Pondering or Sleeping on NJ Pension Reform?

Thomas J. Healey, a senior fellow at Harvard’s Kennedy School of Government, coordinated the work of the New Jersey Pension and Health Benefit Study Commission which has been totally ignored leaving him little to do but vent in a Baron’s editorial* that concludes:

Elected officials have an obligation to look beyond short-term political expediency and undertake comprehensive reforms that do right by their employees, retirees, and taxpayers. Everyone must wake up to the fact that unfunded pension and health benefit liabilities are explosive. Expecting conditions to improve with an uptick in the stock market or the imposition of a new tax or two is irresponsible, if not delusional, governance.

Which will continue at least through 2017 and the next gubernatorial election but Mr. Healey may have unintentionally hit upon the reason for the stasis earlier in his piece:

Two decades of fiscal and political irresponsibility have led New Jersey to one of the worst pension funding ratios in the U.S., along with repeated downgrades of the state’s credit ratings. Elected officials of both parties made pension promises they refused to honor through appropriate funding. They spent money on things voters can see rather than stowing it away in funds only actuaries can appreciate.

A doctor diagnoses cancer and you go on chemotherapy the next day. An engineer uncovers a design defect and a bridge closes to traffic the next day. An actuary predicts pension bankruptcy (albeit in a footnote on page 83 of a 134 page actuarial report which includes 40 nonsensical histograms) and it is only the actuary who appreciates the seriousness of the situation!

Not all cancer patients die and not all bridges with defects collapse so why are those professionals taken so much more seriously? It’s something to ponder.

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* In case you can’t get into the full Healy editorial, here it is:

Public Retirement Reform: New Jersey Ponders the Path

New Jersey walked right up to the edge of the public retirement cliff, took a good look and paused to think about it.

By Thomas J. Healey
Updated Oct. 8, 2016 1:53 a.m. ET

Two decades of fiscal and political irresponsibility have led New Jersey to one of the worst pension funding ratios in the U.S. In 2014, a bipartisan blue-ribbon panel was appointed by Gov. Chris Christie to develop new ways to close the deficit. Photo: Getty Images

The infamous tap water crisis in Flint, Mich. has triggered hearings, investigations, lawsuits, and broadsides by the presidential candidates. It seems that nobody can understand how local leaders could compromise the safety of an entire public water system. The answer has very little to do with mismanagement of natural resources, and everything to do with public pensions.

Flint is one of many cities and states with underfunded public pension systems. These governments have chosen to play a dangerous game of chicken that can spin horribly out of control.

The city’s bloated pension and health-benefits obligations could no longer be properly funded after the biggest taxpayer, General Motors, moved out. Flint faced the same kind of crisis that Detroit did in 2013, when rampant debt from pension obligations played a big role in precipitating the largest municipal bankruptcy in the nation’s history.

Kicking pension problems down the road is widespread. There are currently $3.4 trillion of unfunded pension liabilities in states and large cities, according to Wharton finance professor Robert Inman. That equates to roughly $10,000 for each American citizen. The five most troubled states–Illinois, Connecticut, Hawaii, Kentucky, and New Jersey– have combined debt and retirement costs (if properly funded) in excess of 25% of their states’ revenues, according to a recent JPMorgan report.
New Jersey as a Case Study

Two decades of fiscal and political irresponsibility have led New Jersey to one of the worst pension funding ratios in the U.S., along with repeated downgrades of the state’s credit ratings. Elected officials of both parties made pension promises they refused to honor through appropriate funding. They spent money on things voters can see rather than stowing it away in funds only actuaries can appreciate. This pattern reached its zenith in 2000, when lawmakers significantly hiked pension benefits without any bona-fide means of paying for them, a folly later flagged in a Securities and Exchange Commission review of the state’s bond disclosures.

Saddled with a $95 billion pension funding shortfall (by new Government Accounting Standards Board reporting standards), New Jersey had the courage to explore comprehensive reform. In 2014, a bipartisan blue-ribbon panel was appointed by Gov. Chris Christie to develop new ways to right New Jersey’s rapidly sinking benefits ship. The panel responded with a fair and pragmatic package designed to maximize savings to taxpayers and the state while minimizing the impact on employees and retirees.

For retirement benefits, the commission proposed freezing existing pension plans and providing new benefits through an affordable “cash-balance” plan—a hybrid between a defined-benefit pension plan and a defined contribution savings plan. No employee would lose a single benefit credit for service before the freeze, and no current retiree’s pension check would be affected.

Gold Standard

The commission sought to restore fiscal order to one of the nation’s most generous and costly health-benefit plans by benchmarking employee benefits to gold-level coverage under the federal Affordable Care Act. The state would fund retirement reimbursement accounts so retirees could secure comparable coverage through private exchanges. Those over 65 would be covered under the Medicare Advantage/prescription drug model.

To pay for these wide-ranging measures, the commission considered taxing millionaires, cutting services, selling the New Jersey Turnpike, and dedicating lottery revenues to pension funding. Each of these approaches, however, was deemed inadequate.

Instead, the commission advanced a unified state and local approach that would generate almost $3 billion in annual savings in local health-benefits costs. That, in turn, would enable local governments to reassume responsibility for roughly $800 million in benefit costs which over time had drifted onto the state’s books.

Removing that burden from the state–combined with over $1.4 billion in state-level health-benefits savings, the savings from the shift to cash-balance plans, and the returns on investment over 30 years–would be more than sufficient to lift New Jersey out of its pension hole. And the $3 billion annual savings in local health benefits would far outweigh the $800 million in obligations reassumed, so taxpayers could actually see a reduction in property taxes, the highest in the country.

Theory vs. Practice

While pensions are about numbers, pension reform is about politics. Without a crisis staring them in the face, legislators are only too willing to punt. Even the most tottering plans may have 10 years, 20 years or more before the well actually runs dry, so neither lawmakers nor citizens perceive an imminent threat in need of immediate action.

In New Jersey, the general public has met dire warnings of fiscal chaos with resounding yawns, while public employees have sought to strangle reform by a constitutional amendment mandating that existing pension benefits be maintained and funded in full, regardless of cost. Although such constitutional guarantees have made reform more difficult in other troubled states, New Jersey taxpayers have been told that revenue growth will ensure the proposed amendment will not cost them a dime in new taxes or service cuts.

If a state chooses to sanctify its benefit payments, its officials should be forced to provide permanent funding for the promises they make to public employees.

Elected officials have an obligation to look beyond short-term political expediency and undertake comprehensive reforms that do right by their employees, retirees, and taxpayers. Everyone must wake up to the fact that unfunded pension and health benefit liabilities are explosive. Expecting conditions to improve with an uptick in the stock market or the imposition of a new tax or two is irresponsible, if not delusional, governance.

40 responses to this post.

  1. Posted by dentss dunnigan on October 9, 2016 at 8:04 pm

    Why is nothing being done now ….because politicians know they can take the same approach our previous Governor (Corzine) took …He simply fled the state and left the mess for the next set of fools …

    Reply

  2. Posted by Eric on October 9, 2016 at 8:46 pm

    dentss:
    No, you have it all wrong. cc stated that he was elected to do the job of the people of NJ. He had no other political ambition. When he ended his own campaign, without capturing a single delegate, he stated he was on the “back 9” ready to work for NJ, shortly before he boarded Trump’s 757, as the two were seen waiving from the doorway. I don’t think you can land a Boeing 757 in Trenton.
    He, cc, still has one more year to fix everything. He will. I will also be waiting in the pumpkin patch for the return of the Great Pumpkin this Halloween. This time, I will be right!
    Just show a little faith, there’s magic in the night, as the Boss said.
    Go Linus!
    Eric

    Reply

    • Posted by Anonymous on October 9, 2016 at 9:01 pm

      Eric you are wrong, Cc announced in 2011 that he had saved the pension system and it was the law that contributions would be made. What more can he do he already saved it once, NOT!

      Reply

  3. Posted by Eric on October 9, 2016 at 9:08 pm

    He proudly claimed the”law” that he championed to be unconstitutional.
    Eric

    Reply

    • Posted by Anonymous on October 9, 2016 at 10:03 pm

      Eric, not sure if your being serious or cynical and what direct info you might be privy to. But I’d say, based on cc having the legislation he championed declared unconstitutional, he has less than a year. Because any constitutional fix will have to be passed in time to get on the ballott for at least November 2017.

      Reply

      • Posted by dentss dunnigan on October 10, 2016 at 10:18 am

        So you pass a gas tax that the voters are furious about ,give tax cuts that will blow a 1.5 billion bigger hole in the budget that will again require more service cuts …and you want to put a ballot question to voters to find another 2 billion …LOL

        Reply

        • Posted by Anonymous on October 10, 2016 at 1:19 pm

          You’re right, my bad! Let NJ default on ALL it’s obligations and retirees can get what happened in Detroit, a 4.5℅ reduction in base allowance as COLAs have already been suspended (eliminated). Of course, that’s assuming the master of bankruptcy gets elected POTUS and States are allowed to file bankruptcy. GO DONALD make your America great again…..

          Reply

          • Posted by dentss dunnigan on October 10, 2016 at 2:28 pm

            You don’t have to wait for “the Donald’..election Obama already did exactly that with GM ..took the company and forced the bondholders into receiving zero ( secured debt ,first mortgage holders ) ..That never has been done before ,Obama is a trend setter he’s already made America great again …

          • Posted by Anonymous on October 10, 2016 at 4:15 pm

            Oh you mean the Great Recession mess he inherited from Bush! GM would have been toast anyway unless the govt stepped in to bail them out. Just like the Wall Streeters…..

        • Posted by dentss dunnigan on October 10, 2016 at 4:27 pm

          I’m not looking to place blame ,I’m stating Obama did something that was never done before …He took the company from the owners (shareholders and bondholders) and took it for the government .Another way to have done that with the same results was Chrysler “bankruptcy of 1979 ..instead of taking the company for the government the government guaranteed the loans which enabled the present owners (stockholders) to retain ownership and work through times …and it worked .I’m no fan of the gov taking or even guarantee loans ..It was done to the banks in 2009 and the taxpayer got next to nothing for it while the banks got the money

          Reply

  4. Posted by Eric on October 9, 2016 at 11:25 pm

    Anonymous:
    I was referring to ch. 78 being declared being unconstitutional as far as requiring payments to be made in violation of the debt limitation clause of the NJ constitution.
    Our illustrious supreme court failed to distinguish between current expenses and long-term debt appropriations.
    This is the stench of the political rot.
    Eric

    Reply

  5. Healy is correct that the pension crisis still festers and the Unions are still in denial. The Commission recommended financing pension reforms by reducing health care benefits – a separate issue and wholly on the backs of employees who had not created the crisis. The governor’s call for school finance reform suggests a path for pension reform as well. Key to pension reform is the transition to 401k type systems with matches paid by the local employer. The savings from school reform provide the local revenues for pension reform. The State savings from the reform enable payment of the historical liability and free funds for additional funding of Abbott districts without court direction. It may appear a bit like musical chairs, but done together this could get the gears moving – a little bipartisanship compromise would go a long way.

    Reply

    • Jack Ciattarelli’s school aid reform ideas are motivated in large part by wanting to free up money for the pension system.

      Ciattarelli also wants to give more money to working class and middle class districts, but much of the freed up money would also go into pensions.

      http://nj1015.com/lawmaker-seeks-dialogue-with-njea-on-pension-reform/?trackback=tsmclip

      Reply

      • Posted by George on October 10, 2016 at 9:24 pm

        Not presented in Ciattarelli’s opinion piece are any numbers. The 401k suggestions are sort of amusing, do you suppose the teachers will demand huge payments into such a program to make up for the loss of their ‘speculative’ future pension payments? Why does the 401k suggestion always assume that like private sector workers the police/fire/teachers/DMV will just accept it?

        Chicago came up with a series of tax hikes to at least kick the can down the road a bit. The proposal included increased active teachers contributions, sounds fair doesn’t it? Teacher are threatening a strike, in other words they want another round of tax increases to pay for their increased contributions into the pension scheme.

        Posted 12hrs before strike deadline, I don’t know if the strike has been averted:

        Teacher contract talks enter last day before threatened strike.
        http://www.chicagotribune.com/news/local/breaking/ct-chicago-teachers-contract-talks-20161010-story.html

        Ultimately the tough guy talk only works if you can survive a strike and future elections. My suggestion, eliminate High School for all but special ed students.

        Reply

        • Posted by Anonymous on October 10, 2016 at 9:43 pm

          Heck eliminate free publc education, you got kids you pay and you choose where to send them. No kids, guess what….
          That way all the complainers of intergenerational inequity can have their cake all over their face!

          Reply

          • Posted by George on October 12, 2016 at 1:27 pm

            “eliminate free publc education” It’s not free. All I am suggesting is reconsidering high school. The people attending high school could either go directly to college or start work (what used to be called apprenticeship). Instead of paying for high school the state could pick up 4 or more years of healthcare and workers comp costs.

            My guess is large numbers of the former high school students would end up on the first rung of medical careers. Some would get tired of it and move up the ladder.

          • Posted by Anonymous on October 12, 2016 at 1:59 pm

            Of course it’s not free BUT the cost is directly shared by all properties owners and indirectly shared by renters. Point being why is this “fair” for those of us w/o children? And what do the proponents of intergenerational inequity have to say?

        • What’s not to like about defined benefit pensions for public workers, especially when the State pays for teacher pensions? The problem, as the actuaries keep pointing out, is the numbers don’t work. They work even less when economists and auditors question the actuarial assumptions. The other underlying problem is that the pension promises involve transferring the investment risk from the employees to the taxpayer. So with inaction in 10 or 15 years the State will be forced to either/both reduce benefits and raise taxes. Better to resolve this now,. The 401k transition is intrinsic to long term resolution.

          Reply

          • Posted by Anonymous on October 12, 2016 at 10:34 am

            DCP for ALL – Local, State, & Federal – civilian, law enforcement & military. If it doesn’t work for some then it doesn’t work for ALL. Or are you one of those exceptions folk? BTW, it has nothing to do with the Feds ability to print money!

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

            the fed ability to print money notwithstanding ,the fed can borrow at the lowest interest rate possibly .01%( presently)where as states NJ must pay quite a premium presently at about 6.75% …but for comparison sake what job would you compair to a marine fighting in the middle east to a cop in Newark ..? inquiring minds want to know …but the bottom line is the gov can and will print money look at our debt it’s doubled in the last 8 years …

          • Posted by Anonymous on October 12, 2016 at 1:39 pm

            Ok but what ℅ of military is front line combat versus support staff here and abroad. In some cases military is in more harms way but in alot of ways their in less harms way then, in your example, the cop in Newark. So now what?

          • Posted by Anonymous on October 12, 2016 at 1:41 pm

            And DD, I’m assuming your quick defense of the military means you and/or yours have a vested interest. Like I said, change is good so long as it doesn’t negatively impact who?

          • Posted by dentss dunnigan on October 12, 2016 at 4:11 pm

            I have great respect for our men in Arms ,but I do find your jeliously of their benefits offensive …I will not comment on this subject further

          • Posted by Anonymous on October 12, 2016 at 8:33 pm

            I as well respect our military and first responders but if it’s about jealousy, as you put it, then who’s jealousy of who? I always thought it was about the numbers so don’t make it appear so personal and untouchable. Self interest is a double edge sword!

          • Posted by Anonymous on October 13, 2016 at 3:34 pm

            Just remember whether it’s Washington or Trenton, military, first responders, or civilians – individuals chose to accept employment based on the salary and benefits being offered. The fact that one level of government can “print money” (which we all know has negative economic consequences) and another can’t shouldn’t preclude the moral and, if not for CC’s NJSC, legal obligation to fulfill their commitments.

    • This is an editorial by Assemblyman Ciattarelli himself.

      Reply

  6. Posted by dentss dunnigan on October 10, 2016 at 4:48 pm

    John ,I know you read Zero Hedge they just came out with this ..http://www.zerohedge.com/news/2016-10-10/2-simple-charts-show-which-state-pensions-are-most-likely-enforce-benefit-cuts#comment-8246158 ……………….What I find interesting is..The states with the highest pension burdens — measured as the largest three-year average ANPL as a percent of state governmental revenue — were consistent with previous years. Illinois topped the list with pension liabilities at 280% of total governmental revenue, followed by Connecticut (Aa3 negative) at 209%, Alaska (Aa2 negative) at 179%, Kentucky at 162%, and New Jersey at 157%…Moody’s introduced a new metric which they referred to as the “Tread Water” benchmark. The largest underfunded plans in Kentucky, Illinois and New Jersey would require an incremental 7 – 7.5% of annual state revenue for contributions in order to simply stop unfunded liabilities from growing further.Am I wrong to assume that to just keep our heads above water would require a7% contribution of our states budget ,which would be about 2.4 billion annually and grow every year ..

    Reply

    • Posted by George on October 12, 2016 at 1:39 pm

      A tiny test possible test case, the 4 pensioners of Loyalton Ca are having their Calpers pensions cut. Although they seem to be trying to raise the money.

      CalPERS poised to cut retiree pensions in tiny Sierra town
      http://www.sacbee.com/news/politics-government/capitol-alert/article105236966.html

      Reply

      • Posted by S Moderation Douglas on October 12, 2016 at 5:39 pm

        In the Stockton bankruptcy, Judge Klein noted that the pensions actually involved three contracts.

        The first contract is between the city and it’s employees, specifying the pension payable for each employee, calculated on the years of service and final salary.

        The second contract is between the city and CalPERS, for CalPERS to act as the agent for the city to collect contributions, invest them, and disburse pensions to the members when they retire.

        The third contract is between CalPERS and the workers/retirees.

        If, for any reason, CalPERS can not or will not pay the pensioners the contracted amount, that does not absolve the city from the first contract. If a retiree is due $3,000 a month and CalPERS only pays $1,000, the city is legally obligated to come up with the remaining $2,000 a month to fulfill their original agreement with the employee.

        Think of it like dental insurance. If your insurance is “supposed” to pay eighty percent toward your treatment and for some reason declines to pay, you STILL owe that balance to your dentist. Ask me how I know that.

        Reply

  7. Posted by Anonymous on October 11, 2016 at 12:31 pm

    INTERGENERATIONAL
    GOBBLEDYGOOK
    OR
    GENERATION
    WHINE
    ?????????????????????

    Reply

  8. The numbers for defined benefit pensions don’t work in any setting – public private military – doesn’t matter. Most private pensions are closing. In the past public pay was low and the pensions an offset. Not so today. The only fair way out of the mess is to honor past commitments (capping abuses if possible) but change going forward. People worry about Social Security, but that can easily be fixed. The numbers on pensions are far worse.

    Reply

    • Posted by S Moderation Douglas on October 12, 2016 at 11:04 pm

      Daves11…

      “In the past public pay was low and the pensions an offset. Not so today.”

      A common misconception. Every major study says public workers still earn lower wages than equivalent private sector workers.

      Daves 11…

      “The numbers for defined benefit pensions don’t work in any setting – public private military – doesn’t matter.”

      Also untrue. Although not their “official position”, the Society of Actuaries has had several articles on the advantages of DB systems, although they do recommend much less risky investments. Ed Ring, director of the California Policy Center, also advocates DB pensions, but he recommends much lower benefit levels. David Crane is an ardent proponent of pension reform, but still says the defined-benefit format is very viable.

      Ed Ring…

      ” Preserving defined benefits will require hard choices. But defined contribution plans should supplement pensions or social security, not replace them. And comparing defined benefits – or social security, for that matter – to Ponzi schemes or Pyramid schemes are specious arguments that do not belong in serious debate.”

      Reply

  9. Posted by Eric on October 12, 2016 at 8:42 pm

    daves11
    Past commitments have already been breached. See Berg v. Christie. No cost of living adjustments for those who have already retired prior to the implementation of ch. 78. This class of retiree was guaranteed cost of living adjustments pursuant to statute, case law and employee manual. All three were rendered meaningless.
    Justifiable reliance, placed upon the existing law, was irrelevant. Retirees could not reverse their position. They have already “walked the proverbial plank.”
    Even the well reasoned, unanimous Appellate Division opinion, which delved into the legislative history, was reversed.
    NJ is a corrupt cesspool of a Third World nature, since raw, corrupt politics always rules the day! That is the rule of law. I would rather be judged by pirates.
    I believe your thinking, daves 11, is quite naive if applied to the State of New Jersey.
    Eric

    Reply

    • I’m not saying the givebacks you mention are fair. Or even that they were imposed in good faith. A Democrat administration may reverse some of them. I have advocated many times in this blog and elsewhere for compromise in order to achieve the necessary transition to some variant of 401k. Political inflexibility and denial prevent change that can avoid the coming fiscal crisis – where both your (and my) pension is cut and taxes raised.

      Reply

  10. Posted by Eric on October 13, 2016 at 10:07 am

    daves 11
    I have funded my own retirement. I was fortunate enough to have been able to do so. I worked in engineering and in mathematics. I enjoy analyzing numbers, and would never invest in a mutual fund or in a hedge fund for that matter. I would never trust a “financial advisor” and would never invest other peoples’ money for them, although I had been asked to do so for whatever reason. I even had a friend who had invested in gold, and wanted to tell me where he had hidden it since he did not trust his family. I refused to have him tell me the location for obvious reasons.
    Friends of mine, who had worked in government, have relied upon the law in NJ, and the law had been broken with the “blessing” of the NJ Supreme Court. They, my friends, have been damaged, and in some cases, most severely. The elderly are having the greatest financial burden with zero interest rates at banks, a lack of understanding of financial markets, and the abolition of their cost of living adjustments, which they relied upon as the existing law when they retired. The blame for cost of living adjustment debacle rests squarely upon the NJ Supreme Court as the guilty party. It is a body of politicians, nothing more.
    I blame the NJ Supreme Court for many abuses. NJ never had a balanced budget, as required by law, which was never addressed by the Supreme Court. Clifford Goldman, the treasurer for Brendon Byrne, greatly criticized the court for never having enforced the law mandating a balanced budget. Google his name, pensions, and the NJ Supreme Court. Read the articles about the constant borrowing of money, and how the NJ Supreme Court served as an enabler to the other political branches of government.
    Also, when a government fails to enforce its laws, meaning its citizens and its businesses can no longer rely upon them, a Third World system of government emerges. No one wants to do business in NJ, for not only is its tax structure the highest in the nation, and is a regulatory of nightmare of epic proportions, but also, more importantly, is that it raises the big question mark of having no law upon which to rely for spending, risking, and investing millions of dollars of capital in a business. Why would anyone risk opening a business in NJ? Businesses are fleeing in droves.
    Opening a business has become a mere game of chance, of rolling the dice, rather than careful financial planning of a well thought out business model. The unknowns lurk as too daunting.
    NJ is now Third World thanks in part to the NJ Supreme Court.
    Eric

    Reply

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