Can’t Take Pension Cant

The problem I have with anti-tax groups is that they want lower taxes without putting in the work to understand how to get there or the consequences.  You don’t see them at freeholder meetings or poring over government budgets (making them not much different from most of the media) which often leads them to positions directly contrary to their stated interests.

For example, Erica Klemens, state director of the Americans for Prosperity—New Jersey, and Leonard Gilroy, director of government reform at Reason Foundation, had a guest column in the Star Ledger today urging adoption of proposed pension reform in New Jersey that irked me more with each paragraph:

It’s no secret that New Jersey’s government worker pension systems are a looming fiscal disaster. What may not be clear to taxpayers at this point is that unless meaningful reforms are enacted to rein in the problem, spending on pensions will increasingly poach funds from other government services.

Not after the Burgos decision which confirms that the state can make up their own contribution numbers.

The New Jersey Supreme Court recently ruled that the Christie administration’s $1.6 billion cut to the state’s required annual pension contribution for 2015 fiscal year to help balance the budget was legal. Unions had challenged the cuts as a violation of the state’s 2011 pension reform law requiring increased annual pension contributions after years of underfunding. While the administration may be breathing a sigh of relief that it won’t have to restore those cuts given the state’s empty coffers, the ruling simply leaves more pension debts to be paid by future taxpayers.

Or defaulted upon.

Worse, pension costs are set to skyrocket regardless. In its February report, the New Jersey Pension and Health Benefit Study Commission found that current required pension costs total $3.73 billion annually, and the state treasurer estimates that those costs are set to rise to almost $6 billion annually in the coming years.

Costs that don’t have to be paid after Burgos!

The irony is that by deciding to skimp on pensions to pay for other services in the past, officials basically guaranteed that the reverse would happen in the future. The pension debts are going to have to be paid, and pension costs are likely to rise—and current services suffer—as a result.

Do COLAs have to be paid?

The future does not have to be as bleak as it looks today, but it will require policymakers to unite in pursuit of a strategy to immediately stop digging the hole deeper by shifting all new workers into more sustainable retirement plans, like the 401(k)-style plan proposed by the Study Commission. It would also require the state to commit to consistently plowing the future savings created by converting to a less generous retirement system back into paying off the debt of the current system, which would help alleviate some of the impact on state services.

401(k) plans are not necessarily less expensive depending on the level of contribution but what they certainly are is more transparent which means paying what you owe going forward without those political/actuarial distortions.  As for those future savings to pay off the deficit the Study Commission naively believes it will be coming from reductions in health benefits that both the unions and insurance/political power-brokers will fight fiercely against.

This may seem like a tall order, but there’s no other choice. The status quo is unsustainable, and the financial reality is non-negotiable. The choice for policymakers is simple: fix the pension system now, or watch quality of life suffer as ever more dollars are siphoned off to a broken pension system.

Without a respect for contract law there are always other choices.

47 responses to this post.

  1. Posted by skip3house on June 27, 2015 at 11:04 pm

    We know ‘….Prosperity and Reason….’ are far from stupid, so what are they really after, power-wise?

    Reply

  2. Posted by Anonymous on June 27, 2015 at 11:05 pm

    Like the Hambugular from Popyee said gladly pay you 3 dollars tomorrow for 1 dollar today. Well that’s where we are, we need to stop eating our hamburgers with the works and cut back to a pickle and ketchup.

    Ok a weird analogy but I’m tired of repeating myself.

    Reply

  3. Posted by Anonymous on June 27, 2015 at 11:50 pm

    John,

    Curiosity question.

    Anyway you can provide a high level guesstimate of the ARC funding based on the reforms outlined in the P&B Commission report.

    Specifically what is the “savings” shortfall that would require additional revenue to fully fund the ARC going forward.

    If there are specifics missing, ie % of employer 401k match, etc. make reasonable assumptions to effectuate the calculation.

    Reply

    • It’s a waste of time. The ARC is a bogus number to begin with being ridiculously understated due to political considerations.

      The study commission recommended a contribution of about 4% but that’s not happening and with no negotiations possible they are going to let the plan die of natural causes.

      Reply

      • Posted by Anonymous on June 28, 2015 at 12:10 am

        Do you think IF reforms were to be agreed to that ADEC s/b used for future funding?

        Reply

        • Depends on how you define the ADEC which GASB does not do for you.

          Moot point anyway since NJ is free to ignore, GASB, ADECs, and reality in whatever ‘reforms’ they stumble upon.

          Reply

      • Posted by Anonymous on June 28, 2015 at 8:18 am

        Seems like implementing the P&B reforms must include a dedicated funding source TBD. Maybe the ARC with an assumed ROR of 5% or let’s here some other suggestions?

        Reply

        • Posted by Anonymous on June 28, 2015 at 8:47 am

          Another funding formula is a weighted average of historical performance and future returns based on preestablished benchmark(s)?

          Reply

    • Posted by skip3house on June 28, 2015 at 11:12 am

      ‘Revolute, coined from two obvious actions, had already been used in 1400s to describe curling of leaf edges, but I’ll bet ‘revolute’ may be a possibility here…..

      Reply

  4. Posted by Tough Love on June 28, 2015 at 12:00 am

    John,

    Oh “please”. Of course they’ll be paid, in full and on time …… BH has told us so.

    ————————————————————————-

    And I’m sure you noticed that the Star Ledger omitted a MAJOR element of the NJ pension Commission proposals ………… that the pension freeze must apply to the FUTURE service of all CURRENT workers …. NOT just NEW workers.

    Reply

    • Posted by Anonymous on June 28, 2015 at 6:59 am

      Yep. I said it

      Reply

    • Posted by Anonymous on June 28, 2015 at 9:32 am

      There is no method for the state to default. When the crunch hits, the state will have a choice–pay out of current budget or bond the debt over a period of years. There is no alternative. The state also doesn’t have the $ to pay for defined contribution plan–remember they’ve skipped full payments for 25 years. The public sector union employees are funding the pensions now.

      Reply

  5. Posted by Anonym on June 28, 2015 at 1:05 am

    What has been left totally unsaid is what will happen after the now inevitable pension default. It looks like the NJ plan will be taken over by PBGC. Pension benefits will then continue to be paid. COLAs won’t. So it looks like the whole strategy is to shift the cost to the Federal government, specifically to PBGC. Of course this assumes that PBGC will remain solvent itself.

    Reply

    • Posted by Tough Love on June 28, 2015 at 1:17 am

      The PBGC does not cover “Public” Sector Plans.

      Very small chance they will be paid in full once Plan assets run out.

      COLAs won’t be reinstated.

      The FEDS won’t bail out the irresponsible States/Cities (think … Republican Congress)

      Reply

      • Posted by Anonymous on June 28, 2015 at 9:34 am

        They will be paid in full. There is no mechanism for them not to be paid. The debt will be bonded over the long term. Since the state taxpayers haven’t made a full payment in 25 years, it’s reasonable to bond the debt over a similar term.

        Reply

        • Posted by Anonymous on June 28, 2015 at 12:21 pm

          Such debt would be subject to a ballot. It will never pass.

          Reply

          • Posted by Anonymous on June 28, 2015 at 12:41 pm

            It’ll be up to a court appointed trustee, not the unions, politicians, or taxpayers.

          • Posted by Anonymous on June 28, 2015 at 2:42 pm

            Any takers on this question? Assuming FULL acceptance of the P&B Commission reforms by year-end; what is the level of required full funding over 40 years with a 6.5% ROR?

        • Posted by skip3house on June 28, 2015 at 12:32 pm

          So, the NJ citizens to 25 years into the future will be paying for services rendered to NJ citizens 25 years into the past, plus their own services also?

          Reply

          • Posted by Tough Love on June 28, 2015 at 1:02 pm

            Not to worry. Anon is still in “denial” of the Plan failure sure to come, and assuredly with material reductions in “promised” pensions/benefits.

  6. Posted by Equal Time on June 28, 2015 at 1:07 am

    The Reason Foundation is a hired gun in the pension reform industry backed by the Arnold’s and other Wall Street interests out to capture the trillions in public pension funds in order to reap commission’s and fees ad nausea. Anyone who is earning a living by writing for an organization such as Reason with entrenched pension (reform) views has scant credibility when it comes to conducting an objective and dispassionate debate over whether or not pensions are too generous, financially sustainable, or fair to taxpayers.
    .

    Reply

  7. Posted by skip3house on June 28, 2015 at 10:55 am

    Again, let me ask if contributions from present active NJ workers might be used ‘soon’ for present/soon-to-be retiree benefits? Sure is against logic.

    Reply

    • Posted by Anonymous on June 28, 2015 at 10:58 am

      I’m not the expert but I don’t think there’s any contribution/benefit matching or dedication yet. So to answer your question based on the way things are today, yes.

      Reply

      • Posted by skip3house on June 28, 2015 at 11:13 am

        ‘Revolute, coined from two obvious actions, had already been used in 1400s to describe curling of leaf edges, but I’ll bet ‘revolute’ may be a possibility here…..

        Reply

  8. Posted by Anonymous on June 28, 2015 at 2:16 pm

    John, do you believe that taxes will go up for several years before the pension system goes bust? And that they wont use those taxes for contributions

    Reply

    • Based on my experience in Union County, which is under one-party control, taxes will go up as much as allowed (and even higher if they play with the rules). At the state level the main taxes (income and sales) are based on percentages of economic activity so those will likely go down to the state but up for those of us who are stuck here.

      The pension system is bust already. It can’t pay half of what it owes to retirees ALONE and a lot of the money is in alternative investments that are destined to go bust (and it should be soon now that there is Democratic scapegoat in Tom Byrne heading the Division of Investment).

      Reply

      • Posted by Tough Love on June 28, 2015 at 3:34 pm

        Not sure what “allowed” means….

        I know that there a some States that have Constitutional protection from tax rates rising above stated percentages, but did not believe NJ had such restrictions.

        If not, doesn’t “allowed” mean anything that our Elected Officials (and not overridden by a Gubernatorial veto) vote for can be implemented …. subject of course to any fear these Elected Official may have of being voted out of office by pissed-off Taxpayers.

        Reply

        • Posted by Anonymous on June 28, 2015 at 4:46 pm

          John/TL,

          from above:

          Any takers on this question? Assuming FULL acceptance of the P&B Commission reforms by year-end; what is the level of required full funding over 40 years with a 6.5% ROR?

          Reply

          • How many drones here are in favor of NJ selling assets to supplement the pension funding? I have previously suggested unloading the GS Parkway, NJ Transit, the Medical and Dental School of NJ and the Sports and Exposition Authority (stadiums, race tracks, AC Convention Hall etc). That will mean a reduction in the total number of drones on the assorted State payrolls and that is a good thing for future taxpayers. However it also means reductions in a number of long time bureaucratic power bases and we all know that is anathema to NJ politicians. But I am suggesting a way to get some $ into the funds that are meant to be there to pay your ridiculous pensions. What say you?

          • Posted by Anonymous on June 28, 2015 at 6:44 pm

            Sell what the hell!

          • Posted by Tough Love on June 28, 2015 at 7:37 pm

            PSDrone,

            I am NOT in favor of selling any of NJ’s capital assets. Although illiquid (which means quite difficult to sell for a truly “fair” price) these assets (at least conceptually) are no different than cash and belong to ALL of NJ’s citizens, NOT just the 15%-20% of all NJ workers that work in the Public Sector. There is no justification to earmark such proceeds ONLY to benefit that small group …….. especially knowing how the grossly excessive Public Sector pension benefit structure (which is the ROOT CAUSE of NJ’s financial woes) was negotiated with nobody (absolutely NOBODY) looking out for the Taxpayers’ best interests.

            It’s the grossly excessive PENSION & BENEFIT promises that need to be materially reduced.

          • Posted by Anonymous on June 28, 2015 at 9:18 pm

            If “default”, is inevitable wouldn’t dissolution be the responsibility of a judge or court appointed trustee?

            Interesting the c.78 opinion cited the judiciary should not be involved with the Budget process but default legally compels their involvement.

          • Posted by Tough Love on June 29, 2015 at 2:15 am

            For practical purposes, default means that there is no money to cuts the retiree’s check … even if they tell them NOTHING and never go to any Court.

          • Posted by Anonymous on July 2, 2015 at 2:08 pm

            The same old same old narrative from TL I see… “grossly excessive Public Sector pension benefit structure (which is the ROOT CAUSE of NJ’s financial woes) …”

            NJ has either not funded or underfunded the pension system for decades. Even now the Governor is going to make a partial payment on the partial payment he agreed to make years ago. The payment amounts to what – about 2% of the overall state budget?

            To claim pensions are the root cause of NJ’s financial woes is an outright lie. Might they be some day? Maybe, but they have not been nor are they right now.

          • Posted by Tough Love on July 2, 2015 at 8:50 pm

            All BS from another “Anonymous” (Public Sector worker or retiree) …

            Public Sector pension. TYPICALLY 3x-4x greater pensions (than their Private Sector counterparts) were never necessary, just, fair, or affordable from day one ….. and simply the result of their Union’s BUYING the votes of our Elected Officials with campaign contributions and election support.

            With the “generosity” 3-4 times greater than it should be, so are Plan costs and hence funding requirements.

            In total, NJ’s Taxpayers HAVE likely already paid 100% (or very near thereto) of the cost of a pension 1/3 -1/4 of it current “generosity”…. which is what would be EQUAL to what Private Sector workers typically get from their employers….. and THAT is all that is justifiable.

          • Posted by Anonymous on July 3, 2015 at 2:32 am

            Have not been on this site for a few years now and I see you are making the exact same BS statements as you were years ago. Nothing but a broken record.

            We all know you think public worker pensions are excessive. You are entitled to your opinion but that does not make you correct or right.

            But the fact remains your statement that worker pensions are the ROOT CAUSE of NJ’s financial woes is absolutely unsupported. Just because you say it does not make it so. Just because NJ paid some monies into the pension system does not make those payments the root cause of anything.

            Funny how 5 people I know in the private sector whom are my age and that I am close to all have pension systems extremely similar to NJ public workers. They range from construction to phone company to defense contractor. Three are retired already and the other two will shortly. Imagine that, they retired or will retire earlier than a public worker. That never happens according to you. One person never even had to contribute anything into his pension; nothing AND he has a matching 401K program up to 6%. Yes, new employees in their companies will not receive the same GENEROUS, EXCESSIVE pensions these PRIVATE WORKERS are getting; just like new public workers never will. There are plenty of private workers out there who retired in the last decade or more that have pensions equal to or greater than public workers. I don’t have to do any research or look very far to blow a huge hole in your babble that public worker pensions are 3 to 4 times higher than private workers. Oh sure, I guess the people I know just aren’t the typical private worker…right.

          • Posted by Tough Love on July 3, 2015 at 10:30 am

            Anonymous, I’m make the same ACCURATE statements I’ve made for years …. and have included demonstrations of the MULTIPLES greater Public Sector pensions on THIS blog and elsewhere.

            Yes. “saying” something is so doesn’t make it so, but “demonstrations” that cannot be effective challenged DOES help show that I’m correct.

            Go ahead and try yourself. Here is the last demonstration (actually 2, one after the other). The are 99 comments attached to the following Blog post from Mr. Bury. My (2) comments are the long ones , 3-4 back from the last comment:

            https://burypensions.wordpress.com/2015/05/14/its-embarsaing-and-im-tired-of-hearing-this-i-want-what-i-was-promised/#comments
            —————————————————————————————–
            And if capable of refuting them, be very specific….. BS doesn’t fly.

  9. Posted by dentss dunnigan on June 28, 2015 at 7:07 pm

    and do what with their bonds ……pay them off ? ….LOL

    Reply

  10. Posted by Eric on June 28, 2015 at 8:23 pm

    John:
    Why do you say that the alternative investments are destined to go bust?
    Do you have the update as to the latest calculation of the percentage of pension assets that are in the alternatives?
    Thanks,
    Eric

    Reply

    • Official latest value is here:
      http://www.state.nj.us/treasury/doinvest/

      and that Global Growth and Income representing almost 80%. \

      Also, about 5 years ago assets were around $60 billion. With payouts increasing and contributions sporadic it is very suspicious to see such nominal growth.

      Reply

      • Posted by Anonymous on June 28, 2015 at 8:56 pm

        John, so what’s the legitimate justification for risking plan assets for ROR that will never materialize and paying higher fees to do so. Sounds like a lose lose situation?

        Reply

        • Posted by Tough Love on June 28, 2015 at 9:31 pm

          The only way they can (even on a STRETCH basis) justify the 7.9% investment return assumption is to be heavily invested in very risky assets (aka “alternative investments”).

          And because of the screwy Public Sector Plan accounting rules, at least for share of Plan Liabilities covered by existing assets, that allows them to ALSO discount Plan “liabilities” at that same high rate (LOWERING the supposed cost of the promised pension benefits), a practice that any financial economist would tell you is absurd.

          Reply

        • The original justification was to inflate assets to keep the ARC down but now that the ARC is irrelevant they’ll likely bring asset values down to reality, though it would be unseemly to do it all at once.

          Reply

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