Quarterly Quackery

s2810, introduced on November 14 and to be voted on today, would require New Jersey to pay its pension contributions on a quarterly basis by September 30, December 31, March 31, and June 30 of each year, beginning July 1, 2017.

The bill’s sponsor, State Senate President Steve Sweeney, had an opinion piece in njspotlight today claiming:

Making pension payments every three months — rather than at the end of the year — will ensure that the requisite contributions are made, not skipped. Today, New Jersey legislators will vote on bipartisan legislation to commit the state government to a schedule of quarterly pension payments that will provide fiscal stability to our underfunded pension system and save billions of dollars in future costs for state taxpayers.

Either Sweeney is willfully ignorant of pension funding or he believes his intended audience is since this bill will actually REDUCE the State’s pension contribution.

Current law says that contributions…

…shall be made in full each year to each system or fund in the manner and at the time provided by law. The contribution shall be computed by actuaries for each system or fund based on an annual valuation of the assets and liabilities of the system or fund pursuant to consistent and generally accepted actuarial standards and shall include the normal contribution and the unfunded accrued liability contribution. The State with regard to its obligations funded through the annual appropriations act shall be in compliance with this requirement provided the State makes a payment, to each State-administered retirement system or fund, of at least 1/7th of the full contribution, as computed by the actuaries, in the State fiscal year commencing July 1, 2011 and a payment in each subsequent fiscal year that increases by at least an additional 1/7th until payment of the full contribution is made in the seventh fiscal year and thereafter.

If a contribution becomes onerous either the legislature can pass another law with a lower fraction or the governor is free to skip any payment.  S2810 would not change any of that but what it does do is reduce the amount that the state would have to put in.

Among the generally accepted actuarial standards that public plan actuaries do follow is the interest adjustment for when contributions are deposited.  If you look at the valuation reports you will see an adjustment to the date of deposit – see page from JRS report line item F.6.(d).  What this means is that if the machinations that develop a Normal Cost of $700 million now take into account that the deposit will not need to be adjusted for a full year’s interest but rather for quarterly installments that total Normal Cost would reduce to about $680 million.  There is less money put into the plan which is now on the hook for earning that 7.9%.

10 responses to this post.

  1. Posted by Anonymous on November 21, 2016 at 10:47 am

    And still without any idea of source of funding ….


  2. Posted by boscoe on November 21, 2016 at 3:09 pm

    I may be boxing above my weight class here, but I’m not certain John’s analysis regarding the unintentional consequences of S-2810 (quarterly payments of state pension contributions) is correct. I think this is due to the lag time between the valuation date and the date the actual payment is made to the pension fund based on the state fiscal year which runs from July 1 to the following June 30.

    Using John’s example of the July 1, 2015 actuarial valuation of the Judicial Retirement System, the report determines “the recommended contribution for the plan year beginning July 1, 2015.” However, the report itself was prepared in February 2016, more than half way through the fiscal (plan) year for which it certifies the recommended contribution. The calculation page John references implicitly acknowledges the impossibility of making retroactive payments by stating on line item F.6.(d) that if the amount certified as due July 1, 2015 is actually made on July 1, 2016 (the earliest practical date given that the appropriations act for state fiscal year 2016-17 begins on that date), then the normal cost is increased by 7.90% to reflect lost interest during the one-year lag between certification date and payment date. So far, so good.

    The problem is that the state cash payment for the plan year beginning July 1, 2015 is NOT made on July 1, 2016 as assumed in the valuation report. It is made on June 30, 2017 — the last day of the subsequent fiscal year, and two years (minus one day) after the certification date. When that payment is finally made, there is no official recognition that it is being made without an extra year’s worth of interest due to the system (the time difference between the July 1, 2016 “payable” date and the actual payment on June 30, 2017).

    John’s conclusion — that quarterly cash flow payments throughout the fiscal year should reduce the certified normal cost — would be correct IF those quarterly payments were made during that same plan year. But in fact the state is currently turning over its contribution to the system a full year after that assumed payable date. This same payment mechanism exists for each of the major pension systems, not just the Judicial Retirement System.

    So Sweeney’s bill is actually playing catch-up. As I see it, it should not impact the “State normal cost payable” calculation done by the actuaries unless they change their own methodology. It should modestly improve the timing of the cash flow into the pension funds. But the converse side of the coin is that the state’s own short-term cash deposit balances will decrease by the amounts turned over to the systems throughout the year. And maybe more significantly, the bill ignores the fact that the state’s cash balances are uneven and fluctuate significantly over the course of the year due to statutory payment dates for major taxes (e.g., April income tax payments, quarterly sales tax payments). If the state has to increase its borrowing (issue short-term notes) to cover its own cash-flow shortages, then any net advantage from Sweeney’s bill would be mitigated.


    • Off on a tangent either way. The quarterly payments increase the likelihood the full payment will be made each year. That’s the relevance. A sign of good faith. Also shows they can address pension reform piecemeal in little bites. So this is a start. Fiscal stability for the state and ultimately taxpayer relief requires a transition to 401k type pensions for all public sector employees.


      • Posted by boscoe on December 1, 2016 at 4:18 pm

        With all due respect, what’s off on a tangent is your apparent confidence that “the quarterly payments increase the likelihood the full payment will be made each year.” As far as the “full payment” is concerned, for all practical purposes the full payment is what the Governor decides it will be when he delivers the annual budget in February for the following fiscal year. And as we all know it is not the full payment called for by the actuaries. Quarterly payments of a reduced amount are still a reduced amount.

        I’ve got no issue with quarterly payments, as I noted above. But it’s the equivalent of putting lipstick on a pig. And now that the retirement systems have to offset their expected quarterly payments by any additional cash-flow interest charges the state incurs through short term borrowing to make those payments, it’s one step away from being pathetic, given the massive funding shortfalls in every one of the systems. Perhaps in a year when investment earnings are in the range of 15-20% the quarterly payments will bring in significant assets to the pension systems. It’s happened before but who knows when/if it will happen again.


  3. […] comes down to is a debate over whether the state should REDUCE its contributions on account of the actuarial adjustment for earlier deposits and the cost of borrowing.  The state would still get to pick their contribution by applying some […]


  4. […] fiscal impact as estimated by the Office of Legislative Services is $0. My estimate was this last month and if you are looking for an update please check out NJTV Friday […]


  5. […] New Jersey pension system.  My ten minute interview for the piece consisted of points I had made  in a prior blog (almost all of which was not included in the three minute segment that aired) but I liked the part […]


  6. […] with that quarterly contribution diversion the overwhelming support for this bill by politicians is rooted in its revenue neutrality. It is […]


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