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Christie Budget Will Contain Pension Cuts; Full Payment Not Yet Figured In Despite Court Ruling

New Jersey Gov. Chris Christie will give his budget address on Tuesday afternoon, and details are already leaking about what it will contain.

The governor’s office says that the budget will contain numerous pension proposals, including some that cut benefits for public workers.

Christie will also announce that he will begin negotiating pension changes with the state’s largest teachers union, the New Jersey Education Association.

One thing the budget won’t contain: the state’s full actuarially required contribution to the pension system. The budget calls for a $1.3 billion payment to the system, which is the largest in state history.

But the payment was supposed to be closer to $3 billion. Christie cut the payment last year by nearly $1.5 billion; a judge ruled yesterday that New Jersey must pay the full contribution, but the state is appealing the ruling.

Unions Approve Omaha Pension Reforms

A third union has approved a contract with the city of Omaha, Nebraska that features major pension changes.

Among the changes: new employees will be shifted into a cash balance plan and the full retirement age will be raised. In exchange, Omaha will increase its payments into the city’s pension fund and employees will receive a raise.

From NBC Omaha:

Monday, Omaha Mayor Jean Stothert’s office announced a third and final civilian union in contract negotiations has approved an offer which includes changing to a cash balance pension plan for new employees.

A news release from the office says the offer “solves the underfunded pension liability and achieves unprecedented pension reform.”

CMPTEC members were the last union group to accept an offer changing from defined benefits to a cash balance plan. The change only impacts new employees hired after January 1st.

The unions include CMPTEC, Local 251 and the Functional Employees Group. A fourth group, AEC, is not represented by a bargaining unit, but it will receive the same benefits.

Each group’s agreement allows current employees to remain in the existing pension plan with reduced benefits and an extension to the number of years required to achieve normal retirement.

In return, the City agreed to increase contributions to the pension fund by 7% over the five-year agreement, give employees a 9% raise over the five-year period, and a 1% one-time “lump sum supplement” for 2013 when wage freezes were enacted.

“I am grateful to the membership, the union negotiators and our negotiating team led by Mark McQueen and Steve Kerrigan for agreements that are good for our employees and the taxpayers,” said Mayor Jean Stothert.

The Personnel Board has already approved the Local 251 agreement. In January, they will meet to approve the other two. The City Council must also approve the contracts.

The contracts run through 2017.

“Everybody’s Not Going To Retire At The Same Time”: Actuary Evaluates Former Illinois Governor Edgar’s Pension Comments

Last month, former Illinois governor Jim Edgar gave his thoughts on the state’s pension situation. He notably said he didn’t support the state’s pension reform law, and said the following:

“I don’t think also you have to have 100 percent funding in the pension plan. Everybody’s not going to retire at the same time. I think you can keep probably 75, 80 percent is sufficient, but I think what you’ve got to demonstrate to a lot of folks out there who rate the state’s credit and a lot of those things is that the plan will work over a period of time and that they are committed and are going to stick with it.”

Actuary Mary Pat Campbell, who runs the STUMP blog, weighed in on Edgar’s comments. As you’ll see, she is not a fan of Edgar’s pension knowledge. The full post is below.

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By Mary Pat Campbell, originally published on STUMP

Seems that not all recent Illinois governors end up in prison, (Quinn isn’t out of the woods yet!) but perhaps they should be jailed for this crap:

“I don’t think also you have to have 100 percent funding in the pension plan. Everybody’s not going to retire at the same time. I think you can keep probably 75, 80 percent is sufficient, but I think what you’ve got to demonstrate to a lot of folks out there who rate the state’s credit and a lot of those things is that the plan will work over a period of time and that they are committed and are going to stick with it. We thought when we put in the provision you had to pay into the pension plan first thing before you did anything else that they would keep paying in. I never thought they would have the nerve to change that, but under (former Gov. Rod) Blagojevich they did and so you’re going to have to find some safeguards to put into the plan, but I think it’s going to take 20, 30 years to get to the level we want to get to, but if we start working toward it and don’t go on any spending spree with the pension plan, I think we can do that.”

First off, we do have an appearance of the 80% canard, but there’s a new lie that’s been creeping in that is pissing me off: “Oh, it’s not a problem right now… it would only be a problem if everybody retired at the same time.”

Let me explain, conceptually, what the pension liability is supposed to represent, and what the unfunded portion represents: it is what people have earned for their PAST service, and is using all sorts of assumptions, such as THE AGE THEY WILL PROBABLY RETIRE.

The actuarial value of the pension, under even the craziest approaches, does not assume everybody retires right now.

Let’s consider your pension value for a person still working: each extra year of service, they’ve earned some more. They are also a year closer to retirement. As long as they keep working and are still alive, the value of their pension increases, under most pension benefit design. Sometimes you’ll see a pension value drop at later ages, but that’s getting persnickety (though it has had some repercussions elsewhere).

The pension valuation is supposed to be a snapshot, indicating what has ALREADY BEEN EARNED. There are approaches that try to capture future salary increases, and tries to make accrual less drastic (as one usually does see huge increases in pension value right before retirement under some approaches).

The main time the pension value would be decreasing for a person is when they’re in retirement, as they’re not accruing more benefits, and each year they’re one year closer to death. The time the pension gets paid out is generally getting shorter. If the pension fund cannot cover retiree benefits, it’s in a really bad condition.

And here’s the deal: some pensions are not able to cover just the current retiree portion of the benefits:

Nobody is any more worried now than they were before the New Jersey Pension Study Commission report came out. Yes, “[t]his problem is dire and will only become much worse if meaningful steps are not taken quickly” but what does that really mean to anyone?

…. Scary Conclusions

1. For retirees there may be about $15 billion to cover $40 billion in liabilities and that’s ONLY for retirees leaving absolutely NOTHING for the 151,669 participants who have not yet started receiving monthly benefits except, for now, the refund of their contributions.

2. There is an equally good chance that Conclusion #1 is overly optimistic

I doubt New Jersey is the only state in that situation. As noted earlier, Kentucky is looking really bad.

And in my recent teaser, I showed a set of graphs I am developing for various pension plans. The ones being shown were for Texas Teachers Retirement System. I will explain them in a later post, and start showing you some truly scary information — using the official numbers from the plans themselves.

But shame on Gov. Edgar for mouthing the same bullshit everybody else does in favor of underfunding the pensions. I have looked at over a decades’ worth of Illinois pension valuations, and for all major funds (except one), they deliberately underfunded by substantial amounts, even in “good” years.

If you’re not going to make contributions when times are good, guess what will happen to the pensions when times are bad?

I guess ex-Gov. Edgar wants to cover his own ass for the pensions being underfunded in the go-go 90s, when he was governor (1991 – 1999). Hey! Everybody was doing it! 80% is good enough!

NO, IT’S NOT.

SHAME.

Moody’s: Voter Rejection of Prop. 487 Is “Credit Negative” For Phoenix

Last week, Phoenix voters shot down Proposition 487, the ballot measure that would have shifted the city’s non-public safety new hires into a 401(k)-style retirement plan.

Many public workers, and the city’s mayor, were happy with the result. But one credit rating agency was not.

A Moody’s report released Tuesday said the measure would have improved the city’s finances, and the results of the vote are a “credit negative” for Phoenix.

From the Arizona Republic:

“The vote is a credit negative for the city,” which is grappling with a $4.4 billion adjusted net pension liability, said Moody’s Investors Service. Phoenix has the sixth-highest adjusted pension shortfall relative to revenues among 50 large cities tracked by Moody’s.

[…]

According to the update by Moody’s analysts Tom Aaron and Don Steed, Phoenix actuaries projected the new plan would have increased city contributions by $358 million over 20 years but with savings that would have exceeded those outlays, especially if the underlying investments didn’t perform well.

The ballot measure could have saved the city up to $1.9 billion over 20 years, according to Moody’s, citing a city-council analysis. Cost savings would have derived from limiting the types of pay used to calculate benefits — which leads to the costly practice of “pension spiking” — eliminating supplemental retirement plans offered by the city and calculating pension benefits by spreading them over more years of employee salary, which tends to lower the payout.

But Moody’s admitted the measure would have incurred some extra costs if it had passed. Among the costs: legal expenses. From the Arizona Republic:

On the other hand, Moody’s noted that the measure, had it passed, likely would have triggered costly legal challenges. For example, one part of the proposition would have required only one retirement plan to be offered to newly hired employees, including those in public safety. That would have conflicted with a state law mandating participation in the Public Safety Personnel Retirement Plan, which covers police and fire employees throughout the state.

Moody’s didn’t change the city’s credit rating, however. It remains at Aa1.

Moody’s Report Reveals Cost of Seven Counties Departure From Kentucky Pension System

Seven Counties, a mental health agency, removed itself from the Kentucky Employees Retirement Systems Non-Hazardous Plan earlier this summer in an attempt to avoid the mounting pension obligations it claimed would leave it insolvent.

Soon after, a judge affirmed that Seven Counties could indeed leave the system—a decision that sent shockwaves through Kentucky because of the precedent it set for similar agencies facing similar problems.

The problem for Kentucky, of course, is that it now has to contribute more money annually into the system to cover its growing funding shortfalls.

A new report from Moody’s delves deeper into the extra costs Kentucky faces in the wake of Seven Counties’ departure—and the costs that could come if other agencies follow in Seven Counties footsteps.

The Moody’s report is behind a paywall, but Insider Louisville did everyone the great justice of giving us the details:

Debt rating agency Moody’s Investor Services has just issued a new report finding the departure of mental health services provider Seven Counties Services from Kentucky Employees Retirement Systems Non-Hazardous Plan means the state now assumes an additional $1 billion or so in pension costs.

If the remaining mental health organizations leave the state pension system, that amount could rise to $2.4 billion, according to the New York City-based agency.

Which of course has sparked a big political battle, with legislators and state officials panicked at the thought all community health agencies could exit the pension systems, leading to a meltdown.

The chart at the top of this post illustrates the burden Kentucky is, and could be, facing.

Insider Louisville pulled out one jarring quote from the Moody’s report:

The Commonwealth of Kentucky (rated Aa2/stable outlook) has Moody’s third highest adjusted net pension liability for all states at 211 percent of its revenue.

But Moody’s was quick to point out that they don’t think Kentucky will be falling apart in the near future; the agency believes the state can “absorb” the mounting pension costs as a result of cost-cutting measures elsewhere.