Actuarial Solution to NJ’s Pension Crisis

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.


31 responses to this post.

  1. Posted by Anonymous on July 29, 2016 at 10:34 am

    For those of you who do not know what the Alternate Benefit Program is, it is the mandatory Defined Contribution retirement plan for the public colleges.

    Mr. Christie:

    Why haven’t you reduced the State’s contribution to these retirement accounts?


    • Posted by Anonymous on July 29, 2016 at 10:41 am

      Excuse you, there is an anti discrimination clause in the pension legislation, employee benefit are equal throughout the various pension systems including NJABP.


    • Posted by Anonymous on July 29, 2016 at 10:47 am

      Excuse you, state law governing pensions contains anti discrimination language, you cannot provide to one pension and not the others. The NJABP is equally protected under existing legislation and your point?


  2. Posted by Anonymous on July 29, 2016 at 10:38 am

    Who knew actuaries were such power grabbers?


    • Not so much power as easy money. No IRS or PBGC hassles, a state department do a lot of the grunt work, and million dollar fees (in NJ anyway) and you have to do is supply cover to a ponzi scheme.


      • Posted by Anonymous on July 29, 2016 at 10:50 am

        So for the next Governor who might have a pension reform plan other than cutting pensions , what do the actuaries suggest? Are actuaries NJ pension participants?


  3. Posted by Anonymous on July 29, 2016 at 2:13 pm

    Why not go across the board on all state obligations and not pay the same percentage on all obligations ? so everybody gets screwed equally ? reduce the payments on all state contracts, pay less than 100% on bonds, cut funding on everything. since the state no longer honors its obligations, why are they honoring any
    payment and debt obligations at all ? They can just say we can’t afford them anymore. So we no longer need a transportation fund, just sign contracts with road contractors and then when they finish the work tell them sorry we can’t afford to pay you anything. Everyone says if the state doesn’t have the money they can’t pay their obligations. so if there is no real transportation fund we can get all our road work done for free because there will be no money to pay. Sounds ridiculous, but that is basically what everyone including the courts have sanctioned.


    • Posted by wantfairness on July 29, 2016 at 4:43 pm

      agreed. I don’t want an additional tax on gas…. just to fund the transportation trust fund. If Christie can say we need that just for the transportation trust fund, then lets raise a “special tax” just for the pensions, a special tax just for food services etc. Just say sorry, I don’t feel like funding the transportation trust fund, or the pensions, or schools, or prisons. don’t pay anything to anybody because I don’t want my taxes raised and I don’t feel like meeting any of my prior commitments. whatever money the state gets in taxes spread it equally and only pay .30 on the dollar of what is owed because after all, the tax cuts I previously received were valid and didn’t cause any problems with state funding. I wanted those tax cuts and I want them now….. (quote willy wonka and the chocolate factory)


      • Posted by dentss dunnigan on July 29, 2016 at 5:35 pm

        That’s always been the pensions problem ..there never has been a dedicited tax to fund it and nobody ever ask for one …till now .But to ask for a tax to fund to fun pensions to a specific dollar is craze ,the state doesn’t even do that for education if it comes up short cuts are made . Sure add 2c on to the sales tax for pensions and let the chips fall where they may .


  4. Posted by boscoe on July 29, 2016 at 3:01 pm

    Mr. Bury:

    i am a fan, but your commentary today falls somewhere between cynical and wishful thinking. What you seem to be suggesting is that the actuarial assumptions guiding the state’s annual pension contribution be adjusted to fit the amount of money that a future governor or legislature has determined is affordable in any given year. You must have had a run-in with an actuary sometime in the past, because that scenario is professionally unethical for any registered actuary, even the somewhat compliant firms that the state has hired in the past. You might as well tell your accountant to vouch for a tax return that results in you owing what you feel you can pay.

    If the state wants to reduce its pension obligations in the future, let it walk through the front door by amending (reducing) the benefit structure of the systems going forward. Then let the actuaries do their professional calculations, including actuarial assumptions. Why do a back-door end run by having the actuary provide professional cover for political decisions?

    Speaking of actuarial assumptions, you are aware that the most important assumption for discounting future benefits back to the present is the assumed rate of return on pension fund investments. That rate is established by law (i.e., by politicians), not by the actuary. if it is totally unrealistic, it often requires that the actuary counterbalance other assumptions (e.g., life expectancy or salary progression) to bring some semblance of reality back to the table.

    Here’s another option: assuming this constitutional amendment gets placed on the ballot this fall (I don’t think it will), just have all the unhappy voters vote it down. It’s that simple. Future pension appropriations will be whatever future governors and legislatures decide they will be, and future actuarial calculations can continue to show the state falling further and further behind. What’s wrong with that picture?

    P.S. I am not an actuary and I never portrayed one on TV. But I do know that their professional standards are not as malleable as you would like them to be.


    • I’m sorry if it seemed that I was suggesting that the “actuarial assumptions guiding the state’s annual pension contribution are adjusted to fit the amount of money that a future governor or legislature has determined is affordable in any given year.” That is exactly what I am saying and come Monday I expect to have a blog ready that will prove the point with compiled data from the latest valuation reports for over 100 of the largest state plans proving the point.


    • If the state wants to reduce its pension obligations in the future, let it walk through the front door by amending (reducing) the benefit structure of the systems going forward.
      That would work, but the public unions would torpedo it.


  5. Posted by boscoe on July 29, 2016 at 5:16 pm

    I await your research.


  6. Posted by Eric on July 29, 2016 at 7:06 pm

    According to your post, do you think that full benefits can be paid until 2030?


    • No, I see ad hoc benefit cuts much sooner but this was for purposes of actuaries developing an ARC (ie generating those lowball contributions by only valuing benefits up to a specific date). Not currently a generally accepted actuarial principle but then closed amortization periods aren’t either (except in the public plan world).


  7. Posted by Eric on July 30, 2016 at 12:42 am

    Yes. I agree that the cost of living adjustment case did provide a solution. The cost of living adjustment was provided by statute. It was also guaranteed by case law. See Chiarello, decided in 2010. Finally, the employee handbook, guaranteed cost of living adjustments to retirees, and the book was published by the NJ Division of Pensions and Benefits for public employees to justifiably place and to solidify their reliance.
    As I stated before, Justice Patterson did not know that the entire class of litigants, appearing before her, had already retired prior to the law having been changed in 2011. This is when she indicated that the litigants had notice of the change. Wow! I still cannot believe that remark! Retroactive laws provide notice! Anyone need a Nostradamus?
    It is sad to say that there is no more law in the State of New Jersey. Soon it will be whoever has the quicker draw decides the winner, both regarding the event in question, and the “law” of the land.Might makes right! Perhaps a saloon business will do well, especially in this drought. I vote Barry Albin to be the sheriff. I doubt he would accept. He is too bright.


    • Posted by wantfairness on July 30, 2016 at 10:39 am

      thank you eric. finally someone who gets it. a contract is a contract except in nj and thus nj has become a lawless state. if the solution to a problem is to break the contract then everyone in nj does need not pay anyone who they hire to work for them. I can’t wait to get my entire house redone and including landscaping and not pay entire amount after the work is done. maybe I can get judge Paterson to rule for me in case the contractor takes me to court. my solution is the same as the state. there is precedent with that decision.


      • Posted by dentss dunnigan on July 30, 2016 at 11:29 am

        Are you not being paid a salary for your work .As for the contract being broken it was broken in 1994 when employees in the pension received a pension boost of 9% without it ever being ratified by the union or voters .


        • Posted by Anonymous on July 30, 2016 at 12:03 pm

          No the agreement was not broken by the employees. Whitman negotiated that 9% raise to be permitted to skip pension payments. she told the workers and the public that the pension fund was over funded and that skipping the payment would not harm the pension fund. she had no other way to balance the budget after creating a 30% tax cut out of thin air. The state’s citizens wholly supported this flim flam because they wanted a free tax cut. I am sure you are aware of this. Well, as we all know there are no free tax cuts and the bill for her shenanigans has long ago come due. The 9% raise in my case will be exceeded by the loss of money from the suspended colas in three more years. so I would gladly trade back the 9% for the return of all the lost cola money plus future colas to be received.


          • Posted by dentss dunnigan on July 30, 2016 at 12:48 pm

            you’re sadly mistaken ….Whitman had no right to negotiate anything ,she wasn’t even the governor …..nice try though …


          • Posted by Anonymous on July 30, 2016 at 2:15 pm

            Your the one who is mistaken – it was all in place prior to her leaving for DEP in Washington but DiFransceso signed it.


        • Posted by boscoe on July 30, 2016 at 2:45 pm

          Pension benefits are provided by statute; i.e. a bill being passed by the Legislature and signed into law by the Governor. So (1) they are not “negotiated” in the formal sense of a collective bargaining agreement; (2) they do not need to be ratified by the voters because they are not part of the State Constitution. The 9 percent benefit increase was passed almost unanimously in 2001 and signed into law by Acting Governor DiFrancesco at a time when both parties were pandering for the public worker vote in the upcoming 2001 election. The benefit increase was “paid for” by bogus actuarial gimmicks that repegged the market value of the assets of the retirement systems to two years prior, before the stock market tanked.


          • Posted by dentss dunnigan on July 30, 2016 at 5:27 pm

            link ….?


          • Posted by dentss dunnigan on July 30, 2016 at 5:42 pm

            Bottom line is that politicians can change laws to suit their needs ,increases decreases …just like the suspension of COLA ,it will be returned when funding reaches 75% of obglations .With the pensions in debt 188 Billion that number is meaningless but just the same it was signed and passed .


          • Posted by Anonymous on July 30, 2016 at 7:14 pm

            the increase to pension was signed and passed as deferred compensation. this was accepted by the state workers who really deserved a salary increase as most private sector employees were getting and deserved to have their pensions protected by the state paying the money it owed. The state employees only alternative was to go on strike which they are not allowed to do or accept the deferred compensation. The state then didn’t pay into the pension and PANDERED to the voters in NJ who wanted to keep their tax cuts, and didn’t care how they got it or where the money came from even though it was shown there was no money for the tax cuts.


          • Posted by dentss dunnigan on July 31, 2016 at 9:53 am

            Wel then if what you say is true about the tax cuts (?) taxpayers received you also benifited with those cuts plus you get the pension boost ,workers like you benefited twice at the cost to the rest of us …


  8. Posted by Eric on July 30, 2016 at 5:57 pm

    The cost of living adjustment is gone forever. Read ch. 78. It will never, ever return.
    Even if it were possible, that the statutory funding level were to be reached, a committee, whose members, half of whom are appointed by the governor, has full discretion to reactive the cost of living adjustment OR not to reactivate the cost of living adjustment at all, AND, if reactivated, may also modify the formula. How does a dollar increase per year sound if it were to be reactivated, which is won’t be?


    • Posted by dentss dunnigan on July 30, 2016 at 6:31 pm

      I agree ,but for political speak …it was “suspended” ,and that’s what I tried to point out to be continued funding must reach 75% which is totally impossibly we’ll reach zero before that


  9. Posted by Eric on July 30, 2016 at 9:03 pm

    Yes, suspended means ended. That was the plan all along. Termination.
    Nixon “suspended” the US dollar from being linked to gold in 1971. It was temporary. Guess what? The US dollar is still not linked to gold. The words temporary and suspended are doublespeak for ended.


  10. Posted by wantfairness on August 1, 2016 at 6:27 am

    dentss the pension increase was DEFERRED COMPENSATION for work already done. so by cutting pensions and removing the cola, the only one who is paying is the public worker. everyone got the cuts, but you have not paid for work done, and the public worker who gave you the “free” labor at that time is now paying for your tax cut as well as their own by not getting their contracted deferred compensation labor pay.


  11. Posted by wantfairness on August 1, 2016 at 6:29 am

    dentss… you and all the people in the state of nj just want something for nothing. it is easy to pick out one group and say.. if we take from them we all win. not so. again try that with anyone in the private sector and not pay for labor performed and you will be taken to court and lose.


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