Pension Padding Payment Perversions

NJ Watchdog has yet another story about an elected official getting a job on the government payroll to obtain the 3 years of higher salaries that would greatly increase their pension.  This is particularly damaging to the New Jersey pension system since it creates massive additional late-service accruals which were not anticipated and, due to the simplistic way contributions are split among localities by overall salary, will not be properly funded.

There are several examples of this scam being played out and though I do not have the particulars on benefits that would be payable to former assemblyman and current Division of Motor Vehicles employee and Christie-backer Larry Chatzidakis there is the example of a former Union County freeholder that would serve just as well.

Citing a desire to spend more time with her family, Freeholder Deborah P. Scanlon announced on March 1, 2012 she will retire at the end of the year, ending her fifth term in office.  Obviously reassessing that family-thing it was later reported that “former Freeholder Deborah Scanlon was only out of office for a month before the county created a position for her in the Human Services department.”  How would this impact her pension assuming retirement after those three years of higher salaries are on the books:

Impact on Pension:

Participant: Deborah Scanlon
Date of Birth (est): 1/1/53
Date of Hire: 1/1/98
Assumed Retirement Date: 1/1/2016 – age 63
Annual Benefit accrued through 1/1/13: $8,182 = $30,000 x 15/55
Projected Benefit accrued through 1/1/16 as a freeholder: $9,818 = $30,000 x 18/55
Projected Benefit accrued with 3 years in Human Services: $24,545 = $75,000 x 18/55

The difference using state actuarial assumptions comes to an additional $150,000 in benefit values accrued over those three years (though it’s closer to $210,000 using real-world factors) with the contributions to fund that additional pension determined, according to the NJ website, based on salaries:

Under the current funding method, the normal contribution and accrued liability are derived by taking the second quarter (calendar) report of contributions salaries from 2 years prior, which are annualized (example: for the bills due 4-1-2008, the calculation utilized the 2nd Quarter ROC Report of Salaries from 3-31-06). The annualized salaries are then multiplied by the applicable annual rates determined by an independent actuary.

Assuming Union County is typical and using a contribution rate that has lately been around 11% overall this would mean that $24,750 ($75,000 x .11 x 3) will be contributed over three years to fund an additional $150,000 in benefit accruals and this is considered actuarially sound.

The obvious fix is to determine contributions on a straight Unit Credit basis based on what is being accrued for that participant annually.  Though that would take a little more work (basically computer time since the numbers would already have been calculated) the reason it is not done is:

  1. Contributions would inevitably be much higher
  2. Deborah Scanlon might not get hired if taxpayers had to pay the real cost to fund her pension instead of the mini-contributions that the system allows.

2 responses to this post.

  1. Posted by skip3house on April 21, 2014 at 2:43 pm

    Here a couple ‘big shots’
    Susan Bass Levin wanted free NJ health benefits
    http://www.nj.com/news/index.ssf/2010/11/nj_career_politician_retires_o.html
    and
    Ron Dobies served as mayor of charming, picturesque Middlesex Borough for 26 years, earning a token salary. Upon retirement, he was appointed borough administrator at a salary of $85,000. After three years, he was removed from office in 2009, and he is now entitled to a $46,000 pension and the health benefits.

    Reply

  2. Posted by Tough Love on April 21, 2014 at 7:14 pm

    John, Your fix doesn’t fix the ROOT CAUSE of the problem, as It still foists the incremental cost upon the Taxpayers (and only shifts the TIMING of Taxpayer payment obligations).

    The REAL fix is to do exactly what PRIVATE Sector Plans do to AVOID situations like this. Specifically, the earning of a year of “service credit” is not tied to earning a small dollar amount (now $7,500 annually in NJ) over the calender year. Rather, to earn 1 year of “service credit” in a calendar year, you must document and be paid for AT LEAST 1,000 hours in that year. Considering that most full-time workers only work about 2000 hours/yr., a 1000-hour test (if not fraudulently accounted for) is FAR more difficult to meet. And documentation of specific hours (if available to the public) can be scrutinized and challenged….. e.g., work at home at night shouldn’t count.

    Of course, it will be a cold day in hell before our self-interested elected officials (always willing to make use of such loopholes to enrich themselves at Taxpayer expense) would agree to such a procedural change … even though it’s ROUTINE in Private Sector pension plans. It’s easy to be generous and liberal when it’s SOMEONE ELSE’S (the Taxpayers’) money.
    —————————————–

    And FYI, it could have been far worse … as her salary could have been $125K instead of $75K.

    Reply

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