COLA Case Next and the Current Cost

Arguments for pension payments for FY2016 were set to be heard on May 12 but were adjourned pending the decision by the New Jersey Supreme Court about the FY2015 payments.  We now know they do not have to be made so those proceedings are now moot.

But there is another case out there that might also now be decided: Berg v. Christie where the state is appealing a decision made last year to restore cost-of-living-adjustments for retirees. It is being ‘held’ and is not yet on the court radar but if the lower court ruling is upheld it would cost the state billions of dollars.

Below is a blog from a year ago updating the figures to show what COLA restoration would cost now.

 

The virtual elimination of cost-of-living adjustments (COLAs) for New Jersey retirees was the linchpin of the 2011 reforms.  In a July 14, 2011 press release the governor claimed savings of:

  • $79 Billion in State Contribution Savings: Over the next 30 years, the state pension contribution will be $148 billion, a projected savings of nearly $80 billion. Without reform, the state was projected to contribute $227 billion over the same period.
  • $43 Billion in Local Government Contribution Savings: Over the next 30 years, local government pension contributions will be $70 billion, a projected savings of nearly $43 billion. Without reform, local governments were projected to contribute $113 billion over the same period.

Now that COLAs have been ruled to be a contractual right how much will it cost to make retirees whole?

Extrapolating from official proclamations of savings it would be about $100 billion in contributions over 30 years if the plan had another 30 years of existence.  It doesn’t.

COLAs were suspended as of August 1, 2011 and according to the Division of Pensions Fact Sheet #18:

Prior to the enactment of Chapter 78, P.L. 2011, the Pension Adjustment Program provided a cost-of-living adjustment (or COLA) to retirees and their eligible survivors if receiving a monthly retirement allowance from one of the state-administered retirement systems. The first COLA was paid in the 25th month after the date of retirement. Subsequent cost-of-living adjustments were computed annually and the adjustment was reflected in the February 1st check (which is payment for the month of January). If a beneficiary was entitled to receive a monthly pension upon a retiree’s death, the COLA was applied to that benefit based upon the year of retirement.
To calculate the COLA, the Division of Pensions and Benefits used the CPI for Urban Wage Earners and Clerical Workers (CPI-W), U.S. City Average, All Items, 1982-84=100. The rate of increase was equal to 60 percent of the percentage of change between the average CPI for the calendar year in which the member retired and the average CPI for the 12 month period ending August 31st immediately preceding the year when the adjustment was payable.

Using that as a road map with numbers coming from the CPI-W table a retiree who got a check for $1,000 in July, 2011 would now be getting a check for $1,059.97 if the COLAs continued.  Through July, 2015 that retiree would have been shortchanged by $1,726.*

Assuming $10 billion is currently being paid out to retirees and depending on the interest adjustment, if any, that amounts to about $1.2 billion that is now due to current retirees in lost COLAs with another $50 million liability accumulating monthly.

After all appeals in this case are exhausted in about two years, if this ruling holds the fund might have just enough money left in it to make that final $5 billion payment.

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For anyone who feels like checking my numbers:

COLA effective February 1 of each year based on 8/31 CPI-W factor

Average 8/31 CPI-W factor

  • 8/31/10: 214.205
  • 8/31/11: 223.326
  • 8/31/12: 228.184
  • 8/31/13: 230.537
  • 8/31/14: 234.17

Percentage increase applied February 1 with new dollar payment:

  • 2/1/12: 2.555%; $1,025.55
  • 2/1/13: 1.305%; $1,038.93
  • 2/1/14: 1.0062%; $1,049.38
  • 2/1/15: 1.0095%; $1,059.97

Total payments missed: 12 x $25.55 + 12 x $38.93 + 12 x $49.38 + 6 x $59.97 = $1,726.14

12 responses to this post.

  1. Posted by Tough Love on June 17, 2015 at 1:12 am

    I suppose the retirees could demand interest (from the dates initially due to the date actually paid) on the delayed COLA payments if they ultimately prevail.

    Reply

  2. Posted by Eric on June 17, 2015 at 9:21 am

    Anonymous:
    It would not be “suicide” if the NJ Supreme Court were to limit the class of those entitled to the cost of living adjustment, as suggested by the Appellate Division opinion, to a very, very small group of retirees to protect the integrity of the system while at the same time showing some semblance of the rule of law.
    Eric

    Reply

    • Posted by Anonymous on June 17, 2015 at 9:32 am

      C.78 allowed for continued funding of existing COLAs and suspended future COLAs based on % funded in respective funds? Anyway where’s the money to pay?

      Reply

  3. Posted by truthnolie on June 17, 2015 at 11:31 pm

    Once again….everyone comparing Apples to Watermelons…..as I’ve said time and again, the Local Parts are separate and not in the dire straits the hysteria would lead you to believe.

    This is from the NJ League of Municipalities….btw, no friend of the unions for sure:

    “The NJ Supreme Court decision underscores the need for a State solution to the underfunded State pension and health benefits systems. This decision should have no impact on local budgets, as municipal employers and their employees will continue to meet their pension funding obligations, as required by statute. Because of that, the pensions of local employees are safe, and the local PERS and PFRS funds are fiscally sound.”

    Read those last two sentences again……”no impact on local budgets”……locals “continue to meet pension obligations AS REQUIRED BY STATUTE” and…..LOCAL Pers & Pfrs funds are FISCALLY SOUND”.

    I wonder, in light of this info, how restoration of COLA can be denied to the Local system retirees? Perhaps this is an arguable point since such restoration would be coming from systems fiscally sound.

    Reply

    • Posted by Tough Love on June 18, 2015 at 12:08 am

      Not true, The LOCAL Plans ARE indeed in “dire” straits, just not as “dire” as the STATE Plans. Comparisons are “relative” …. e.g., an “FAT” person may look rather normal next to a much “FATTER” person.

      Under the new GASB accounting Standards NJ’s Local Plans have funding ratios in the mid 60’s, and to put that into perspective, under the valuation of Private Sector Plans, Gov’t regulations consider a 60% funding ratio SO DIRE that further pension accruals CANNOT be granted.

      If it makes you feel better, the STATE Plans have a 44% finding ratio and are beyond help.

      ———————————————————————–

      Quoting …”Because of that, the pensions of local employees are safe, and the local PERS and PFRS funds are fiscally sound.””

      I don’t believe you could find a financial economist or an actuary that would describe NJ LOCAL pension Plans (with a mid-60s funding ratio) either “safe” or “fiscally sound”.

      ———————————————————————-

      P.S. Being able to say that you met this year’s pension obligations doesn’t translate into “fiscally sound”. E.G., if Christie had put in that $1.6 Billion (that the NJ SC decided he didn’t), NJ’s Plans would still be underfunded by $200 BILLION … and that’s money that should be CASH IN HAND TODAY for PAST service accruals.

      Fiscally Sound ? Hardly.

      Reply

      • Posted by truthnolie on June 18, 2015 at 12:30 am

        So….your point then is that the NJ LOM is stumping for the unions & its members??? This was the same organization that was pushing municipalities to institute furloughs, layoffs, etc. of employees…….Yeah, right…..now you know why everyone sees you as delusional.

        What is your convoluted take as to why they would make a statement like that?? Oh….let me guess…they’ve now been bought and paid for by the nefarious unions…..lmao.

        Reply

  4. […] number I agree with but it must be understood that because of the low-interest rate environment COLA increases would […]

    Reply

  5. […] any reasonable measure the New Jersey retirement system is already bankrupt so it is not the $1.2 billion in restored Cost-of-living-adjustments (COLAs) that concerns […]

    Reply

  6. They have plenty of money for welfare recipients and refugees, all who contribute nothing. Yet, they sock it to the people who worked all their lives and want to retire with a decent income. Welfare to workfare, hold off on immigration until it is fiscally feasible here.

    Reply

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