How Did State/Local Plans Become Underfunded?

The Center for Retirement Research just released a six-page issue brief trying to answer that question by looking at factors like:

  1. investment returns;
  2. contributions;
  3. deviations from actuarial assumptions (e.g. workers living longer than expected);
  4. benefit changes; and
  5. assumption changes (e.g. long-run investment returns).

I can make it even briefer.  In fact, two words….

Actuaries; Politicians


That all these actuarial assumptions are not being realized means they are faulty.  The funded status of a plan is a critical component in the selection of the investment earnings rate to be used and the actuarial community has chosen to ignore that aspect.

No doctor would treat cancer with only aspirin because that is all their insurance company would pay for (I’m guessing/hoping here) but public plan actuaries routinely use the actuarial assumptions and methods legislated by people with no relevant experience in pension funding but an immediate interest in keeping costs down.


New Jersey may be an extreme case in the level of their unfunded pension and OPEB liabilities and the ham-handed approaches taken to ignoring responsibilities and ‘fixing’ problems by fiat but the scariest part is that we also are an extreme case when it comes to the priorities of the man who is supposed be working on the plan:

27 responses to this post.

  1. Posted by Tough Love on January 6, 2015 at 1:42 pm

    The Title of this blog-article ..How Did State/Local Plans Become Underfunded? …. is the WRONG question.

    The questions that NJ’s Taxpayer SHOULD really want answered is ….

    (a) How & why did we let NJ’s Public Sector Unions and our elected officials COLLIDE to grant such unnecessary, unjust, unfair (to Taxpayers), unaffordable, and grossly excessive (by ANY and EVERY reasonable comparison to what comparably situated Private Sector workers get), pensions & benefits, and

    (b) Are we smart enough to realize that the ROOT CAUSE of NJ’s pension mess is the grossly excessive pension/benefit PROMISES, and that our funding problems are a CONSEQUENCE of that root cause? And, BEFORE addressing that “consequence” (our funding problems), we must FIRST address the ROOT CAUSE (the grossly excessive pension & benefit promises) by VERY materially reducing (by at least 50%) the pension accrual rate for the future service of all CURRENT workers?


    • Posted by MJ on January 6, 2015 at 3:14 pm

      TL, I think part of that answer may be in the fact that up until maybe 5-7 years ago, information was not so readily available as it is today with the internet, blogs such as Johns, online newspapers, articles, etc. The average taxpayer both public and private probably had no idea what promises were being made much less how it would be paid for or what would happen 20 years down the road. Certainly as more and more people become aware of the gross imbalance in our current system, things will most definitely change. I still stand by my assertion that IF the pensions could be funded they would be. What possible reasons would the stupid politicians have for NOT funding them? Simple, they can’t and a promise on paper is better than nothing at all.


      • Posted by Tough Love on January 6, 2015 at 3:31 pm

        Quoting …” I still stand by my assertion that IF the pensions could be funded they would be. ”

        I agree that they can’t be funded, because TOO MUCH money s required to do so …. and that is all because the promised pensions (AND benefits) are simply WAY WAY too generous.


    • Posted by Actuary on January 8, 2015 at 4:56 pm

      BINGO. TL all your comments are spot on correct. Thank you.


  2. Posted by skip3house on January 6, 2015 at 1:52 pm

    Hi, If mention of more high brackets of NJ Income Tax is appropriate, rather than cruel regressive taxing systems NJ relies on too much (Property, Sales, Gambling….fees for you name it…….. Then YES.

    Tax must be based on ‘ability to pay’…or, as Willie Sutton said ” where the money is…”

    I know Henry agrees but if the rest of your ‘contributors’ will be rubbed wrong, tell me now? Waste of time just being cowed by wealthy protecting their excess discretionary spending ability.

    And, waste of time talking of trivial amounts by merging, county control, population differences, property tax more stable than income(stupid logic)…..all talked to death. Now, NJ needs more revenue stream

    Regards, Skip House


    • Posted by Tough Love on January 6, 2015 at 3:07 pm

      Commenting on your point (quoting) … “And, waste of time talking of trivial amounts by merging…”

      A PERFECT example of the WORTHLESS merger BS that takes place in the PUBLIC Sector is the very recent merger of the Bergen County Police Dep’t into the Bergen County Sheriff’s Dept. The Sheriff clearly stated that they will have 49 more combined sworn officers (about 20% of the total) than they need. But per the signed “Agreement” (between the varies stakeholders ,,, essentially the Sheriff’s Dept., the now-closed Bergen County Police Dep’t., and an assortment of elected officials) any reduction in officer headcount will ONLY happen through attrition as officers retire or simply resign (which almost never happens).

      Corporate America knows that 90+% of the financial benefit of mergers comes from quick headcount reduction, and they aggressively do so, giving terminated employees contractually agreed-upon severance pay, and sometimes modest sweeteners (such as modestly larger severance pay, and perhaps covering healthcare premiums for a few months).

      So WHY is it done so DIFFERENTLY in this (and all other) PUBLIC Sector mergers? Should Bergen Taxpayers told they MUST be an employer of the clearly UNNEEDED? Why was THEIR (the Taxpayers) best interest …. as the payer of salaries, pensions, and benefits …. not even considered in putting together this Union/Politician self-serving agreement … noting that it keeps those (the Police and other PUBLIC Sector workers) supportive of the scum that manages Bergen County?


      • TL, let’s not also forget that 10-15 years ago, that health insurance was more reasonable and most private and public had pretty good insurance. Then the stock market collapse, the housing collapse and the great recession came and private had to adjust, downsize, contribute more to get less but nothing in the public sector changed. Not one thing. Things went on as though nothing had happened. Nothing of significance to reduce costs. Hosuing prices continue to decline but taxes keep going up year after year. Things are upside down, unbalanced and out of touch. Most people realize that things aren’t right and are just beginning to undstand why. These public sector costs will eat communities alive one by one. Get out while you can.


        • Posted by Tough Love on January 6, 2015 at 6:22 pm

          Quoting … “These public sector costs will eat communities alive one by one.”

          Yes they will.


  3. Posted by Javagold on January 6, 2015 at 2:34 pm

    And the market is getting ready to roll over. Let the public takers put that 50% collapse into their equation and see what that leaves them with. ZERO.


  4. Let’s not forget….just in…Mercedes Benz corporate offices are leaving NJ for Georgia. Reason? Lower taxes, lower cost of living. Im sure those publics are going to get all that they were promised.


    • Posted by Tough Love on January 6, 2015 at 3:35 pm

      Hopefully they will get only 1/3 of their promised pensions & benefits …. because THAT is just about the value of what comparable Private Sector workers get ….. and Public Sector workers should get EQUAL (but not more) on the Taxpayers’ dime.


  5. Posted by anon2 on January 6, 2015 at 3:33 pm

    Pay the ARC appears from table three to correlate with good. Honestly, pay normal cost plus interest at a minimum (even if don’t pay anything on the balance) seems like a pretty good step.


  6. Posted by anon on January 6, 2015 at 3:57 pm

    The difference in the actuarial experience contribution between the bad plans and the other in table 4 is really striking. That the “actuaries” part of your two words?


  7. John, I’m your opinion why wouldn’t the powers that be make the pension contributions as “promised” to the pensioners? Why not just make the contributions based on the current circumstances and move on?


    • They would love to since most of them are expecting some of that pension money eventually (if not already getting it). Based primarily on the situation in NJ I see two main reasons:

      1) Other priorities. If you put $10 billion into the pension you take it away from someplace else – either from taxpayers and you look bad or from cutting back on those contracts to the companies your old law partners have set up to cash in on the government gravy train. Think Bill Palatucci and halfway houses:

      2) Lack of imagination. Pensions have always been paid – with some exceptions that they can rationalize as anomalies (Detroit, Prichard, Central Falls, etc.) – so a lot of people can’t imagine that the paper promises won’t be honored somehow (massive investment returns, divine intervention,…). Something always turns up and, if it doesn’t this time and massive defaults become necessary, they figure they will be somewhere else blaming subordinates for keeping them in the dark about the real scope of the problem that they would have solved if they’d only known.


      • Posted by Tough Love on January 6, 2015 at 5:52 pm

        At this point, the “if I only knew” would be quite a “hard-sell”.

        So they’ll just change that to …”if I only knew BEFORE it got too big to fix”.


  8. Posted by Javagold on January 6, 2015 at 10:12 pm

    2015. If you don’t hold it. You don’t own it. Learn it.


  9. The report only starts with 2001, and thus says benefit changes had nothing to do with it. And blames low investment returns starting from the peak of the 1990s bubble by including its deflation, but not its prior inflation.

    Inadequate taxpayer contributions may be most of the blame in NJ. The CRR is ducking the reality in places like NY and CA, where huge pension increases went through in 1999 and 2000.

    Moreover, in cases where there were both retroactive pension increases and taxpayer underfunding (most of them), 100 percent of the future damage due to the interest on the resulting pension hole is attributed to taxpayer underfunding.

    It’s a harsh thing to say, but I find the analysis deceptive.


    • Posted by Tough Love on January 7, 2015 at 6:15 pm

      Quoting … “Inadequate taxpayer contributions may be most of the blame in NJ.”

      No, “funding” problems is not a CAUSE of our pension mess, but a CONSEQUENCE of the real ROOT CAUSE … pension generosity that is grossly excessive by any and every reasonable measure when compared to the pensions typically granted comparably situated Private Sector workers.

      To accept that we (the Taxpayers) should fully “fund” Public Sector pensions as promises, IMPLIES that we accept the underlying pension generosity (upon which the funding requirements are based) as reasonable. Clearly they are NOT reasonable. They are grossly excessive and full funding of such promises is an unnecessary and unjust theft of taxpayer wealth.


  10. Posted by dentss dunnigan on January 7, 2015 at 7:05 pm

    “Inadequate taxpayer contributions” implies new jersey taxes are too low …how stupid is that …we just saw another Company MB leave this state because of high taxes .


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