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New Jersey Lawmakers Warn of “Devastating” Budget Cuts in Wake of Court Pension Decision

A New Jersey Superior Court judge ruled this week that the state acted illegally when it cut its contribution to the state pension system in 2014.

If the state’s appeal of the ruling fails, it will have to come up with an additional $1.57 billion in 2015 in order to make its full payment to the pension system.

That money isn’t yet budgeted for – which means lawmakers will soon need to rearrange some items in the general budget to make space.

Lawmakers reacted this week to that steep price tag, warning of cuts that would come as a result. From NJ.com:

“The impact on programs at the end of the year would be devastating,” state Assembly Majority Leader Lou Greenwald (D-Camden) said. “The reality is we have to either make draconian cuts and make the payment…”

[…]

Assemblyman John Wisniewski (D-Middlesex) said Christie created the problem with his “duplicitous assessment of how to handle our pension obligations,” which included touting his 2011 overhaul of the pension system and telling workers that it saved their pensions, and then arguing in court that his own law was unconstitutional.

“He has an obligation to come up with a solution, since he is the one who came up with a solution that put us in this predicament in the first place,” said Wisniewski,

Assembly Minority Leader Jon Bramnick (R-Union), however, said it’s up to the Legislature to figure out what to cut now.

“All budgets are prepared by the Legislature,” he said. “So the court is saying to the Legislature you have to put this much money in the pension fund. So I’m assuming the governor will ask the legislature to come up with the program cuts that would be needed to find $1.6 billion.”

While the Legislature must pass budgets, it’s Christie who first proposes them.

Assemblyman Jay Webber (R-Morris), a member of the budget committee, said the payment Judge Jacobson ordered is about 5 percent of the budget.

“We have to be able to find it. And I think the other thing it emphasizes is we need a new round of reforms to our pension system,” Webber said. “We need to change those promises for new employees and employees who are far enough out from retirement that they can plan their retirements accordingly.”

The lawmaker reactions came before details emerged about Christie’s new pension reform proposals.

The savings realized through the proposals, if enacted, could make the cutting process easier for lawmakers.

Photo credit: “New Jersey State House” by Marion Touvel – http://en.wikipedia.org/wiki/Image:New_Jersey_State_House.jpg. Licensed under Public domain via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:New_Jersey_State_House.jpg#mediaviewer/File:New_Jersey_State_House.jpg

Pension Shortfalls Felt By Police Departments As Hiring, Retainment Becomes More Difficult for Cities

Pension obligations have strained police departments across the county as they weigh ways to cut costs without hurting the quality of their force.

But sound solutions are hard to come by as benefit cuts make it harder to recruit and retain good officers.

By the same token, mounting pension obligations make it more unlikely cities will spend money on hiring new officers even as department numbers dwindle.

From Bloomberg:

The shortfalls in the 25 largest state and local-government pensions have tripled over the past decade to more than $2 trillion, according to Moody’s Investors Service. Those gaps, which persist even as the stock market reaches record highs, have mayors scrapping plans to increase patrols and reopen precincts as they spend more on retirement instead.

In cities that cut benefits, officers have quit or retired, underscoring the challenge of balancing the promises of the past with the duties of the present.

“The difficulty you run into when you have minimal staffing is there’s less proactive time that an officer can spend on community-oriented policing,” said Brian Marvel, president of the police union in San Diego, where the number of officers has dropped by 200 since 2009. “There are officers out there doing great work every day. They’re just not doing as much of it.”

[…]

The diminished force in San Diego, which has declined to 1,850 sworn officers from 2,050 five years ago, mirrors a national trend: There were about 390,000 police officers nationwide in 2013, down 14 percent from four years earlier, according to the Federal Bureau of Investigation’s most recent figures.

Rebuilding police ranks is crucial to preventing their standing in communities from slipping even more, said George Kelling, a senior fellow at the Manhattan Institute for Policy Research, a New York nonprofit that studies techniques for making police more effective at reducing crime.

“Community policing is very labor intensive, and if you want to get out into the community, you have to have the resources,” said Kelling, who helped develop law-enforcement tactics adopted in New York. “Most cities ought to be viewing policing as an investment rather than a cost.”

San Diego’s police force isn’t only declining in terms of officers employed; the force has become less experienced, as the average officer only has 6 years of police experience, according to Bloomberg.

Photo by www.GlynLowe.com via Flickr CC License

California Attorney: Bankruptcy “Not a Practical or Desirable” Way To Cut Pensions

Teague Paterson, an attorney from Sacramento specializing in labor law, has penned a column in Monday’s Sacramento Bee in which he explains his position that bankruptcy is “not a practical or desirable” way to cut pension benefits.

From the column:

Imagine for a moment that you have run into deep financial trouble and have decided to file for bankruptcy protection. Your credit rating plummets, your home is sold at a fire sale, and you can’t rent an apartment or buy a car. You spend long hours at the negotiating table as creditors pick over the remains of your finances. Ultimately, you place your future in the hands of a total stranger, the bankruptcy judge.

Isn’t that a scenario that you would try to avoid at all costs?

If the consequences for an individual facing bankruptcy are devastating, the consequences for a municipality are 10 times as dangerous. Bankrupt cities face soaring crime rates, shrinking property sales, and the reduction or elimination of basic public services. It’s is not a decision that an elected official or city manager would willingly make unless there were no other options, as the decision by a bankruptcy judge presiding over Stockton’s bankruptcy makes clear.

Judge Christopher Klein’s ruling Thursday to approve Stockton’s bankruptcy plan confirms that the situation in Stockton will have little impact over the larger national debate on public pensions. Municipalities will not be filing for bankruptcy in waves in efforts to jettison pension debt.

For the very few severely distressed cities that may consider bankruptcy, the question will not be whether they can reduce pensions, but whether they should. In Stockton, the answer to that question was clear to all with a stake in Stockton’s future – and after two years of litigation that cost tens of millions of taxpayer dollars, the bankruptcy judge agreed.

Another key excerpt from the column:

Despite the media attention to cities such as Stockton and Detroit, municipal bankruptcy is exceedingly rare. According to one analysis, 13 local governments had bankruptcy filings since 2008. Five of those have been dismissed. To put it in context, there are more than 39,000 local governments in the U.S.

Although the bankruptcy process threatened to rob Stockton of its ability to make the best decisions for its residents, ultimately the judge accepted the city’s decision. In Stockton, the practicalities of running a city with an eye toward a brighter future shaped this outcome. Judge Klein acknowledged the serious and considerable pre-bankruptcy concessions accepted by Stockton’s employees, and the virtual guarantee that employees would leave to work elsewhere if Stockton reduced their compensation any further.

Stockton faced a unique set of circumstances brought on by revenue losses and a crippling national recession. Thankfully, it’s a situation that the overwhelming majority of municipalities will never have to face. As much as pension opponents would like to focus their analyses of Stockton as a blow to pension security, bankruptcy is simply not a practical or desirable option for cities dealing with pension obligations.

Read the whole piece here.

Photo by TaxRebate.org.uk

Think Tank: Blame Pension Costs For The 140 Tax Increases On California’s Ballot

When Californians go to vote on November 4, they will find a ballot stuffed with tax hikes. There will be 140 different proposed tax increases on ballots across California. Is there a reason behind the surge?

Mark Bucher, president of the California Policy Center, thinks he knows the reason. In a new column he says voters need look no further than pension costs. From Bucher’s column in the Sacramento Bee:

Tax-weary Californians looking to explain this paradox need look only to former Vernon (population 114) city administrator Bruce Malkenhorst for an answer.

Malkenhorst received a $552,000 pension in 2013, according to just-released 2013 CalPERS pension data on TransparentCalifornia.com.

[…]

Malkenhorst is part of a growing number of 99 California retirees who received at least half-million-dollar pension payouts in 2013, up from four in 2012. Such lucrative pensions mean that in 2014, California will spend approximately $45 billion on pensions, equaling total state and local welfare spending for the first time. And in the zero-sum game of government spending, an extra dollar spent on pensions means one less spent on welfare, infrastructure or safety – or returned to the taxpayer.

Though Malkenhorst and his ilk personify California’s pension profligacy, they do not drive it. That distinction goes to the 40,000 California retirees who took home pensions greater than $100,000 in 2013.

These are the pensions of Susan Kent, a retired Los Angeles city librarian, who took home a $137,000 pension in 2013. And Thomas Place, a retired San Joaquin court reporter, whose pension was $105,000. And, Betty Smith, a retired Alameda nurse, who received $116,000.

Anecdotal evidence aside, more tax dollars than ever are going toward paying pension costs. From Bucher:

Six-figure pensions for mid-level public servants have brought the state to the point where one out of every nine state and local tax dollars goes to pay for pensions. That’s up from one in 16 tax dollars in 1994. Tax increases now do not increase government services, but simply service government pensions.

And these compensation figures do not include five-figure health benefit obligations, which will only increase as the population ages and health care costs inflate. Bankrupt Stockton, where city employees who worked as little as one month receive a lifetime of retiree health benefits (including spousal coverage), is already paying this price.

Barring pension reform, Stockton – where one in five tax dollars will soon go to pensions – is a harbinger of things to come for other California cities that find themselves at some point on Stockton’s adverse pension spiral: Big pension obligations mean fewer tax dollars for services like safety and infrastructure, driving away taxpayers and increasing pension burdens further. Hence the need for yet more tax increases.

But taxpayers are having trouble keeping up: California pension funds are currently only 74 percent funded. And this is an optimistic estimate given that pension funds assume a very high rate of return of about 7.5 percent per year, an ambitious goal in this investment climate. For every 1 percent this projection drops, California taxpayers must contribute $10 billion more per year to maintain the same funding level, according to a recent analysis by the California Policy Center, using investment formulas provided by Moody’s Investors Service.

The entire column can be read here.

Fact Check: Has Tom Corbett Been Shorting The Pension System?

Tom Corbett has used the campaign trail to paint himself as a pension reformer – Corbett, the incumbent governor of Pennsylvania, says the pension system needs to be overhauled and supports a plan to shift public workers into a 401(k)-style plan.

His opponent, Tom Wolf, disagrees. Wolf says the problem isn’t the current system—it’s the current governor. He says the system’s current funding problem stems from Corbett’s failure to make required payments into the system.

The issue was brought up during a debate Wednesday night. WESA reports:

Wolf argued that the pension system itself is not flawed, but that the state needs to put more money into fully funding its pension obligations.

“Governors have not adequately paid into that fund,” Wolf said. “We need to figure out a way to do that, pay that debt, because that balance keeps coming up. I plan to do something about that. I will not keep delaying payment, I will do something.”

Corbett took issue with Wolf’s assertion that his and previous administrations have not adequately paid into the system, and instead said it’s the system itself that needs to be overhauled.

“We do have to, though, bite the bullet and start reforming how we’re paying into that system, rather than continuing to say we’re just going to continue to pay at $610 million new dollars each year for the next, I think it’s 25 years,” Corbett said.

Corbett seemed to dodge the issue of failing to pay the state’s actuarially required contributions (ARC). But Wolf has a point.

Since 2008, Pennsylvania has consistently shorted its largest pension funds.

The state has gone above and beyond when it comes to making payments to the Municipal Retirement System (MRS); but that system is also much smaller than the others.

Both candidates have points here. Wolf is right that Corbett has shorted the pension system. But while making full payments would be a step in the right direction, it wouldn’t solve the system’s funding crisis on its own.

Chamber of Commerce Gives New Jersey “F” On Pensions, Fiscal Responsibility

The U.S. Chamber of Commerce released a state-by-state report card yesterday, grading all 50 states on various areas, including education and fiscal responsibility.

New Jersey graded well on education. But it flunked the fiscal responsibility portion of the report card, earning a solid “F” from the Chamber of Commerce.

Why? The under-funded pension system was singled out as the main reason for the failing grade. From the report:

“Grade: F – New Jersey receives very low marks on fiscal responsibility. Only 65 percent of the state’s pension is funded, and the state’s most recent contribution was a meager 39 percent.”

More on the rationale behind the grade, from NewsWorks:

The grade is comprised of two factors: one, the percentage of pension obligations that are currently funded and, two, the amount of money allocated from each state’s 2012 budget for pension fund contributions.

For the first factor, the U.S. Chamber of Commerce calculates N.J.’s total pension funding at 65 percent. A few other states share that large a gap in available funds for pensioners. But no other state made as low a contribution to pension funds in 2012 as N.J.’s paltry 39 percent. Even renowned laggard Illinois managed to earmark 76 percent in funds toward pension obligations that year.

The N.J. Pension and Health Benefit Study Commission reported last week that N.J. has a combined $90 billion in unfunded pension liabilities. That’s three times our annual state budget. This week Fitch Ratings and Standard & Poor’s dropped our bond rating down yet again. There are no quick fixes to this, like millionaire taxes or amnesty programs or even higher contributions from already-strained state workers. Indeed, it’s unclear how to fix this at all.

Ten other states received F’s in the fiscal responsibility category.

View the entire report card here.

Report: U.S. Public Pension Funding Up 6 Percent in 2013

Funding ratios of the largest public pension plans across the country have improved since last year to the tune of 6 percent, according to report by Wilshire Consulting released Monday morning. From Reuters:

In the study provided to Reuters, Wilshire estimated 109 state retirement systems had enough assets to cover 73 percent of their obligations in the year ended June 30, 2013, up 5.7 percent from 69 percent in 2012. Still, 90 percent of those plans were considered under funded.

Russ Walker, vice president at Wilshire Associates and an author of the report, attributed the rise to the strong rally of global stock markets over the 12 months, offsetting “weaker performance by global fixed income and allowing pension asset growth to outdistance the growth in pension liabilities over fiscal 2013.”

For years, many states short-changed their public pensions, putting in far less than recommended by actuaries. The 2007-2009 recession further cut revenues, while plans’ investments, which provide two-thirds of revenues, went into a downward spiral.

[…]

Pension assets totaled $428.9 billion, while liabilities were $589.7 billion, reported Wilshire, a Santa Monica, California-based independent investment consulting firm. Of the retirement systems studied by Wilshire, 34 had equity allocations that equal or exceed 70 percent, while 14 systems were below 50 percent.

As the report notes, the vast majority of plans (90 percent) are still considered underfunded despite 2013’s improvement.

Experts generally consider an 80 percent funding ratio the lower limit of a “healthy” pension plan.

Winnipeg’s Pension Reserves Quickly Depleting; Budget Pains Likely Coming

For years, Winnipeg has had a “rainy day fund”, worth hundreds of millions of dollars, that was used to pay pension expenses. It was advantageous for the city because the general budget could be insulated from rising pension costs.

But that may not last much longer. The rainy day fund is drying up, and pension costs are still rising: the city expects to use $16 million to pay down pension expenses in 2014, and for the first time that money might have to come straight from the general budget.

From the Winnipeg Sun:

The [rainy day] fund has dipped from $130 million in 2006 to $60 million in 2012.

“Once the fund is dry the city will likely be left scrambling to find $16 million (or more) each year to fulfil its pension obligations,” said CTF prairie director Colin Craig. “That’s the equivalent of about a 3% property tax increase each year.”

Craig said the city has indicated it withdrew $16.3 million in 2013 and expects to withdraw about the same in 2014.

“Candidates are currently having trouble finding $20 million annually for the proposed rapid transit expansion,” continued Craig. “Well, surprise! They’re likely going to have no choice but to start finding $16 million each year to pay for the city’s pension plan too. It’s pretty clear the taxpayer can’t afford everything that council candidates are promising.”

The city’s 2013 annual report states, “Until recently the Winnipeg Civic Employees’ Benefits Program’s special-purpose reserves have been used to subsidize the cost of benefits. … the Program’s reserve position is currently insufficient to continue to subsidize the cost of benefits on a sustainable basis.”

If the fund contained $60 million in 2012, it will likely contain less than $28 million when 2015 begins. By the time 2016 rolls around, the general budget will become exposed to the city’s pension expenses.

Pittsburgh Comprehensive Fund Returns 16 Percent For Year

Pittsburgh’s Comprehensive Municipal Trust Fund reports that it returned 16 percent on its investments from September 1, 2013 to August 31, 2014 (the fund’s fiscal year). Reported by TribLive:

The pension system earned 16 percent on its invested portfolio during the 12 months ending Aug. 31, Executive Director Paul Leger said.

“It’s a very good value,” Leger said. “It’s actually something I tell my friends about.”

Funds for police, firefighters and municipal employees totaled $670 million in August, about 58 percent of the money needed for $1.15 billion in pension obligations for current and future retirees. Invested funds totaled $648 million in December, about 64 percent of their obligations.

The system earned 17.5 percent on investments in 2013, 15.8 percent in 2012, 9.3 percent in 2011, 8.4 percent in 2010 and 11.2 percent in 2009, according to reports from Chicago-based Marquette Associates, the Comprehensive Trust Fund’s investment adviser.

Pennsylvania state law mandates that any local-level pension fund with over $1 billion in obligations is subject to a state takeover if funding levels fall below 50 percent. Pittsburgh’s fund nearly fell below that level in 2010, but it avoided the state takeover scenario by re-directing over $700 million worth of parking taxes into the fund.

Photo credit: “PittsburghSkyline with WarholBridge” by TheZachMorrisExperience. Licensed under Creative Commons Attribution-Share Alike 3.0 via Wikimedia Commons

For Chicago, Property Taxes Still A No-Go As City Turns Elsewhere to Fix Pension Pains

ct-met-0129-chicago-pension-debt-gfc — Source: The Chicago Tribune and Morningstar

In Chicago, property taxes are among the most politically unpalatable ideas one can bring to the table.

But Illinois law requires the city to dramatically increase its payments to its two major pension funds to the tune of $500 million by 2016. In the past, the city has levied property taxes a year or two in advance of the payments in order to fund the required contribution.

One glance at Chicago mayor Rahm Emanuel’s actions of late, however, confirms that property taxes remain off the table. Tasked with improving the fiscal health of the city’s pension systems, Emanuel is exhausting all his policy options—without turning to property tax increases.

From the Chicago Tribune:

Since taking office in 2011, Emanuel has cut the size of the city workforce, reduced health care costs and found other efficiencies, like organizing garbage collection by grids rather than a ward-by-ward basis.

The mayor also has increased a host of fees, fines and taxes. He’s held the line on property tax hikes at City Hall, though Chicago Public Schools has increased them under his tenure. Some revenues, like real estate property taxes, sales taxes and income taxes, have rebounded slightly as the economy has slowly improved.

Emanuel previously declined to identify any way to come up with additional city revenue for the city worker and laborers funds until he had worked out an overall pension change plan this spring that lowered annual cost-of-living increases for retirees and boosted employee pension contributions. He’s taking the same approach to police and fire pensions by declining to discuss additional revenue before an overall pension change plan is worked out.

Pension360 covered earlier this week a hike in telephone fees that will net the city $50 million this year and next.

Still, Chicago’s budget gap is projected to be around $297 million in 2015. With the $500+ million pension payment looming as well, the pressure is mounting and Chicago officials may have to make some politically unpopular decisions.

City officials can still change their minds and hike property taxes—but the deadline to do so is last Tuesday of December 2015.