Bad pension ideas migrate to desperate NJ

hevesi6n-2-webFor two decades NJ has been a repository of some of the worst government pension practices in nation. Now in a desperate attempt to find answers to its huge pension problems, policy makers seem willing to consider bad ideas from elsewhere, perhaps reflecting how little the state understands about how it got into its mess in the first place. The latest notion, if this article can be believed, is that neighboring NY managed to avoid similar problems thanks to its comptroller’s office, which somehow kept the state out of pension trouble. This ignores the fact that a recent NY comptroller went to jail after using the pension system in a pay to play scheme and the current one is allowing over-burdened municipalities to punt on their pension obligations. Exactly what Jersey needs!

NY State pensions are better-funded than Jersey’s. If there is a key reason why that is the case, however, it is not that the comptroller has been a model of fiduciary responsibility, but that a NY union decades ago sued to enforce pension discipline in the legislature and governor. A far as I can tell, until the recent union lawsuits against Christie, Jersey unions did nothing of the kind.

The early 1990s NY case brought by the CSEA, which E.J. McMahon describes at the bottom of this post, not only prevented Cuomo (Mario, not Andrew) and the legislature from engaging in a specific pension gimmick  (similar to a one that NJ adopted in 1994, as I explain in section one of this study), but the court decision also established the principal that the state’s constitution demands full funding of pensions. In overturning the NY bill signed by Cuomo, the court said:

Said legislation allows employers to deplete moneys in the existing pension fund by reducing the amount of employer contributions.

That, the court ruled, was unacceptable.

One result of this has been that NY pension funds are far better funded than those in many states, including NJ. However, the level of benefits that NY provides has also kept driving pension costs higher. This is where DiNapoli has acted in exactly the wrong matter.

He’s allowing a dubious “amortization” program which has encouraged the state and more than 100 municipalities to forgo some $3.3 billion in pension contributions in the past three years. Many of these municipalities, as I explain here, are economically distressed upstate communities with little economic growth, so it’s not clear how they will pay this money back on top of their regular pension commitments.

Since this plan merely “defers” contributions rather than reducing them through some dubious pension accounting, I suppose it might be considered legal despite the 1993 NY court of appeals ruling, though the idea hasn’t been tested in court. But the crucial point for those who think a comptroller might have kept NJ out of trouble is that DiNapoli is using the power of his office over pensions to allow governments to kick the proverbial can down the road.

Meanwhile, there has been much discussion in NY over the wisdom of granting one elected official power over pensions, ever since Alan Hevesi and a bunch of his cohorts got nailed for corruption associated with their ability to hand out contracts for management of the state’s pension fund investments. The  conference in NJ that discussed the wisdom of a comptroller-run state pension systems appears to have neglected to mention Hevesi. At least the article about the conference never mentions him being discussed.

To backtrack for a second,Jersey residents might wonder why the state’s government unions never sued to stop the kind of machinations with the state’s pension funds. I can’t answer that, though history shows that the unions were sometimes willing co-conspirators in the pension chicanery. As Democrat and Senate President Steve Sweeney wrote in a 2010 Star-Ledger editorial:

When former governor Christie Whitman passed her pension bonding scheme, some unions worked with her on the back-end to get their own members’ retirement age dropped to 55 and their pension contribution dropped 40 percent. State union leaders never batted an eyelash in 2001 when the governor and Legislature boosted pensions 9 percent without offering any means to pay for it, and then negotiated a 40 percent decrease in their members’ pension contributions — things they knew the system could not sustain. The union leaders need to take off their blinders and stop ignoring their own complicity in this problem.

Maybe the NJ unions would not have succeeded with a lawsuit demanding more rigorous funding because the NJ constitution does not offer workers as strong protection for pensions as the NY constitution does. But as Sweeney suggests, it doesn’t seem like NJ unions were interested in enforcing pension discipline because it would have undercut their focus on getting as much as they could, perhaps because they figured that no matter what happened, their pensions would be protected. NJ workers now fretting about the future of their pensions might aim some of their ire at their former leaders.

 

 

 

Comments (4) Add yours ↓
  1. Tough Love

    Steve, Nice discussion.
    —————————————————————————————

    A suggestion for your next article ….. please look at the Report that recently came out (trumpeted by those who OPPOSE pension reform in NJ) saying that retirement Plan costs would RISE materially with a switch from DB to DC Plans. You can find it here:

    http://njpp.org/assets/reports/NJPPKRCPensionsOct2014.pdf

    I’m well versed in pension design and funding, and a strong advocate for Public Sector pension reform. I posted a very long comment on John Bury’s blog countering the Report’s position, but with my being simply a commentator, mostly uninformed readers don’t know what (or whom) to believe…. me or the Report. An unbiased commentary FROM YOU on the linked Report would e very welcome. You can find my LONG COMMENT here:

    http://burypensions.wordpress.com/2014/10/06/favorable-conditions-for-new-jersey/#comments

    readers

    October 9, 2014 Reply
  2. Joel L. Frank

    The public higher education workforce in NJ has been mandated into a DC plan since 1969. The employer contributes 8 percent of the worker’s pay while the worker contributes 5 percent. Participation in this DC plan known as the Alternate Benefit Program should be expanded to include the entire public sector workforce in NJ.

    That said, all current DB Plan participants should be given the choice of having the present value of their pension benefit accrual transferred to their new DC investment plan account. The State of Florida did this about 12-14 years ago.

    October 9, 2014 Reply
    • Tough Love

      Yes Joel, And I’m SURE that in fairness, you will agree that that (lump sum) “present value” should be calculated using the SAME 7.9% interest rate used as their Plan’s investment assumption.

      RIGHT ?

      October 9, 2014 Reply
    • Tough Love

      Joel, Follow-up to my above comment…

      You’re a smart guy ……. (especially since per prior comments of yours, I believe you may act a paid financial adviser to those who invest in such DC Plans) …. and I’m sure you do (or SHOULD) realize that with NJ’s State Plans about 55% funded and NJ Local Plans about 75% funded (even using the very high “official’” NJ investment/discount rate assumption of 7.9%), there isn’t anywhere near sufficient Plan assets to accommodate everyone if they all elected to make such a DB to DC switch. And I’m sure you ALSO do (or SHOULD) realize that for each Plan participant allowed to make a DB to DC switch (by taking a 100% share of THEIR accrued pension, when on average there is only sufficient assets for 55% & 75% shares in the State & Local Plans respectively) WORSENS the funding ratio for the remainder who elect NOT to make the switch.

      Why would you make such a recommendation possibly knowing the harm it would do (by worsening the funding ratio for the remainder) to those not switching ?

      October 11, 2014 Reply

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