How Stingy is NJPP’s Least Generous Public Pension Plan?

In a comment to my last blog on the flawed methodology that New Jersey Policy Perspective (NJPP) used to assign the label ‘stingy’ to New Jersey public pension plans for non-public-safety employees:

To answer one of your questions – “The least generous pension plan by far, with a score of 24.5, covers municipal employees in California’s Contra Costa County. The pension plan ranked 99th, the New Hampshire Retirement System, received an overall generosity score of 74.5, not far below New Jersey’s 85.”

The obvious question is how can this “careful study” of 100 plans rank the 99th one as the least generous by far.  Where is number 100?  But, that aside, let’s look at the the Contra Costa County Employees’ Retirement Association 12/31/12 actuarial valuation report:

Page 124 is where the Summary of Plan Provisions starts and the components of benefits accrued for General Tier 1 members include:

Final Compensation for Benefit Determination: Highest consecutive twelve months of compensation earnable.

Service Retirement Eligibility: Age 50 with 10 years of service, or age 70 regardless of service, or after 30 years of service, regardless of age.

Benefit Formula (Nonenhanced):

Retirement Age……Benefit Formula

50 (1.24%xFAS1 – 1/3×1.24%x$350×12)xYrs

55 (1.67%xFAS1 – 1/3×1.67%x$350×12)xYrs

60 (2.18%xFAS1 – 1/3×2.18%x$350×12)xYrs

62 (2.35%xFAS1 – 1/3×2.35%x$350×12)xYrs

65 or later (2.61%xFAS1 – 1/3×2.61%x$350×12)xYrs

Post-Retirement Cost-of-Living Benefits: based on Consumer Price Index to a maximum of 3% per year, excess “banked.”

Plugging in all these factors for a retiree who made $100,000 at retirement age 65 with 30 years of service yields an annual benefit of $77,203.80:

[.0261 x $100,000 – .0261 / 3 x $350 x 12] x 30

A 77% replacement ratio with an estimated value of $1.2 million from the the “least generous pension plan by far” of 100 public plans rated by NJPP.

5 responses to this post.

  1. Posted by bpaterson on December 30, 2014 at 2:21 pm

    yeah, who wants to get $77,000 a year for life after working in a mediocre mid-level job, not when there is 98 other plans that are even better.

    Some questions:

    Wonder if that plan addresses any of the other possible benefits such as health benefits.

    Maybe the not-mentioned 100th ranked one, is the private sector at basically $0/year. At least we made the top 100!

    Reply

  2. Posted by Mike on December 30, 2014 at 2:22 pm

    This comment has little to do with NJ pensions…I’m just continuing the theme of exploring the Contra Costa County pension plan. I vaguely recalled, and googling confirms (See esp in Contra Costa Times), that this particular plan was notorious for the widespread use of spiking. So the fact that it based the pension calc on an extremely liberal (and illegal) application of final 12 months salary should have counted extra in the scoring by NJPP.

    The Segal report indicates that they assume a “terminal pay” of 4% – 24% of final salary, which among other things covers the inclusion in the pension formula of “selling back” unused vacation in the final year before retirement. A California law was passed in 2012 to address the matter, challenged by a union lawsuit. For this valuation the need for the terminal pay assumption is seen to continue for people hired < 2011, and to be greatly reduced for newer hires. A recent court ruling appears to halt the practice for all employees, but not retroactively for those already retired.

    Bottom line…this was a particularly poor example of a plan that should be judged to provide a "low benefit."

    Reply

    • The entire NJPP study was pathetically sloppy. They mindlessly pulled off valuation numbers to stick into an arbitrary ranking system they made up since it was easier than doing an honest comparison which, considering all the tiers in most public plans, would be almost impossible.

      What Contra Costa has is different multipliers for different retirement ages and the NJPP people likely took over the lowest age which had the lowest multiplier without thinking.

      You can’t really blame NJPP for trying since they are in the propaganda business but it’s inexcusable for the Star Ledger to give some slight legitimacy to all this by calling it a ‘careful study’.

      Reply

  3. Posted by Tough Love on December 30, 2014 at 8:17 pm

    Nice workup John, but let me help bring it to conclusion….

    That 77.2% of final pay pension is annually COLA-adjusted, which (with a pension starting at age 65) increases it’s “value” by just about 25% vs an otherwise identical non-COLA-adjusted pension …. keeping in mind that PRIVATE Sector pensions are non-COLA-adjusted about 99% of the time.

    So we have the LEAST GENEROUS “PUBLIC” Sector pension that (after adjusting for the COLA’s incremental value) is equivalent to a non-COLA-adjusted annual pension of 77.2% x 1.25 = 96.5% of final salary.

    Noting that 30 years is NOT a particularly long career in the PRIVATE Sector, a Private Sector pension for a similarly situated (in pay, service years, and age at retirement) individual would not-often come in above 40% of final 3-year average pay …… noting that the 40% would be based on a per-year-of-service formula-factor of 1.33% (typical-to-generous in the modest number of Private Sector DB Pension Plans still crediting accruals to current workers).

    So we have …. JUST from a Private/Public “pension” comparison, that the LEAST generous Public Sector PUBLIC Sector Plans is more than twice as generous as a typical-to-generous Private Sector Plan (and CERTAINLY FAR FAR more generous than the MUCH more common Private Sector DC or “Cash Balance” Plans).

    Add to this mix that (per a recent study*) the typical Public Sector retiree healthcare benefit is worth a level annual 12% of pay vs most often ZERO Private Sector employer-sponsored retiree healthcare benefits. So let’s just add a modest amount and say that the LEAST GENEROUS PUBLIC Sector retirement package (pensions+ benefits) is worth 2.5 TIMES the typical-to-generous Private Sector retirement package (pensions + benefits).
    ———————————————————————

    Which is why, in the FIRST comment to John’s prior post (also on this subject) I said:

    “And of course, nary a mention that this “study” compared NJ pension Plan generosity ONLY to other “PUBLIC” Sector pension Plans …. while it’s NJ’s PRIVATE Sector Taxpayers supposedly on the hook to pay 80-90% of these Plan’s total costs.”

    With Private Sector TAXPAYERS footing (or at least “responsible for”) in most cases 80%-90% of total Public Sector Pension Plan costs, shouldn’t the generosity of PUBLIC Sector pensions rightfully be compared to what PRIVATE Sector workers get …. and not some OTHER group of overcompensated PUBLIC Sector workers?

    ________________________________
    * California and other public employers are required to calculate and disclose what’s called the “normal cost,” which represents the value of the future retiree health benefits accruing to employees today. California’s actuaries found that in 2011 state employees earned around $2.2 billion in future retiree health benefits and their total wages were around $18.01 billion. So those benefits are worth around an extra 12% in wages. This is compensation that private sector workers rarely receive.

    Reply

  4. Posted by Tough Love on December 31, 2014 at 12:31 am

    Looks like another commentator, who has identified himself/herself as a “pension actuary” has been commenting on the morass that has increasingly been infecting this nation.

    I highly recommend reading his/her commentary. You can read his/her comments under the handle “sbourg” at THIS article:

    http://www.businessinsider.com/illinoiss-public-pension-crisis-2014-12

    Reply

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