Privatization Flaw Trumps Contribution Allocation Flaw

Costs for Pension and Health Care benefits for public employees in New Jersey are rising and at least one municipality thinks it has hit upon a solution that takes advantage of a flaw in the manner in which these costs are allocated.  But their solution, privatization, is not working because the tax money being diverted from funding these benefits is going to private companies who are swindling public officials and politicians at the bargaining table.

Municipalities make their pension contributions on April 1 based on this methodology:

Under the current funding method the normal contribution and accrued liability are derived by taking the second calendar quarter Report of Contribution salaries from three years prior. The second quarter salaries are annualized to provide the basis for assessment (example: for the bills due 4-1-2008, the calculation utilized the 2nd Quarter ROC Report of Salaries from 3-31-05).  The annualized salaries are then multiplied by the applicable annual rates determined by an independent actuary.

That rate for PERS is 11.92% of salary based on the 6/30/13 valuation report and payable as of April 1, 2015.  For PFRS it is 24.32%.

This system works reasonably well when the payments consist of only the benefits accrued for each year but for these plans the percentage of the calculated contributions attributed to past accrued liabilities are 85% in PERS and 67% in PFRS thus foisting prior costs on current taxpayers based on current payrolls.

In theory if a municipality privatized all their jobs and had no payroll they would avoid paying those unfunded liabilities.  Union County is trying to do just that.

They have privatized their golf operations, will privatize their nursing home operations, and are thinking about outsourcing their jail operations to another county.  The problem is that the deals being struck are transferring the money saved from not paying employee benefits into the coffers of private companies who are negotiating sweetheart deals.

The flaw in the contribution allocation method can be fixed by going to straight Unit Credit funding that develops contributions based on year-to-year accruals with the unfunded portion separately funded (or not) based on what is determined to be most equitable after an honest discussion among unbiased parties.

That other flaw might be with us for a while.

4 responses to this post.

  1. Posted by truthnolie on November 18, 2014 at 6:09 pm

    Read up public employee haters (although I’m sure the clueless, delusional morons like TL & Javadolt would never accept what is being presented):


    • Posted by Tough Love on November 19, 2014 at 11:25 pm

      Interesting distortion to the truth ………..

      First, who said that the cost to Taxpayers of NJ’s Public Sector workers’ healthcare should be compared ONLY to other PUBLIC Sector workers. No, that cost should be compared to what PRIVATE Sector workers pay towards THEIR healthcare, and then only after some VERY major adjustments to reflect the MUCH more generous health coverage provided to PUBLIC Sector workers ….via lower deductibles and copays, lower coinsurance percentages, lower out-of-pocket maximums, lower drug copays, and more inclusive coverage.

      Second, your referenced study conveniently ignored RETIREE Healthcare costs, virtually universal (and sometime completely free of any retiree contribution) in the PUBLIC Sector, while almost completely gone in the PRIVATE Sector.


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