The National Association of State Retirement Administrators (NASRA) is a lobbying group for defined benefit plans in the public sector and their latest report compares the percentage of the Annual Required Contribution (ARC) that public plans around the country deposited between 2001 and 2013. New Jersey came out worst with a shortfall of over $23 billion (out of a total national shortfall of $123 billion) and a funding percentage of 38% (with the national average at 84%).
One obvious intent of the report is to pin blame for the impending collapse of the New Jersey retirement system on New Jersey itself rather than a flawed funding system that allows politicians to low-ball contributions and deputizes actuaries to find the means.
Of course New Jersey is a fiscal basket case. If it were an individual it would be declared without capacity to enter into contracts. But the system for funding public plans is also at fault and will bankrupt all defined benefit plans (though not as quickly as New Jersey) and the NASRA report tacitly admit as much in the first paragraph.
The annual required contribution, or ARC, refers to the amount needed to be contributed by employers to adequately fund a public pension plan. The ARC is the sum of two factors: a) the cost of pension benefits being accrued in the current year (known as the normal cost), plus b) the cost to amortize, or pay off, the plan’s unfunded liability. The ARC is the required employer contribution after accounting for other revenue, chiefly expected investment earnings and contributions from employee participants.
Burypensions Blog 
Posted by Tough Love on March 12, 2015 at 2:00 pm
Every time I read discussions that zero-in on the lack of full “funding” of the promised pension benefits as the “cause” of our financial problems I cringe. My apologies for being so repetitive, but …………
Taxpayers must stay focused on the fact that “funding” requirements FOLLOW from (and directly in proportion to) Plan “generosity”. Not being able to fully fund a very “generous” Plan is usually NOT due to a lack of political will, but due to the fact that the HUGE sums needed to do so are simply not available (while meeting a city’s essential service needs)….. with the ROOT CAUSE of this (incorrectly labeled) “funding problem” being directly traceable to grossly excessive pension/benefit “generosity”.
“Funding” problems are a CONSEQUENCE of that excessive generosity, not a CAUSE of the financial pension mess many States and Cities now find themselves in.
To truly “fix” the problem, Taxpayers must address the REAL CAUSE (excessive “generosity”) and must demand either:
(a) a hard freeze (zero future growth) of all Public Sector DB pensions for the future service of all CURRENT workers. The current absurdly excessive DB Plans should be replaced (for future service) with a DC (401K-style) Plan with a Taxpayer %-of-pay “match” of 3%-5% of pay, just like Private Sector Taxpayers typically get from their employers, or
(b) If (a) above is not possible (after exploring ALL legal avenues and options to do so), then the pension accrual rate for the future service of all CURRENT Public Sector workers should be reduced by 50% for all non-safety workers and by 66% for all safety workers (with the most egregious pensions) …… and even AFTER such reductions, the resultant pensions would STILL be greater than the pensions granted 90+% of comparable Private Sector Taxpayers.
Posted by S Moderation Douglas on March 12, 2015 at 4:43 pm
“My apologies for being so repetitive, but …………”
Don’t worry TL. It never gets old.
Constant repetition doesn’t make it true, either.
Win some, lose some.
Posted by Tough Love on March 12, 2015 at 5:11 pm
Keep in mind that the NJ pension problem is a real undeniable “MATH” problem, now WAY beyond the ability of politicians to “kick the can down the road”. and ignore the guaranteed failure but a few years away.
Perhaps a lot MORE people should be “repeating” this message and DRUMMING it into our elected official’s heads.
Posted by S Moderation Douglas on March 12, 2015 at 9:30 pm
“One obvious intent of the report is to pin blame for the impending collapse of the New Jersey retirement system on New Jersey itself rather than a flawed funding system that allows politicians to low-ball contributions and deputizes actuaries to find the means.”
Seriously? The funding system ate my homework?
Is the NASRA data incorrect? Or are we just shooting the messenger?
Posted by Tough Love on March 12, 2015 at 11:46 pm
You seem to have missed John’s point ……….
If the politicians could NOT low-ball contributions, and HAD TO to make annual contributions consistent with full funding (over the average remaining career duration of active workers, and using assumptions most financial economists deem to be appropriate) the extraordinary pension promises in place today would never had been granted, because there would never had been sufficient revenue available to make the EXTREMELY high REQUIRED contributions.
Posted by S Moderation Douglas on March 13, 2015 at 12:53 am
Still missing it. What is unique about New Jersey state politicians? The local retirement systems, while not perfect, managed to at least come close to meeting their ARCs.
Even if the state required contributions were low balled, it looks like they completely failed to allocate ANY money many years. Almost as if they were intentionally trying to sabotage the system.
Posted by Tough Love on March 13, 2015 at 1:40 am
No, the Local Plans came close to meeting the phoney “low-balled” ARCs, no where near what the ARCs would have been if they were (as I stated above) ……. “consistent with full funding (over the average remaining career duration of active workers, and using assumptions most financial economists deem to be appropriate)”
The “proof is that under GASB’s new accounting standards, NJ’s Local Plan funding ratios are in the mid 60’s (not as bad as the State Plans, but still terrible).
Posted by S Moderation Douglas on March 13, 2015 at 2:07 am
And the state virtually ignored ALL the ARCs, lowballed or not.
It’s the difference between driving with your oil a quart low and driving with no oil in your engine at all.
“One obvious intent of the report is to pin blame for the impending collapse of the New Jersey retirement system on New Jersey itself.”
Of course the blame is on New Jersey. The only question is whether the collapse is malfeasance, or intentional sabotage.
Posted by Tough Love on March 13, 2015 at 2:42 am
Quoting S Moderation Douglas … “And the state virtually ignored ALL the ARCs, lowballed or not.”
To a large extent, they did, but the real question should be …… has the State of NJ (meaning it’s taxpayers) contributed as much to these Plans as would have been necessary to “appropriately” fund (i.e., consistent with Corporate pension Plan funding practices) pensions EQUAL TO what the typical Private Sector Taxpayer gets from his/her employer.
I don’t know the answer to that, but if we (the Taxpayers) have indeed done so, then we have contributed a fair amount and the shortfall in the funding of current Public Sector plans is CAUSED BY their excessive generosity … which should never have been granted in the first place.
Posted by MJ on March 13, 2015 at 8:15 am
The problem with trying to salvage anything that is left of the pension system is that everyone is trying to “pin blame” instead of making any real reforms. Initially, reforms will be painful but everyone would adjust. I agree with TL that if the actuaries were recommending the real amount needed to fund the overly generous pensions this would never have happened because it would have been impossible to do in the first place. Now, there is no where to run. If the pensions could be funded, they would so why aren’t they if the politicians funding them? Because they can’t. The publics, instead of blaming the private taxpayers who are taxed enough, should be demanding that the system be reformed so that they can continue to receive something in their retirements. It is a basic math problem with a lot of zeroes on the end of the numbers. Unfortunately, what we read about is most likely the tip of the iceberg.
Posted by Tough Love on March 13, 2015 at 10:11 am
The trouble is that many of the “publics” are stomping their feet like immature little children throwing a temper tantrum, and demanding that because …. “they were promised”….. they MUST BE PAID (and in FULL), whatever the pain (and unfairness) to the Taxpayers.
Posted by dentss dunnigan on March 13, 2015 at 10:32 am
That’s why Christie wants to dump this onto the property taxes laps and let the towns deal with the ever increasing higher taxes …..something like this would make the “Corzine years ” look like child’s pal ….
Posted by Tough Love on March 13, 2015 at 11:38 am
This gives me great concern, the dumping of this …”onto the property taxes laps and let the towns deal with the ever increasing higher taxes”.
John,
A bit outside your area of expertise (a legal rather than actuarial issue), but do you know if the towns have the LEGAL ability to refuse to accept this liability ? It seems very odd that party “A” (the State) can just transfer a liability that is legally theirs (the UAAL for PAST Service accruals) to Party “B” (the Localities) without their consent.
If the Localities have a choice, but want to”cooperate” for a global solution to the statewide pension mess, they must get an IRON-CLAD guarantee that the Commission’s “cost neutral” proposal (of Local Healthcare reductions offsetting their new pension costs) will in fact happen, and not just for years 1,2 and 3, but for 30+ years until the UAAL is paid off. The Localities should INSIST on a “guarantee” that legally transfers BACK to the State any excess of pension costs taken on over annual healthcare savings.
I can envision many ways in which this can work out badly for Local Taxpayers. For example, say it’s initially “cost neutral”, but (as would be expected) our self-serving elected officials slowly start to bring healthcare benefits BACK UP to their earlier level…… as a result of the “oh poor me” pleas from their workers. That’s going to eat away at the healthcare “savings” while the pension costs can’t be taken down further to offset those increases.
Posted by burypensions on March 13, 2015 at 11:48 am
Localities are not going to pick up pension and benefit costs for teachers. The state has been doing it for decades (since the income tax came in?) and there is no way school districts can take the hit (even if they work out a 100-year phase-in) since those insurance companies don’t take IOUs.
Posted by Tough Love on March 13, 2015 at 1:08 pm
John, I hope you’re correct. Unless I misunderstood the Commission’s Report, transferring the teacher pension and retiree healthcare costs to the localities was the proposal.
I know the State doesn’t have the money. Nobody, (State or Local) has sufficient revenue (w/o unfair taxes or unacceptably low service levels) to fund these extraordinarily generous promises.
Posted by Anonymous on March 13, 2015 at 7:25 pm
It doesn’t matter who it gets dumped on the problem still remains. The solution is obvious but too unpalatable for our governor. There is no honor among thieves. The politicians will take care of themselves and allow the publics to throw each other under the bus. Reform will come one way or another
Posted by MJ on March 13, 2015 at 2:49 pm
John, I thought I read somewhere that Christie plans on using the Exon settlement money to shore up the pensions. Have you heard anything about this?
Posted by dentss dunnigan on March 13, 2015 at 3:59 pm
by the time the lawers get their cut ,and CC using some money to plug a few holes ,I doubt 150 million would be left for the pension
Posted by S Moderation Douglas on March 13, 2015 at 6:35 pm
MJ:
“The problem with trying to salvage anything that is left of the pension system is that everyone is trying to “pin blame” instead of making any real reforms”
TL:
“The trouble is that many of the “publics” are stomping their feet like immature little children throwing a temper tantrum”
S Moderation Douglas:
IF……the state had actually met their required contributions, lowballed as they may be, since 2001 (not trying to cherry pick here, just refering to the NASRA data) would there be any need for foot stomping today?
IF…..required contributions were made in the past, would the state pension fund today be in “impending collapse”?
Putting aside the hot button police and fire workers,
IF….you were an engineer or physician earning less than private sector pay, having faithfully (because you had no choice) contributed to the pension system for the last 30 or so years, and were contemplating a secure retirement, would you not be stomping your proverbial feet? or worse?
Posted by Anonymous on March 13, 2015 at 7:31 pm
Douglas, knowing what I know if the corruption, ineptness and empty promises made by politicians I would not and have not placed any of my retirement security in that system. Those who have wisely fended for themselves will be better off. Again, the pensions have not and will not be funded because way too much was promised to way too many people doing way too little and contributing peanuts. If there was a way to fund the pensions it would have already been done. This problem is not unique to NJ just seems to be more pronounced
Posted by S Moderation Douglas on March 13, 2015 at 8:09 pm
Would but that I could say the same. Fortunately, I have never had extravagant tastes, and if my pension were to disappear tomorrow, I could exist on Social Security. Since SS is also subject to the corruption, ineptness and empty promises made by politicians, I have enough savings to last at least a year. After that there’s always the recycle business, I suppose.
I’m sure personal responsibility is an admirable goal, but for many, especially in the lower ranks of workers, public or private, setting aside the 15% or more of income to fund a reasonable retirement is not going to happen. It can be done. Has been done. I have seen it. But it is rare and not something to rely on as a social norm. This is one of several reasons I support DB pensions…and Social Security. Some may consider both to be paternalistic, but I think this country would be in much worse shape without them.
Posted by Tough Love on March 13, 2015 at 11:06 pm
Traditional DB pensions would be fine, if they were not so one-sided …. with the PUBLIC Sector workers being 90% on the receiving end, and PRIVATE Sector taxpayers being 90% on the “paying” end.
Posted by MJ on March 14, 2015 at 8:28 am
I agree that DB plans would be fine especially for lower income workers but again way too much was promised to way too many doing way too little with no possible way to fund it. SS was set up so that those in higher income brackets pay more into the system and get less out of it so that those making less end up getting more. I’m sure you know all of this. Perhaps the publics should be demanding that the politicians, double dippers, insiders and scammers get kicked out of the system to free up more to put into the plans.
Posted by Tough Love on March 13, 2015 at 11:00 pm
Quoting Anonymous … “Again, the pensions have not and will not be funded because way too much was promised to way too many people doing way too little and contributing peanuts. ”
Perfectly stated !
Posted by Tough Love on March 13, 2015 at 10:58 pm
S Moderation Douglas, responding to your 3 “IFs”:
#’s 1 and 2 ….. You haven’t been paying attention. By fully “funding” the Plans, we (the Taxpayers) implicitly accept the “generosity” of those Plans as reasonable and acceptable, BECAUSE “funding” FOLLOWS FROM (and in direct proportion to) Plan “generosity”. WE are RIGHT in NOT putting in anywhere near full funding, because the “generosity” is grossly excessive and clearly the result of collusion between the Public Sector Unions and the elected officials whose favorable votes (on pay, pensions, and benefits) are BOUGHT with campaign contributions and election support.
#3 …. Well then maybe if the Public Sector pension formulas didn’t so OVER-COMPENSATE the much larger group of non-professional workers, we would have a better balance and been able to give the professional workers more. Example: Why does the NYC Token Booth clerk make 2x the wages and 3x the pensions and benefits of the typical bank teller ?
Posted by S Moderation Douglas on March 13, 2015 at 11:46 pm
“You haven’t been paying attention.”
“generosity…..yada, yada, yada……..”
Yeah, I’m sure I have read *your opinion* on this before.
The question was, if the state had funded their pensions as the local governments did, would they not be in roughly the same condition as the local pensions, i.e., if not ideally funded, at least not in imminent collapse?
“WE are RIGHT in NOT putting in anywhere near full funding, because the “generosity” is grossly excessive and clearly the result of collusion between the Public Sector Unions and the elected officials whose favorable votes” ????
Pretty sure that’s not the official State of New Jersey policy.
Posted by Tough Love on March 14, 2015 at 1:08 am
But it rapidly becoming the official policy of NJ’ s Private Sector Taxpayers.
Posted by S Moderation Douglas on March 13, 2015 at 7:29 pm
“What NASRA is saying is that there will never be a situation where expected experience is more favorable that what is assumed …….”
An actuarial question, which at this point may be moot and/or hypothetical, since NJ is already a “fiscal basket case”:
I understand the concept of valuing liabilities at the risk free rate, sort of. And that today’s ARCs are “lowballed”, in New Jersey and most everywhere else.
But, IF…by some miracle New Jersey (state and/or local) were able today to set, and fund, the ARC at the risk free rate, keeping current investment strategies, how many years would it take until the ARC became…..zero?
I realize past performance is no guarantee of future returns, but go back to 2001 (again, because that coincides with NASRA data) and, ceteris paribus, calculate the pension costs and balances going forward at a 4% discount rate. I assume that would more than double pension contributions for the first year or so, but you seem to be implying that those “unsustainable” (doubled) contributions would continue in perpetuity.
Even through one major, and one uber-major recession, wouldn’t the pension system be overfunded today, or ARCs be reduced to much less than they are this year?
Posted by Tough Love on March 13, 2015 at 11:19 pm
When an individual or the typical Corporate Investor invests in the market, they might expect returns to be reasonably consistent with long-term averages …. but THEY accept the risk they they MIGHT turn our much lower.
Public Sector Pension funding has turned this concept on it’s head, because the generosity of Plans (while still very high) is marginally acceptable IF and only IF those log-term averages materialize.
But … and here’s the problem ….. unlike the individual or Corporate investor (noted above) who accepts the “risk” that things may turn out poorly, Public Sector pensions refuse to accept that risk (say by lowering the promised pensions if poor experience materializes) but instead, hand the taxpayers a larger bill so the now unaffordable (and clearly too generous) pension promises do not have to be reduced.
Posted by S Moderation Douglas on March 13, 2015 at 11:28 pm
Interesting…I guess. But not even close to responsive.
Posted by Tough Love on March 14, 2015 at 12:43 am
Responsive ???
Try for a moment to THINK as thought you were not a Public Sector worker/retiree (on the RECEIVING end of these very generous pensions), and instead were one of the many Private Sector workers with little or no employer-funded retirement Plan, yet called upon to fund 89-90% of the total cost of the very generous pensions granted ALL public Sector workers.
Posted by Tough Love on March 14, 2015 at 12:57 pm
S Moderation Douglas, What you failed to consider in your arguments, if/when the funding ratio neared 100% (both of us knowing that with proper accounting it’s REALLY closer to 70-75%) the Public would start clamoring for “their rightful share” of that surplus in the form of increases pensions (or increased wages … which would in turn increase their pensions, using up that surplus) …. just as has REPEATEDLY been done in the past.
Posted by Eric on March 14, 2015 at 10:30 am
S Moderation Douglas:
I agree with your arguments. You are very persuasive, and have also studied Latin.
Eric
Posted by S Moderation Douglas on March 14, 2015 at 1:45 pm
Also tall and handsome. I don’t know why people don’t mention that.
Posted by Eric on March 14, 2015 at 9:24 pm
S Moderation Douglas:
Buxom women, yes. Tall and handsome men, no.
Eric
Posted by Rick Dove on March 14, 2015 at 11:55 pm
Roy,
I wonder if some of the pension committee people or union lawyers are using this blog? It was pretty lively chatter today.
Rick
Posted by Tough Love on March 15, 2015 at 12:25 am
I sincerely so………… It would be pointless to be preaching only to the insatiably greed workers/retirees who frequent this blog (and the small group who rightfully support material pension reform).
Posted by george on March 21, 2015 at 4:10 pm
“Likewise localities should be picking up all costs for their school districts rather than negotiating benefits that oblige income-tax payers.”
My problem with this idea is the state sets hiring and most other education standards, which means the state and increasingly the federal gov sets wage and other cost levels. So it is just an illusion that towns can set wage levels lower.