posted by Anonymous on May 26, 2014 at 7:48 am

        Are there any options out there that would be better? I was looking at Illinois reports and they don’t seem better.

        Reply

        • I lean towards getting honest numbers from truly independent actuaries but, in the short-term, that would not be ‘better’ for decision makers who would need to put in a lot more money or cut back benefits.

          GASB is moving that way and if we get people wondering why these plans that have been contributing their ARC are so underfunded maybe we’ll get there. AAA might also have a bigger role they could play here.

          Reply

          • Posted by Anonymous on May 26, 2014 at 8:49 am

            I know some states have an independent actuary do valuation work for the legislature. Do they do this in New Jersey? Sorry, I’m not very on top of New Jersey. In Illinois, they’ve taken the first step of having another actuary at the state, but they are just reviewing work, not also performing it. This is particularly concerning given the recent reform and decisions being made based on these valuations.

          • Posted by Anonymous on May 26, 2014 at 8:58 am

            Why are there no standards for what an actuary report should contain? GFOA lays out a CAFR, but there are always these other actuary reports that seem to just be whatever pops into their minds?

          • Posted by Taxpayer on May 26, 2014 at 10:19 am

            Are there “truly independent actuaries?” “jumbo shrimp?”

        • Posted by Anonymous on May 26, 2014 at 10:07 am

          Just got notification on this post and now I’m irritated again. Why don’t other actuaries in the public sector point out when work is not acceptable? Did they learn nothing from the practices of Enron and company in the related field?

          Seems like they’d know they all get painted with the same brush and so go out of their way to rectify these bad examples. You know, to keep being employed?

          Reply

          • They are when they are paid for it. For example Milliman was brought in by the Detroit bankruptcy people to challenge the canard of full funding in the official GRS report for the plans though the methods and assumptions Milliman used in Detroit to get the underfunding they would never consider using in their own plans (i.e. New Jersey) unless they were told to which is just as bad.

          • Posted by Anonymous on May 26, 2014 at 3:00 pm

            The only way to have actuarial work that can be relied on is to pay multiple firms to witch hunt each other? That seems inefficient, but considering the amount of money we are talking, probably still worth it.

          • Posted by Anonymous on May 28, 2014 at 2:35 am

            How much are we talking for an audit? Is it within the realm of reasons for the unions to pay for an independent one?

  6. […] What he left off mentioning were the revaluations undertaken for the express purpose of lowering contributions, the dodgy actuarial methods,  and the arbitrary contribution reductions (with one outright […]

    Reply

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