Wendell Steinhauer, president of the 200,000-member New Jersey Education Association, came out with an op-ed on njspotlight today urging:
“a constitutional amendment to require the state to fund its pension obligations responsibly. It’s the least expensive, most responsible way to solve the problem created by a generation of fiscal irresponsibility. Amending the constitution to impose the fiscal discipline that our elected leaders lack is the only solution that will work.”
No it’s not and New Jersey has already set out on the another path. Now it’s up to the actuarial community to pave the way by officially sanctioning the default assumption.
The least expensive way to solve the problem for taxpayers is obviously to renege on the obligation. Cost-of-living-adjustments (COLAs) have already been taken away though they supposedly had been funded for. Had the actuaries anticipated this court ruling then prior Annual Required Contributions (ARCs) would have been lower. The next step is reducing the base pension to a level that the state is comfortable funding.
The legislature needs to act on this constitutional amendment next week so it can be on the ballot this November. What it will do is require the state to make the ARC as determined by the actuaries to be sufficient to fund benefits. The ARC is based on a number of assumptions but principally it is the rate of member mortality and interest to be earned on investments. Throughout the public plan world these assumptions are ridiculously optimistic (ie generate lowball ARCs) which will lead to plan bankruptcies inevitably when those assumptions are not realized.
For New Jersey, which has not even been making those watered down ARCs for decades, D-Day is near but the COLA ruling has provided a solution. Consider this scenario:
The constitutional amendment passes. It is 2021 and the actuaries come out with $10 billion as the ARC, even using their dodgy assumptions. The state can only afford to pay $4 billion so the actuaries go back and rerun their numbers but this time valuing only the benefits that are certain to be paid out. It could be 40% of benefits across the board or full benefits until 2030 and then nothing thereafter. In any case, after applying this ‘default assumption’ the contribution comes down to that $4 billion.
All perfectly legal, within the constitution, and based on generally accepted (in the public plan community) actuarial principles.