employee contributions

Think Tank: New Jersey Pension Benefits Aren’t That Lucrative

One of the criticisms leveled at New Jersey and its underfunded pension system – and one of the main justifications used to cuts in worker benefits – is that New Jersey’s public employees receive more generous pension benefits than their peers in other states.

But a left-leaning think tank released a report Wednesday that cast doubt on the generosity of New Jersey’s pension benefits relative to other states.

From NJ.com:

New Jersey’s public employee pension plans ranked among the least generous of top public pension plans in the country, according to a report released today.

The study shows New Jersey’s pensions are more modest than 94 of the country’s 100 largest plans.

[…]

The study considered whether pension plans protect retirees from rising inflation, how benefits are calculated and how much employees contribute to their plans.

New Jersey fell in the bottom half in all three fields, which Stephen Herzenberg, the Executive Director of the Keystone Research Center, who authored the report, called the three most important dimensions of generosity.

[…]

Workers kick in 6.93 percent of their pay — and that number is rising — while employees contribute less in more than half of the other systems, according to the findings.

New Jersey’s retirees do not receive yearly cost-of-living adjustments to offset inflation, unlike 69 other plans included in the study that offer some protection from inflation. Retirees are suing to restore the cost-of-living increases that Gov. Chris Christie suspended as part of a 2011 pension reform package.

The state’s formula for calculating pension payments also uses a low multiplier — 1.67 percent — that lands it in the bottom quarter of plans.

The report notes that Garden State workers also receive some of the lowest pension benefits, but those were not factored into the rankings.

On average, pension benefits are $26,000 a year. Local government employees receive less on average, $16,000, while teachers receive more, $40,000. State employees collect $25,000.

Read the full think tank report here.

Photo: “New Jersey State House” by Marion Touvel. Licensed under Public domain via Wikimedia Commons

Memphis City Council To Vote on Competing Pension Reform Measures

After postponing a vote earlier this month, the Memphis City Council will vote on two competing pension reform measures at their last meeting of the year Tuesday.

Memphis Mayor A.C. Wharton Jr. drew up one of the measures; an alternative to that measure is being proposed by a council member.

Details of the measures from Memphis Daily News:

Memphis Mayor A C Wharton Jr.’s proposal [would] switch all new city hires in 2016 as well as city employees with less than 10 years of service to a hybrid pension plan that mixes a market-based retirement account with a defined contributions plan. City employees with 10 years or more of service would remain vested in the city’s existing private contributions plans.

An alternative by council member Myron Lowery to only include new hires in the change to the hybrid plan was amended two weeks ago, but no final vote was taken on the new alternative put forth by council member Wanda Halbert.

Halbert’s plan would include new hires in the switch to the hybrid plan as well as city employees with less than 7 1/2 years of service.

She made the proposal after saying city employees should be expected to make sacrifices toward making the liability sustainable for the city. Her proposal is based on detailed discussions with Segal Consulting, the Atlanta actuary hired by the council earlier this year to advise it. She also used numbers from PricewaterhouseCoopers, the actuary firm used by the Wharton administration.

[…]

Council members in the last month have been discussing whether the city should keep contributions unvested city employees made under the existing plan if they move to the hybrid. Some on the council have advocated a “sweep” of those contributions into a fund that would be available to unvested city employees when they retire.

Halbert’s plan to include those with less than 7 1/2 years of service in the switch had eight votes on the 13-member council two weeks ago. But a final vote was delayed.

Tuesday’s meeting is the last time the Council will meet until 2015.

New Chicago Treasurer Makes Pension Funding His Priority

Chicago Treasurer Stephanie Neely is stepping down at the end of November.

Her replacement, Kurt Summers, said his priority will be fixing the city’s pension systems. From the Chicago Sun-Times:

The full City Council is expected to ratify the appointment of Kurt Summers at Wednesday’s meeting, but the incoming treasurer is not waiting for the vote before rolling up his sleeves and getting to work.

He’s already meeting with actuaries and pouring over the books of the four city employee pension funds.

They include the Municipal Employees and Laborers funds that have already been reformed and police and fire pension funds still waiting for similar action.

In 2016, the city is required by law to make a $550 million contribution to shore up police and fire pension funds with assets to cover just 29.6 and 24 percent of their respective liabilities.

Much of that money will have to come from Chicago taxpayers.

That’s because, unlike Municipal Employees and Laborers, police officers and firefighters do not get compounded cost of living increases.

The process of making the city’s pension funds healthy, he said, includes decreasing investment fees and increasing investment returns. In other words, “investing more efficiently and less expensively.” From the Sun-Times:

As a member of the board overseeing all four city employee pension funds, Summers said he can “make a dent” in the taxpayer burden by reducing investment fees and bolstering returns.

Summers noted that the firefighters and laborers pension funds are paying dramatically higher fees to their investment managers than the Municipal Employees and police pension funds.

“One fund is paying 80 percent more in fees. Another is paying 50 percent more. Yet, there’s one client: The city of Chicago. That’s real money. For fire, the value of that is about $2.5 million-a-year on $1 billion in assets,” he said.

“These kinds of things aren’t going to solve the kinds of holes we have. But any benefit we can find to invest more efficiently and less expensively is a benefit to taxpayers and retirees.”

Summers noted that the bill that saved the Municipal and Laborers Pension funds — by increasing employee contributions by 29 percent and reducing employee benefits — assumes an “actuarial rate of return” on investments of 7.5 percent-a-year.

That makes it imperative that the funds invest in the “right type of assets,” he said.

“If there’s market shock during that time that looks anything like what happened in 2008 — or even what we saw in July — then you end that period of fixed, graduated contributions with less funding than was modeled out in the legislation and there’ll have to be greater catch-up to get to 90 percent funding,” Summers said.

“We’ll have to have portfolio and asset allocation changes to protect our rate of return because ultimately, the taxpayers and retirees are relying on us to hit that number and, if we don’t, they have a bigger bill on the other side of the graduated payments structure.”

That doesn’t necessarily mean being conservative, he said.

“It’s a common misconception to say, `If I invest in the markets or fixed-income [instruments], we’re gonna be protected, but real estate, private equity or hedge funds are risky.’ That’s plain wrong,” Summers said.

“The reality is, you have just as much, if not more exposure to risk and volatility in the market with investments in basic public securities than you do with alternative products meant to mitigate risk and limit volatility. That’s the business I was in — trying to do that for clients around the world.”

As Treasurer, Summers would be a trustee of the city’s pension funds.

Judge: Unions Must Use Different Argument If They Want To Overturn Baltimore Reforms

After several years and numerous legal battles, a federal judge today affirmed that a series of pension reforms enacted by Baltimore in 2010 were constitutional.

But the judge, Barbara Milano Keenan of 4th U.S. Circuit Court of Appeals, left the door open for unions to again challenge the reforms. This time, unions will have to bring a different legal argument to the table.

Quick context: In 2010, Baltimore overhauled its police and fire pension systems and implemented reforms—higher employee contributions, higher retirement ages and lower COLAs—which were projected to save the city $64 million annually. Details from the Baltimore Sun:

Under the mayor’s plan, firefighters and police have been required to increase contributions to the pension fund — now 10 percent of their salaries. Many officers were told that they would no longer be able to retire after 20 years, but would have to stay on the force for 25 years to receive their pensions. Retired workers also lost what was called the “variable benefit,” an annual increase tied to the stock market. Instead, the youngest retirees receive no annual increase through the variable benefit, and older retirees receive a 1 percent or 2 percent annual increase.

The bolded section is key. The first legal challenge against the reforms centered around the decrease in COLAs. Unions argued that the change was illegal because Maryland, like many states, treats pension benefits as contracts that cannot be impaired.

Most states sidestep the contract issue by applying reforms to new hires only. But Baltimore had decreased COLAs for retirees as well.

So, in 2012, a District Court ruled the change illegal, saying “elimination of the variable benefit constituted a substantial impairment of certain members’ contract rights, and that the impairment was not reasonable and necessary to serve an important public purpose.”

The ruling today overturned the District Court’s decision and re-instated the COLA decreases. The logic behind the ruling, from Reuters:

The appeals court said the reform was a “mere breach of contract, not rising to the level of a constitutional impairment or obligation.”

It also dismissed the notion that allowing the reform to go through would give a city “unfettered discretion to breach its contracts with public employees,” because of protections in Maryland law.

“This contention lacks merit because, under Maryland law, the city is only permitted to make reasonable modifications to its pension plans,” wrote Keenan. “Any reduction in benefits ‘must be balanced by other benefits or justified by countervailing equities for the public’s welfare.’”

But the judge said unions could change their argument, and they might have another shot at overturning the legality of the reforms in court.

Judge Keenan said that unions should argue the city took “private property for public use, without just compensation.”

And unions do plan to keep fighting.

“We have to get with our attorneys and decide which way to go, whether it’s federal or state,” said Rick Hoffman, president of the firefighters union. “I personally think this ruling strengthens our stance.”

Photo: “Ext-Night” by Basilica1 Licensed under Public domain via Wikimedia Commons