Drivers of Public Plan Underfunding

My Summer, 2018 issue of Plan Consultant (An Official Publication of ASPPA) came in the mail today, just in time to pore over in the passenger seat of what could well be a four hour drive to Newington, CT, but first, excerpts from an article by past ASPPA president Joseph A. Nichols that this group may find interesting.

I have to admit that many public pension plans are in a world of trouble – for example, the state system in New Jersey. However, for that woefully underfunded plan and other plans in the same situation, much of the trouble started when the sponsoring entities decided to not fund the Actuarially Recommended Contributions (ARC).

……………….

From 2001 to 2013, New Jersey contributed 38% of the ARC….In more recent times, the funding of the ARC has not gotten any better. According to the state’s 2016 Comprehensive Annual Financial Report, the actual percentage of the ARC contributed for the New Jersey state plan was almost 10% in 2014 and 2015. How can this happen?

……………..

Now, just because New Jersey risks defaulting on promises for not funding the plan, that does not mean that all public pension plans are in crisis or in a nightmare.

Mr. Nichols blames the crisis on ‘responsible’ officials shorting the ARC and not being able to cut back projected benefits. Nothing though on actuarial organizations not disciplining members for allowing politicians to dictate their assumptions and keeping the real scope of the problem from public view behind a wall of gimmickry and arcana.

Read the article and give me your thoughts. My ride’s here.

 

 

20 responses to this post.

  1. Posted by Analyst on June 29, 2018 at 2:53 pm

    Great points from both parties . But I am always amazed that people overlook other factors —expenses for example . Bad investment choices by consultants and staff . Projected benefits are easy targets because they are obvious . But if full ARC is paid and decisions are bad , then ARC just goes higher . I invite someone on this blog to do the following : 1) Take the underpayments of ARC and show what they would have earned if invested in the plan . 2) Use the returns of the median public fund and compare NJ investment performance to their policy and to their peers. 3) analyze the impact of overpaying for mediocre returns ( consulting and manager fees ) . 4) then let’s talk about benefit reductions / modifications .

    Reply

    • Posted by PS Drone on June 30, 2018 at 2:08 pm

      No. START with authoring reasonable, realistic, fair, benefits commencing at age 66, pension plans that are capped well below $100,000 for all public “servants” and THEN go back and force the budgeting and payment of the revised ARC. That would make sense and be FAIR to all citizens of NJ. Who knows, the plans might be over 80% funded already.

      Reply

      • Posted by Tough Love on June 30, 2018 at 9:47 pm

        Yes, THAT’S the key. There is no justification for the “calculated ARCS” because they are A FUNCTION OF overly generous pension promises.

        Taxpayers should ONLY fund an ARC that is associated with benefit levels EQUAL TO (but not greater than) what THEY typically get from their employers.

        Reply

        • Posted by Stanley on July 1, 2018 at 10:50 am

          Equal benefits? How about just a stipend to ensure that they don’t starve to death and if they want a more lucrative retirement they have to hone their saving and investing skills. Let’s end this “til death do us part” scam. No one treats the private sector employee in this way.

          Reply

          • Posted by Tough Love on July 1, 2018 at 11:16 am

            A public Sector pension “EQUAL” to that typically granted Private Sector workers rarely amounts to more than the employer’s share of Social Security contributions (6.2% of pay … up to the SS maximum wage base) plus 3% to 4% into a 401K Plans).

            For MOST Public Sector workers that’s about 1/4 to 1/3 of the TRUE COST of the pensions they have been granted.

            I don’t think granting such should be a concern for NJ’s taxpayers………… but NOT more.

          • Posted by El gaupo on July 1, 2018 at 7:47 pm

            But but but….Stanley says stipends are the way to go.
            I got a better idea. Let’s eliminate his social security and replace it with a small stipend. I’ll stick with the current pension plan I have now. Thanks. But hey…what the fuck do we need cops for anyway. Look out for your neighbors. Make citizen arrests when need be. Hell, get rid of prosecutors and judges while your at it. Mob rule. Lol. All while doing your own full time job.
            Gotta love this guy. Boomer who gets everything and don’t want to pay for shit.

          • Posted by Stanley on July 5, 2018 at 10:40 am

            Senor Constable Gaupo Uno,

            The police are just a backup to a civilized society. If it isn’t the accepted and practiced norm to live a responsible life and respect the rights of others to also live a responsible life, then the society falls into thuggery and cops don’t make much difference. I don’t have to point fingers or name names, but some areas are already there and many are headed in that direction. And bud, when you grant credit it behooves you to pay strict attention to the three Cs.

    • EQUAL miasma.

      You wouldn’t know equal if it bit you on the butt.

      A pension is just one part of the compensation for public workers.

      OR…

      for private workers.

      Most private workers have no pension, or 401(k) at all.

      Analyst is correct… A lot of public pensions are underfunded because of optimistic assumptions and other governance problems. That needs to be addressed. But New Jersey deserves a special mention for not meeting even the very lax ARCs.

      What you think is equal is not what was determined by your elected representatives, and is nothing but biased, misinformed opinion.

      That’s no way to run a pension.

      as Analyst says… again…

      1) Take the underpayments of ARC and show what they would have earned if invested in the plan .

      2) Use the returns of the median public fund and compare NJ investment performance to their policy and to their peers.

      3) analyze the impact of overpaying for mediocre returns (consulting and manager fees) .
      ————————————————-
      4) then let’s talk about benefit reductions / modifications .

      Reply

  2. Posted by skip3house on June 29, 2018 at 3:41 pm

    in article (unable to copy/paste?) ‘…and benefits (B) have already been discussed’,… is this what is meant…..?
    .’…at the point in time a deficit is projected, benefit payments from that point forward must be discounted at a lower rate…’
    Not much of a discussion.

    Reply

  3. Posted by Stephen Douglas on June 29, 2018 at 5:19 pm

    Wait for it…

    Reply

  4. Posted by Tough Love on June 29, 2018 at 8:09 pm

    Quoting ………………

    “I have to admit that many public pension plans are in a world of trouble – for example, the state system in New Jersey. However, for that woefully underfunded plan and other plans in the same situation, much of the trouble started when the sponsoring entities decided to not fund the Actuarially Recommended Contributions (ARC).”

    Statements such as this are flawed ……… that is, in not addressing the ROOT CAUSE of the problem ……….. BECAUSE that ARC is A FUNCTION OF the Plan’s generosity.

    Why SHOULD Taxpayers fund a ludicrously excessive Public Sector pension ?????

    —————————————-

    The real question should be …………….. if we took all of the Taxpayers contributions (and investment gains) over the past say 30 years, what % of a pension EQUAL TO (but no greater than) that typically granted Private Sector workers would it have funded? I’m guessing it would be pretty darn close to 100%.

    Reply

    • Posted by Stephen Douglas on June 29, 2018 at 8:27 pm

      Analyst on June 29, 2018 at 2:53 pm

      ” . I invite someone on this blog to do the following : 1) Take the underpayments of ARC and show what they would have earned if invested in the plan . 2) Use the returns of the median public fund and compare NJ investment performance to their policy and to their peers. 3) analyze the impact of overpaying for mediocre returns ( consulting and manager fees ) . 4) then let’s talk about benefit reductions / modifications .”

      Here’s your big chance.

      Reply

      • Posted by Tough Love on June 29, 2018 at 11:28 pm

        A guy/gal with the handle “Analyst” should do their OWN calculations.

        Reply

      • Posted by Stephen Douglas on July 1, 2018 at 5:03 pm

        A guy/gal with the handle “Tough Love” who is neither has very little room to criticize.

        Do the math. Show your work.

        Reply

        • Posted by Tough Love on July 1, 2018 at 7:02 pm

          I have …. on this blog ……. many times.

          It’s just that Public Sector light-bulb-changers (like you) don’t have sufficient grey-matter to “get it” …………. or are so biased (also like you) that their minds are closed to the gross-overcompensation, insatiable greed, and arrogance of Public Sector Unions/workers

          Reply

        • Posted by Stephen Douglas on July 1, 2018 at 8:02 pm

          Not “that” math. That failed the logic test years ago. Or has someone come forward to support it?

          I’m talking about Analyst. The taxpayers of New Jersey have a right to know what might have been if governor’s from Whitman to Christie had done their jobs.

          Lots of states have unfunded liabilities, New Jersey has criminal negligence.

          Reply

          • Posted by Tough Love on July 1, 2018 at 9:00 pm

            What NJ’s Taxpayers have a “right to know” is ……….. what funded percentage would their years have contributions produced today if all of NJ’s Public Sector pensions were always EQUAL TO but no greater than the retirement security typically provided comparably paid NJ Private Sector workers by their employers

            And I’d bet is darn near 100%.

            Nj’s Taxpayers NEVER owed NJ’s Public Sector workers any more.

        • Posted by SeeSaw Jr on July 2, 2018 at 6:03 pm

          A guy/gal with the handle “Tough Love” who is neither has very little room to criticize.
          LOL! This coming from a trough feeder with TWO first names. Gotta love it.

          Reply

  5. “Mr. Nichols blames the crisis on ‘responsible’ officials shorting the ARC and not being able to cut back projected benefits.”

    I guess he wants to talk about New Jersey. How about New York City, where residents and businesses have paid far higher taxes for far worse services for decades (those who didn’t flee to lower tax New Jersey) in order to fund pensions.

    But still ended up in the hole because benefits were retroactively increased? Over and over again, right down to today.

    And all under Omerta.

    Reply

    • Well, he said so.

      “At times of high investment returns, investment income was so high that even with lower contributions, benefits were increased. For example, during the dot-com market increase in the late ’90s, many plans were over 100% funded and required contribution
      amounts for many plans were at all-time lows. Ignoring warnings about market corrections, benefits were increased to use up the surpluses — surpluses that were supposed to be used for market downturns.”

      The 100 percent funding was a lie. A LIE!

      When you have an asset price bubble, the market value of assets may be higher on paper, but future investment returns will be lower. The historic average dividend yield on the S&P 500 was 4.3%. That dividend yield was factored into the expected rate of return. But at the peak of the dot.com bubble, the dividend yield was just 1.0%, because stock prices were so high relative to dividends. The expected rate of return on stocks should have been cut by 3.3%. It was increased instead.

      https://larrylittlefield.wordpress.com/2013/11/29/pensions-the-nature-of-the-lie/

      Generation Greed lied and robbed the future from the generations to follow to benefit itself. Not just with regard to public employee pensions, or even just with regard to government.

      Reply

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