Judging A New Jersey Actuarial Report

Buck Consultants (Buck) in the cover letter to their July 1, 2014 actuarial report for the Judicial Retirement System Plan (JRS) of New Jersey  warns:

No one may make any representations or warranties based on any statements or conclusions contained in this report without Buck Consultants’ prior written consent.

Going to the law dictionary:

A representation is an assertion as to a fact, true on the date the representation is made, that is given to induce another party to enter into a contract or take some other action. A warranty is a promise of indemnity if the assertion is false. The terms “representation” and “warranty” are often used together in practice. If a representation is not true it is “inaccurate.” If a warranty is not true it is “breached.”

So why is Buck afraid of you believing what they say and conclude in their report?

Because it’s a sham.  Starting with basic census and asset data (that you probably can trust) every aspect of this report serves their client’s purpose of understating the contribution amount masked under a patina of professionalism that strains credulity.  For example, later in the cover letter Buck asserts:

The valuation reflects economic assumptions recommended by the Treasurer, which include a rate of investment return of 7.90% per annum and assumed future salary increases of 2.50% per annum through fiscal year ending 2021 and 3.50% per annum for fiscal years ending 2022 and thereafter. These assumptions will remain in effect for valuation purposes until such time the State House Commission or the Treasurer recommends revised assumptions.

In my opinion, the actuarial assumptions used are appropriate for purposes of the valuation and are reasonably related to the experience of the System and to reasonable long-term expectations. These assumptions were selected in accordance with applicable Actuarial Standards of Practice published by the Actuarial Standards Board.

Assuming that ‘economic’ and ‘actuarial’ refer to similar assumptions it is difficult to believe that the ASB in any ASOP approves of the client being able to select their own assumptions. But the real sham are the numbers these assumptions manipulate.  Working backwards from Buck’s numbers:

Underlying Valuation Census Data:

  • 391 active participants with total compensation of $66,028,491 for an annual average of $166,319
  • 561 retirees getting $49,946,393 for an average annual payout of $89,301
  • 4 vested terminees expecting $45,875 annually

Buck 7/1/14 Liability Values:

  • $444,577,573 for retirees
  • $164,706,096 for non-retirees
  • $30,803,195 amortization part of unfunded
  • $17,619,466 Annual Accrual Cost

Closer to Reality:

Replicating Buck’s data and then valuing liabilities using PPA rates instead of  what Buck was told to use results in 25% higher liabilities* and an already pathetic funded ratio of 40% dropping to 32% even before  considering the:

  • return of cost-of-ling-adjustments
  • return of the employees’ own contributions
  • proper valuation of all that junk littering the plans that they like to call ‘alternative’ investments
  • only available sources of funding being judges themselves and the state of New Jersey, both being equally opposed to making more than token contributions

Put it all together and I represent, with or without Buck’s permission, that this is a zombie plan.

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* If interested in trying this at home here is how I worked the numbers.

16 responses to this post.

  1. Posted by Tough Love on May 3, 2015 at 10:02 pm

    Such disclaimers are ROUTINE in the Reports of professional Service consulting firms …. but they are directed at 3-rd parties reading the report, NOT the entity paying for the consultant’s services….. who certainly has the right to rely on representations made.

    I doubt that it means anything other that what I just stated, and is routine practice. Unfortunately such disclaimers are needed protection due to the litigious society we live in……. where 3-rd parties (who didn’t pay for the consultant’s services) may make claims to have relied on Report representations.

    It’s possible that Buck is looking to fend off potential Plan Participant claims that THEY replied on Report representations, noting that Plan Participants are NOT the client under such engagements.
    ———————————————-

    That being said, I too feel that these Reports are a sham…… a HUGE sham.

    Reply

  2. Posted by Jim on May 5, 2015 at 9:38 am

    John, I’m curious. Regarding NJ’s actuarial liabilities how long will it be before the shit hits the fan?

    Reply

    • Actuarially they are there as benefits have been cut (taking away COLAs) and they don’t have even half the money they need to pay just the retirees in full. However, it may take more convincing for some people.

      To go pure pay-go it’s about 5 years. A real dollar reduction in retiree monthly payments will likely happen within a year with the next ‘reform’

      Reply

      • Posted by Tough Love on May 5, 2015 at 11:49 am

        Do you mean a year from now, or a year from the point it goes pay-go ?

        Reply

        • It’s hard to predict with NJ what the next stupid idea will be (who would have thought up redefining full contributions as 1/7th of the ARC) but with all the failures of the past they may just start hitting up retirees with their next ‘reform’. Wild guess is that they will cap annual pensions at maybe $100,000 and then work their way down over the years if they get that constitutional amendment that allows them to cut benefits (or even if they don’t).

          Reply

          • Posted by Tough Love on May 5, 2015 at 12:17 pm

            I think you just gave “BH” and his alter-ego “Anonymous” a heart attack.

          • Posted by BH on May 5, 2015 at 1:48 pm

            TL, paranoid as ever… I love it!
            Yes, there will be reforms.
            No, it won’t happen within a year.

            Christie needs to announce he isn’t running first after this new round of bridgegate sinks him even deeper. Then he loses any and all power and credibility within the legislature. He goes to some law firm in 2 yrs or to prison. Then we get a New governor in place… New talks of reforms….rinse and repeat….on and on……….it goes.

            There’s no sense of panic within the public sector. And I know many who have their foot in many doors. So, just keep spewing your equal and fair venom until you’re blue in the face.

            None of it matters when those in power are rich and not affected. Do you not realize they sit back and laugh at the rest of us??? Well, if not… Too bad.

            Later…

          • Posted by Anonymous on May 5, 2015 at 3:07 pm

            Quoting …”Christie needs to announce he isn’t running first after this new round of bridgegate sinks him even deeper. Then he loses any and all power and credibility within the legislature. He goes to some law firm in 2 yrs or to prison. Then we get a New governor in place… New talks of reforms….rinse and repeat….on and on……….it goes.”
            ——————————————

            It’s a MATH problem. Christie’s leaving won’t change that.

          • Posted by Tough Love on May 5, 2015 at 3:11 pm

            Quoting BH …”Christie needs to announce he isn’t running first after this new round of bridgegate sinks him even deeper. Then he loses any and all power and credibility within the legislature. He goes to some law firm in 2 yrs or to prison. Then we get a New governor in place… New talks of reforms….rinse and repeat….on and on……….it goes. ”

            It’s a MATH problem. The end of Gov. Christie’s term won’t change that. Sweeney will be looking at the SAME choices, which to have any real impact MUST include very material pension & benefit reductions for all CURRENT workers (including those at the Local level).

  3. Posted by MJ on May 5, 2015 at 3:41 pm

    Wasn’t Sweeney pushing for reforms way before the great recession? If this was just going on in NJ I might buy the notion that the funds were mismanaged, poorly designed, etc. but with the same story just different location, I can’t understand why these legislators can’t see the writing on the wall. I really do believe that they are just hoping it goes away. As BH stated rinse and repeat. Only problem is that the situation will continue to worsen.

    Reply

    • Posted by Tough Love on May 5, 2015 at 3:56 pm

      Quoting …. “I can’t understand why these legislators can’t see the writing on the wall.”

      Oh they see it. It’s just that they like the Public Sector Union’s campaign contributions and election support too much to do anything about it.

      Reply

      • Posted by BH on May 5, 2015 at 6:38 pm

        Power is money…..or is it the other way???
        Ha!!! Either way, TL, you hit the nail on the head!! The unions must me very powerful then…indeed. And something will be done about it…. Taxes!!!
        So prepare to move out if jersey if you won’t pay, (like you will) and be replaced just as fast. People whine and moan about high taxes, but they’ll either pay or be replaced by others who will. And dramatically, almost like magic…job growth occurs and everyone gets rich again… The pension problems are no longer a concern until the next economic collapse and we need a scapegoat.

        Later….

        Reply

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