Tag: actuaries

John Bury: 4 Things The New Jersey Pension Panel Failed To Say

stack of papers

Over at Bury Pensions, actuary John Bury covers New Jersey pension developments as close as anyone. And there’s been a lot to talk about lately, as the New Jersey Pension and Health Benefit Study Commission just released their first report last week.

But what wasn’t in the report is just as important as what was. While the report served as a great primer on how New Jersey’s pension mess came to be, it fell short on some counts.

Here’s John Bury’s take on what was left out.

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By John Bury

The report did a good job of piecing together available public information but anyone could have done that. What this panel of experts was supposed, and failed, to do is bring their knowledge of the truth of the situation to the general public.  Perhaps some did not possess that knowledge and others who did wimped out but here is what should have been in the report:

Actuaries lie

A 54% funded ratio and $37 billion shortfall for the state portion of the New Jersey pension sounds bad enough but people should be aware that these figures are generated by actuaries whose sole responsibility to their politician clients is to keep contribution amounts low.  Ask yourself how a plan returning 16.9% in trust earnings when it is assuming 7.9% worsens their shortfall.  It’s primarily because of a flaw in basic actuarial math which is not being adjusted for since getting it right is not what public plan actuaries are paid for when right means higher contributions. Then there is the smoothing canard that the panel completely ignores, quoting the $44 billion actuarial value of assets as real rather than the $39.5 billion market value.

Politicians cheat

$14,9 billion in skipped ARC payments under Christie in cahoots with the legislature who not only get to decide how much they put in but they also get to brag that their selected mini-contributions are the full statutorily required amounts though they get to define what is statutorily required.

Benefits are protected

Hinted at on page 18:

One of the reasons the reforms described above have had little impact on the unfunded liability is that many of them do not apply to all current employees.

And the reason many recent reforms are not applied successfully (witness the COLA fiasco) is that Christie Whitman in 1997 exchanged constitutional protection of those benefits for the ability to reduce contributions to a desired level (i.e. nothing).  That needs to be admitted and reforms must include either paying for all those promised benefits in full or coming up with some strategy to get public employees to agree to reduce their benefits voluntarily.

Hybrid plans won’t work here

Though a Defined Contribution plan is the only type of plan that governments, run by political considerations and without independent funding discipline, should be allowed to sponsor moving new employees into these plans would only worsen the underfunding since a valuable input into the ponzi scheme New Jersey currently runs (employee contributions) would be shut off and new hires who are typically younger could wind up getting even higher benefits than under an age-weighted defined benefit system.  In the private sector the shift to cash balance plans worked because older employees could be forced (or tricked into) accepting them.  It would take a massive amount of ‘creativity’ and will to work the same magic in the public sector where employees have more leverage and  politicians are not bargaining with their own money.

Pennsylvania Weighs Risks, Rewards of Pension Obligation Bonds

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Pension reform has been the talk of Pennsylvania politics these last few months, and the reasons are equally political and practical: if retirement costs keep rising, the state’s fiscal handcuffs will keep tightening—and they are already uncomfortably snug. That leads eventually to budget-cutting maneuvers, many of which are sure to be politically unpalatable.

But a recent analysis from the actuaries for the state’s Public Employee Retirement Commission presents a policy tool to save the state money. The tool: pension obligation bonds (POBs), the controversial bonds that carry big risks and big rewards for the states that issue them.

The actuarial analysis stated that the state could save $24.5 billion over the next 30 years if they issued just $9 billion in POBs. The state’s PSERS system could reduce costs by $19.8 billion with POBs, according to the analysis.

More from the Pittsburg Post-Gazette:

The analysis does not account for the cost of the bonds, and the actuarial consulting firm, Cheiron, notes: “While the special funding provides a savings to the Systems, there is the potential for there to be a net cost to the Commonwealth.”

The governor’s budget office offered one analysis, from Public Financial Management, Inc., that projected borrowing $9 billion would require the state to pay $10.4 billion in interest over 30 years.

State and school district payments are scheduled to rise sharply in coming years, and policymakers face the prospect of searching for significant new revenues or exacerbating the estimated $50 billion unfunded liabilities of the retirement systems for state and public school workers.

Gov. Tom Corbett, who is touring the state to promote another pension plan, has said he does not support borrowing to pay down the state’s pension liabilities, and House Republican leadership has not embraced the approach.

But Senate Democrats back refinancing the pension debt with $9 billion in bonds, and Tom Wolf, the Democratic candidate for governor, says he would explore funding mechanisms like pension obligation bonds. Mr. Wolf’s campaign said he favors following the payment schedule set in 2010.

The risks of POBs are well-known, and not everyone is on board with even considering this policy option.

One man, who says he has worked in the bond market for 50 years, wrote into the Post-Gazette to express his displeasure with the proposal. From the letter:

Issuing bonds provides elected officials a way to pay back the banks, investment houses and attorneys for their ongoing contributions to their election campaigns. Instead of having the courage to take steps to solve the current problems they will attempt to borrow their way out of the problem. It’s analogous to amassing large debt on your credit card, borrowing at high rates to pay off the debt and then continuing to use the card for new debt.

Colin McNickle, the editorial page director at Trib Total Media, weighed in on the issue as well this week:

First off, such bonds currently are not legal in the commonwealth. The state Legislature would have to reverse course. But, second, pension obligation bonds have a horrible history of failure because of their questionable application.

Such bonds are taxable general obligation bonds sold to investors. Governments see it as a reasonable way to shore up underfunded pension plans now while off-loading the costs to the future. And if that sounds financially hinky, you’re right.

“While POBs may seem like a way to alleviate fiscal distress or reduce pension costs, they pose considerable risks,” wrote scholars at Boston College’s Center for Retirement Research in a 2010 white paper. “After the recent financial crisis, most POBs issued since 1992 are in the red.”

Just last February, a panel commissioned by the Society of Actuaries warned that public pensions should not be funded with risk or if it delays cash funding: “Plans are not funded in the broad budgetary sense when debt is issued by the plan sponsor to fund the plan.”

As the Center For Retirement Research has previously pointed out, POBs often get a bad rap because they are “issued by the wrong governments at the wrong time.” Meaning, the states that issue POBs are often in states of fiscal distress and aren’t in a position to take on the risk posed by the bonds—even if they’re in the perfect position to benefit if the bonds work out.

So the question remains: Is Pennsylvania the right state? And is the right time now?