CF7: Transferring Assets to Unions

New Jersey is trying to entice the unions into accepting the Christie Freeze plan by dangling the remaining trust assets as bait.  Page 6 of the Roadmap (with accompanying footnote 23) explains the deal:

transferring the assets, liabilities and full responsibility for the existing pension and new retirement plans to employee entities willing and able to assume this obligation. 23

23 The “employee entities” holding the plans may have to be structured as “government plans” to comply with ERISA and other regulatory requirements and tax considerations. In this Report, “employee entities” refers to plan structures that satisfy these requirements while providing employees with the greatest permissible degree of ownership and control over the assets and liabilities of the plans. Determining the exact form of entity that would satisfy these requirements will be one of the tasks to be undertaken by the Implementation Task Force discussed in this Report.

Later on page 12 of the report another sweetener:

The preceding elements of the Commission’s approach would reduce the State’s obligation to fund the existing pension plans to a predetermined sum each year. This would, in turn, facilitate transfer of the assets and liabilities of these plans and of the new retirement plans to employee entities willing and able to assume these obligations.  If this were done, employees would control their own destiny with respect to these benefits – and assume the risk of managing the plans to ensure that the available funds are sufficient to pay for the provided benefits. This transfer would permit the State to provide the bond market with a much greater degree of cost certainty.

Here is the real deal on this proposed transfer:

The unions would like to have the assets under their control (as unions in the private sector do with multiemployer plans) since part of that money can be doled out to their friends in the investment and legal fields or even to themselves*.

However in the private sector multiemployer plans are covered under ERISA, most notably by the funding rules, which is something those running these zombie plans would want to avoid.  In addition ERISA would bring the Pension Benefit Guaranty Corporation (PBGC) into the picture which is a coverage not sought by government unions (who do not want the added oversight) or the PBGC itself (which would not want the added liabilities) or even plan participants (now that there is a mechanism for cutting benefits). Hence we have that footnote 23 which seems to imply that ERISA would need to be amended to assure that these public sector multiemployer plans are exempt under ERISA**.

As for providing “providing the bond market with a much greater degree of cost certainty” this may have something to do with taking those massive liabilities off of the state’s books (though presumably the obligation to pay would still be there based on what the NJEA and other unions bill) until such time as GASB catches on.

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* On the form Schedule C attachment to the 5500 filing anyone getting at least $5,000 must be listed.  Check out all the professionals and fund employees on this filing.

** Or the footnote could mean that ERISA would need to be amended to assure that these public sector multiemployer plans are NOT exempt under ERISA since it may be a way to dump those unfunded liabilities onto the PBGC.  Either interpretation is possible since when you are drafting language with hidden meaning sometimes the real meaning gets lost.

8 responses to this post.

  1. Posted by Tough Love on March 1, 2015 at 1:17 am

    WOW, so basically, while the State of NJ wants to set up a new Cash Balance DB (yes DB) Plans to replace the existing Traditional-style DB Plans for the FUTURE service of all CURRENT workers … where the Plan Sponsor assumes the investment risk (which, to be fair will be rather modest, and a LOT lower than the current Traditional DB plans) … at the same time, it (the State of NJ) wants to have nothing to do with even that limited risk, transferring it to the new Plan sponsor (the Unions ?, a employee-led group ?) and effectively to the workers.

    Sounds like a recipe for Plan Sponsor (Union ?) diversion/theft of the funds.

    Reply

  2. Taft-Hartley, here we come? Never in the history of public employee unionism did a public employer hand over control of its pension responsibility to a union. This is a bad idea.

    That said, Detroit has just finished its bankruptcy proceeding but is still responsible for the pension system. In the 1970s the City of New York experienced a de facto bankruptcy while its pension funds were 35 percent funded—-they never handed over the pension funds to the unions.

    Reply

  3. John;

    Please clarify: Are not most private DB plans governed by a joint labor/management board of trustees? Is this not the case with the craft unions?

    Thanks,
    Joel

    Reply

    • Most private plans are employer controlled as they get to name the trustees. Multiemployer (union) plans have some union representation but that hasn’t worked out so well as the majority of multioemployer plans are in worse shape than government plans, though for different reasons.

      Reply

  4. Posted by Anonymous on March 1, 2015 at 5:41 pm

    Since the focus is on freezing the teacher’s pension fund, they can be transferred to NJABP Providers like higher ed employees. This isn’t rocket science, the union understands ABP.

    Reply

    • The Alternate Benefit Program is a Defined Contribution plan. Since 1968 the college crowd has been mandated into this Plan. The DB Teachers’ Pension and Annuity Fund was closed to them. So for nearly 50 years they have chosen their retirement investment via Teachers’ Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF). The contribution rates have never changed. The State throws in 8 percent of salary while the participant throws in 5 percent. Additionally, they have the participant-only funded 403(b)/457(b) at their ready.

      That said the Commission has recommended a Cash Value plan as the new plan. Cash Value plans are still Defined Benefit plans. In my view the Commission’s first choice was a DC plan but they knew the unions would balk JUST LIKE THEY BALKLED 30 YEARS AGO WHEN GOVERNOR KEAN’S COMMISSION PROPOSED A NEW PLAN CONSISTING OF PART DB AND PART DC .

      THE UNIONS HAVE A ONE TRACK MIND—THEY ARE JOHNNY ONE NOTE TO A FAULT. TOO BAD IT WAS NOT PUT TO A VOTE OF THE MEMBERS AFTER A THROUGH AND COMPLETE DEBATE OF THE ISSUE———–AFTER ALL THESE MEMBERS HAVE MASTER’S DEGREES!!!

      Reply

      • Posted by Tough Love on March 2, 2015 at 1:36 pm

        Joel, It’s “Cash Balance”, not “Cash Value”.

        —————————–

        P.S. If those master’s degrees were in Math or Finance, instead of typically being in Education, they would have realized that these absurdly generous Public Sector DB pensions are a Ponzi scheme that ultimately HAVE TO blow up.

        Reply

  5. Posted by lipper on March 5, 2015 at 9:49 pm

    With all of the union corruption in NJ, this is just an unbelievable proposal (especially coming from a republican administration)! If Christie is endorsing this, how is that going to fly in Iowa. Hand over millions to unions in NJ! Imagine, Carla Katz could have turned over the management of the funds to Corzine at MF global after a “meeting” in their hoboken condo! Absolutely incredible.

    Reply

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