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New Jersey Pension Commission Releases First Report

It came a little behind schedule, but the New Jersey Pension and Health Benefit Study Commission released its preliminary report yesterday.

This first report was all about identifying and detailing the causes and current state of New Jersey’s pension funding shortfall. As such, no recommendations were made for fixing the system.

Although the report, notably, did not name Chris Christie, it did lay a portion of the blame on politicians for creating the pension mess. From NorthJersey.com:

The report in part blames politicians for failing to properly fund the pensions and siphoning surpluses during robust years resulting in a $37 billion unfunded liability in the state pension funds.

“While high benefit levels are one driver of unfunded liabilities, the lack of state contributions is a critical contributing factor,” the report states. “Put simply, if the state cannot find the economic means and discipline to consistently fund its pension obligations, the system will fail. The funding decisions over the last twenty years are telling examples of bipartisan contribution to fiscal distress.”

The report also said that Gov. Christie’s 2011 pension reforms didn’t sufficiently address the system’s problems.

Matt Arco of NJ.com put the report’s talking points more succinctly:

1. The looming unfunded liability is massive

2. Retiree health care costs are massive (and unpaid for)

3. Blame can be spread across the board

4. Failure to fix the problem will cost millions more

5. The 2011 reforms weren’t enough

The full report can be read here.

Moody’s: Strong Returns Can’t Keep Up With Obligations

Moody’s released a strongly-worded report today on the state of public pension funds in the U.S. The report claimed that strong investment returns haven’t improved the funding gap facing pension systems, because unfunded liabilities have grown even more than assets.

From Bloomberg:

The 25 largest U.S. public pensions face about $2 trillion in unfunded liabilities, showing that investment returns can’t keep up with ballooning obligations, according to Moody’s Investors Service.

The 25 biggest systems by assets averaged a 7.45 percent return from 2004 to 2013, close to the expected 7.65 percent rate, Moody’s said in a report released today. Yet the New York-based credit rater’s calculation of liabilities tripled in the eight years through 2012, according to the report.

“Despite the robust investment returns since 2004, annual growth in unfunded pension liabilities has outstripped these returns,” Moody’s said. “This growth is due to inadequate pension contributions, stemming from a variety of actuarial and funding practices, as well as the sheer growth of pension liabilities as benefit accruals accelerate with the passage of time, salary increases and additional years of service.”

U.S. states and cities are contending with underfunded worker retirement systems. The 18-month recession that ended in June 2009 wiped out asset values and forced cuts to contributions. Now, liabilities are crowding out spending for services, roads and schools.

For the report, Moody’s gathered data on the 25 largest pension funds in the country, which control about 40 percent of all pension assets in the U.S..

The New York Common Retirement Fund had the best average return over the past 10 years. The fund returned 8.67 percent annually.

Photo by www.SeniorLiving.Org

Lagerkvist: Here Are the Seven Deadly Sins of the New Jersey Pension System

New Jersey’s pension system is shouldering $51 billion of unfunded liabilities. How did it get that way?

In an editorial in the Philadelphia Inquirer, investigative reporter Mark Lagerkvist goes through what he calls the “seven deadly sins” of the state’s pension system. Excerpted from the article:

#1 – Retirement shams

A New Jersey Watchdog investigation revealed state attorneys general rehired 23 of their own retirees as investigators and supervisors. More than half of those law enforcement officials “retired” for only one day before they went back to work for the state.

The rehired retirees collected $3.77 million a year — $1.56 million a year in pension pay plus $2.21 million in salaries. Such costly personnel maneuvers have happened so often that state officials even have a name for it — “resignation pickup.”

#2 – Full pensions for part timers

The loophole, exclusive to the Public Employees Retirement System, is open to a wide range of part-time elected and appointed officials from New Jersey’s 565 municipalities, 590 public school districts, 21 counties and other governmental entities.

The list includes state legislators, county freeholders, mayors, councilmen, school board members, prosecutors, judges, town attorneys, tax assessors and many others who work for public entities covered under PERS, the largest New Jersey retirement fund.
#3 – Double-dippers and triple-dippers

Eighty percent of New Jersey sheriffs — elected in 17 of the state’s 21 counties — collect pensions as law enforcement retirees in addition to their six-figure salaries. Their payrolls include 29 undersheriffs who also double-dip. Overall, those 46 top county cops rake in $8.3 million a year – $3.4 million in retirement pay plus $4.9 million in salaries.

#4 – Disability pension abuses

5,500 retired police officers in New Jersey receive more than $200 million a year in disability pensions. They have been judged “totally and permanently disabled” by the state Police and Firemen’s Retirement System or State Police Retirement System.

“I’d say 95 percent of the disability applications are questionable,” said John Sierchio, former chair of the PFRS Board of Trustees. “It’s people who don’t want to work anymore.”

#5 – Ill-advised health benefit costs

If you think a $51 billion pension deficit is bad, here’s something worse.

The New Jersey state retirement system also faces a staggering $53-billion shortfall in funding retiree medical benefits, according to a report released by state actuaries last month.

#6 – The deadbeat state

From fiscal 2006 through 2011, New Jersey shortchanged its pension funds by more than $10 billion. Instead of contributing the expected $13.1 billion to the retirement accounts during that period, the state only pitched in $2.3 billion, according to a report by Common Sense Institute of New Jersey.

#7 – The $100,000 Club

New Jersey’s $100,000 Club of retired public officials has ballooned by 75 percent in the past three years. It is growing at a faster rate than the state’s pension deficit.

A total of 1,731 retirees collected $100,000 a year or more from state pensions last year, an increase of 739 pensioners since 2010, according to a New Jersey Watchdog analysis of Treasury data.

Mark Lagerkvist is an investigative reporter at the watchdog group New Jersey Watchdog.

There’s much more in the way of explanation over at the article, here.

Pennsylvania Lawmaker Speaks Out Against “Irresponsible” Reform Efforts

Pennsylvania Gov. Tom Corbett spent most of his summer traveling the state and touting the need for pension reform. The legislators are now back from their breaks, but pension reform bills continue to gather dust.

Republicans have been vocal about Democrat lawmakers’ unwillingness to work with the reform bills currently on the table. Now, one Democratic lawmaker has clarified why her party refuses to engage with the Republicans. Rep. Michelle F. Brownlee (D) writes in the Patriot News:

Republican leaders have already acknowledged the real pension problem is debt, not benefit costs. The solution to pension debt is the same as the solution to credit card debt: Pay the bills. Yet the Corbett/Republican pension proposal focuses on cutting benefits for future workers.

Act 120 of 2010 already cut new worker benefits starting in 2011 by nearly 50 percent, saving Pennsylvania $34 billion. Further cuts will sacrifice the retirement security of tens of thousands of future teachers, nurses, first responders, counselors and other public workers. The strain on safety net programs would stress future state budgets. Why do that when the Corbett plan offered by the Republicans, by their own admission, will do nothing to pay down the pension debt any faster?

If “reformers” truly believe we need to pay down the unfunded liability more quickly than Act 120 does, then they need to offer additional revenue so the state and school districts can do that.

It’s irresponsible, and a huge disservice to Pennsylvania, for those who do or should know better to continue misstating the pension problem and misleading the public about the solution.

She was responding to an editorial lambasting both parties, written last week by Dwight D. Weidman, vice-chairman of the Franklin County Republican party. He wrote in the Patriot News:

A very wise Pennsylvania politician recently opined, “In Pennsylvania, the unions buy Democrats, and rent Republicans”.

No doubt what the author of this statement was thinking about when he made it was the fact that close to twenty Republican legislators have steadfastly opposed any attempt to help enact urgently-needed reform to Pennsylvania’s public employee pension system, because of their ties to public sector unions.

To be sure, not a single Democrat legislator is willing to step up and save the state from certain bankruptcy, but that shouldn’t really matter, since the Republicans control both the Senate and the House and could fix our pension debt crisis, but won’t, and that is disturbing.

[…]

If lawmakers fail to act, this issue will, in time turn Pennsylvania into a large-scale version of Detroit, with both businesses and population fleeing ever more burdensome taxes that will be needed to fund the growing pension obligations.

Weidman criticized the 16 Republican assemblymen who “won’t get on board” with pension reform efforts. Many of those lawmakers receive campaign support from various unions.

New Jersey Lawmaker Puts New Pension Proposal On Table

Chris Christie’s pension commission members aren’t the only ones brainstorming pension reforms in New Jersey lately. A Democratic assemblyman has proposed a plan that would shift new hires into a hybrid plan with some attributes of defined-contribution plans and some attributes of defined-benefit. Reported by The Star-Ledger:

Assemblyman Troy Singleton (D-Burlington) last week sent some public union leaders a draft of a bill he’s considering introducing that would keep the current pension system in place for those already enrolled in it, but shift new public workers to a “collective defined contribution retirement program” – a sort of mix between a traditional pension plan and a 401(k).

“It may be something we don’t introduce, but it may be something we do in a different form. But I’d like to start some dialogue in where our pension system goes in the next step for our pension system,” Singleton said in a phone interview “The only thing I would tell you is it’s still a work in progress.”

The idea did not get a warm reception from the public worker labor unions, even though Singleton himself comes from the private side of organized labor, as an official in the Northeast Regional Council of Carpenters.

And Singleton acknowledged that the plan would not do anything to solve the pension’s unfunded liability of about $40 billion, which he said must be dealt with through increased state payments.

Singleton provided the Star-Ledger with an outline of how the plan would function. The gist:

Workers would establish accounts that both they and their employers would pay into, though the workers would pay three times as much as the employer. The money would be managed by a “professional money management provider” that could charge fees of no more than 0.25 percent of the total, while the plan’s appointed board and the State Investment Council would determine where the money would be invested.

The investment returns would be annually credited to the retirement accounts. But if the return is greater than 8 percent, the excess would go into a reserve fund, which would later be used if the investments lost money. The plan would allow for “bonus” payments to the retirement accounts if the reserve fund is healthy enough.

It’s far from the current pension system, in which workers’ final retirement payments stay the same, no matter how good or bad the funds’ investments are doing.

Christie appointed a commission last month to examine the state’s pension system and propose reform ideas. The commission’s final report will come in the next few months.

UK’s Largest Pension Fund Foresees “Difficult” Year

The UK’s Universities Superannuation Scheme (USS), the country’s largest pension fund, is preparing for the possibility that its unfunded liabilities could be larger than reported, and its financial condition more serious than its 85 percent funding ratio might suggest. From Financial News:

USS pays out £100 million worth of pensions a month, and its team of fund managers and traders in London undertake £1 billion worth of transactions every day. The team beat its targets last year, producing a 7.9% return against benchmark performance of 6.5%, according to its annual report to March 31, 2014, published late Wednesday.

Despite all this, the pension fund is struggling financially. It is currently undertaking a full formal valuation of its assets and liabilities as of 31 March 2014, a lengthy and complex process which it is expected to complete by the end of the year.

The pension scheme has provided an interim estimate of its funding level at the same date – 85%, implying a deficit of around £7 billion. This is a fall from the deficit reported at 31 March 2013 – £11.5 billion – reflecting a recovery in markets in the meantime.

However, USS’s trustees cautioned that the final figure might be “materially” different to £7 billion, and could be larger.

Administrators of the fund, along with labor groups and other parties, are already planning various cutbacks and cost-saving measures to head off the potential news of higher-than-believed liabilities. Reported by Financial News:

The main proposals are to close the old final-salary section of the scheme to its existing members – it was closed to new joiners in 2011 – and to introduce a new cap on the pensions that can be built up under the new career-average benefits section.

At the same time a new defined-contribution section, offering pensions that aren’t guaranteed, would be opened so that any members earning more than the cap can put their extra savings into it.

According to Universities UK’s July proposal: “This threshold has not yet been set but, depending on affordability, Universities UK’s aim is to maximise the number of scheme members who will fall below the salary threshold.”

The Universities Superannuation Scheme became the largest pension fund in the country this year after its assets grew to £41.6 billion.

Report Provides New Look at Public Pension Debt, State-by-State

Robert Sarvis and the Competitive Enterprise Institute have released a new report on public pension debt in the United States. The report draws from several estimates of pension debt and produces a list of states with the highest (and lowest) burdens of pension debt on their shoulders.

The report begins by laying out some of the reasons most states are shouldering massive pension debts:

One reason is legal. In many states, pension payments have stronger legal protections than other kinds of debt. This has made reform extremely difficult, as government employee unions can sue to block any scaling back of generous pension packages.

Then there is the politics. For years, government employee unions have effectively opposed efforts to control the costs of generous pension benefits. Meanwhile, politicians who rely on government unions for electoral support have been reluctant to pursue reform, as they find it much easier to pass the bill to future generations than to anger their union allies.

Another contributing factor has been math—or rather, bad math. For years, state governments have understated the underfunding of their pensions through the use of dubious accounting methods. This involves using a discount rate—the interest rate used to determine the present value of future cash flows—that is too high. This affects the valuation of liabilities and the level of governments’ contributions into their pension funds.

More on the ‘bad math’ portion of that argument:

In defined benefit plans, states are on the hook for payouts regardless of their pensions’ funding level. Therefore, the discount rate used in the valuation of pension liabilities should be a low-risk rate, because of the fixed nature of pension liabilities. Ideally, this should as low as the rate of return on 10- to 20-year Treasury bonds, which is in the 3 to 4 percent range.

However, in the U.S., most state and local governments use discount rates based on much higher investment return projections, usually of 7 to 8 percent a year. This usually leads to state and local governments making lower contributions, in the expectation of high investment returns making up for the gap. However, while such returns may be achievable at some times, they need to be achievable year-on-year in order for a pension fund to meet its payout obligations, which grow without interruption. Therefore, failing to achieve such high returns can result in pension underfunding that extends into the future. Discount rates based on high return projections also incentivize pension fund managers to seek higher returns. This encourages in-vesting in riskier assets, which incur large losses for investors when they go south.

For years, this practice was validated by the quasi-private Government Accounting Standards Board (GASB). To improve accounting, GASB recently introduced new standards that have pensions deemed underfunded—those with a funding level of under 80 percent—use a lower discount rate. However, pension plans deemed to be above 80 percent funded will still be able to use a high discount rate. Thus, the new GASB standards do not go nearly far enough to end the dubious accounting practices that have exacerbated state pension underfunding by hiding its extent.

Of course, these factors affect different states in different ways. Not all states use an 8 percent discount rate, although many do. That’s why the report breaks down which states are the worst off based. We won’t give away the results–but there are some surprises. Click the link below to check out the results of this interesting study.

Read the full report here.

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