NJ’s public sector pension plans are expected to be mostly insolvent by 2027 as the pension demands of retirees far outweigh the capital appreciation and new contributions to the fund. That’s what happens when you assume 7.95% annual pension fund returns (not adjusted for inflation) and 1980s era mortality data to pay for “special” retirements after 25 years of service. The fact is people are living longer than they were in the 1980s. So NJ has public sector retirees who will earn more from their pension (plus health plan benefit cost savings before Medicare kicks in) than they did in their 25 years of service. For example, the average PFRS retirement age is 52. If that retiree lives to 84,the recent expected average male lifespan in the US, then they’ll draw a pension for 32 years vs. only 25 years of service. This is nothing more than a Ponzi scheme where retirees are taking out much more than the <10% they actually contributed from wages could ever earn in the pension funds. Simply, the pension math no longer works.
There is no ‘fix’ possible. We are well past the point where a ‘fix’ could be implemented.
The optimal path now (something that Christie intentionally/unintentionally followed) is to hasten the demise of the unsustainable pension liabilities. Restructuring is inevitable, the sooner it is done the better it will be for all sides – pensioners as well as taxpayers.
As he nears end of second term, governor still struggling with state’s deeply troubled public-worker pension system, while some stakeholders look to a new administration for relief
Credit: Governor’s Office/Tim Larsen
Gov. Chris Christie once bragged about “fixing” New Jersey’s beleaguered public-employee pension system with a series of reforms that were enacted during his first two years in office.
But now, as the second-term Republican prepares to present a final state budget to lawmakers next week, the retirement funds for public workers remain a huge problem, and any long-term solution will likely not come from Christie, but from a successor who will be elected later this year.
Christie confirmed during a recent NJ 101.5 FM radio appearance that he’s planning to boost the annual state pension contribution up to $2.5 billion in the 2018 fiscal year spending plan. The increase would set a record for state pension funding in a single budget, but also fall well short of the full amount that actuaries say is needed to return the retirement system to overall good health. And it was Christie, in 2010, who signed a law that committed the state to fully funding the actuarial estimate by the 2018 fiscal year.
Christie, meanwhile, also left the door open during the radio interview to calling on lawmakers to approve new benefits cuts for public workers along with the next state budget. That comes even after he bragged in 2011 that benefits changes passed that year were “providing real, long-term fiscal stability for future generations.”
Ridgewood NJ, the New Jersey pension crisis in 60 seconds . Reader says ,” the unions rule NJ and the politicians are at their beck and call. They’re bankrupting the state and municipalities, and taxpayers get screwed at every turn. Benefits should be diminished big time, but the unions get the vote out to keep the good times rolling. You keep voting in theives and you’re gonna get robbed. Any time the unions want something, assume it’s bad for state and local tax payers”
State and local governments have promised an estimated $5.6 trillion in pension benefits that they cannot afford to pay. (Photo: iStock Photos)
COMMENTARY BY
Rachel Greszler
Rachel Greszler is a senior policy analyst in economics and entitlements at The Heritage Foundation’s Center for Data Analysis. Read her research.
Pensions are a huge part of public employees’ compensation, often providing a quarter to a third of their total compensation. A new report from the American Legislative Exchange Council shows how politicians play politics with public pensions, threatening public employees and taxpayers alike.
State and local governments across the U.S. hold about $3.8 trillion in public employee pension assets. Unfortunately, the politicians and pension officials who manage these assets often sacrifice higher returns for personal and political gain.
Pension plan officials are supposed to look out for the best interests of pension beneficiaries, but the American Legislative Exchange Council report, “Keeping the Promise: Getting Politics Out of Pensions,” tells a different story:
Rather than investing to earn the best return for workers, [lawmakers and pension plan officials] use pension funds in a misguided attempt to boost their local economies, provide kickbacks to their political supporters, reward industries they like, punish those they don’t, and bully corporations into silence and behaving as they see fit.
The report shows three ways that pension officials play politics with public worker pensions:
1. Economically targeted investments. These are a way for public pension plans to buoy local projects at the cost of receiving significantly lower returns. These subpar investments strip pensions of billions of dollars in returns. Alabama is the biggest offender, with over 16 percent of its pension assets invested in them.
One particularly egregious example is Alabama’s pension fund investment in the troubled oil repair and shipbuilding firm Signal International. Alabama invested $21 million and later loaned $73 million to Signal (despite three years of it providing 11 percent losses).
Shortly thereafter, Signal was forced to pay $21 million to settle what was called “one of the largest cases of labor trafficking in modern times.” Signal later entered bankruptcy and was purchased by one of Alabama’s pension funds.
2. Political kickbacks. These allow private individuals and companies to buy access to public pension investments by making political contributions to certain local politicians, and by lobbying pension funds to invest in them. Investments based on politics instead of performance costs the average pension fund over $200 million a year.
The California Public Employees’ Retirement System, known as CalPERS, suffered massive losses from political investments, largely at the helm of board member and union leader Charles Valdes.
Despite having no investment experience and twice filing for personal bankruptcy, Valdes spent 25 years as a CalPERS board member where he added significantly to pension deficits by granting investment contracts to political donors and engaging in suspect behavior with other board members.
During his 13 years as the investment committee chair, CalPERS experienced one of the worst investment performances of any public pension plan in the nation.
3. Political crusades. These are a way for politicians and pension officials to use pension investments to advance political views or causes. The most common example of late is pension funds divesting from energy companies.
Since divestment is based on political agendas instead of returns, it should come as no surprise that it results in significantly lower returns. A hypothetical portfolio showed divestment from energy products resulted in a 23 percent loss over five years, compared to no divestment.
There are also significant administrative and frictional costs (the impact of selling large quantities at once). Administrative costs for large college endowments were 12 times higher than socially conscious funds, and frictional costs were estimated to reduce the value of a fund by 2 to 12 percent over 20 years.
Moreover, political crusades have extended from certain sectors of the economy to personal objections.
For example, the American Federation of Teachers union has used its influence over an estimated $1 trillion in pension assets to “blacklist” about three dozen individual hedge fund managers who donated to causes and organizations that the union doesn’t like. Consequently, pension funds in at least seven states divested their pensions from these hedge fund managers to some degree.
One of the main reasons state and local pensions can get away with politically motivated pension fund management is that they lack adequate regulations and enforcement. State and local pensions are not subject to the federal Employee Retirement Income Security Act of 1974, but rather are regulated by states themselves.
The easiest way for states to eliminate the negative influence of politics in pensions is to shift to defined contribution plans. This would require governments to pay their workers’ retirement benefits immediately and would prevent politicians from having any role in workers’ personal investment decisions. Moreover, taxpayers would no longer be on the hook for unfunded promises.
Short of a complete shift to defined contribution plans, however, states need to strengthen fiduciary responsibilities to ensure pension officials are acting in the exclusive interests of participants, require greater oversight and transparency of public pension operations, and diversify pension boards.
State and local governments have already promised an estimated $5.6 trillion in pension benefits that they can’t afford to pay. Governments cannot afford to continue sacrificing valuable investment returns for the sake of short-term political and personal gains.
Ridgewood NJ, New Jersey has among the smallest reserve funds of any state. According to analysis by the Pew Charitable Trusts, New Jersey would be able to operate just eight full days with its budget reserves alone, less than a third of the average across all states. New Jersey also has just 42.5% of the assets it needs to meet its future pension obligations, nearly the smallest share of any state. Credit ratings agency S&P recently downgraded New Jersey’s bonds from A to A-, nearly the worst rating in the country. The agency cited the underfunded pension as one of the main reasons for the downgrade as well as the recently announced tax cut.
The “tax cuts”, which will amount to an estimated $1.4 billion in lost revenue a year by 2021, have been criticized as politically expedient and financially irresponsible as New Jersey struggles to balance its budget. New Jersey’s credit rating has been downgraded 10 times under Gov. Chris Christie, more than any other governor in U.S. history.
While most residents will not see a deal to raise New Jersey’s gas tax by 23 cents a gallon, to 37.5 cents as a “tax cut” or in reality , despite Governor Christies war with the media most people realize that the nails have long been driven into New Jersey’s economic coffin. The Massive flight of personal assets as well as businesses, running from the state’s high tax anti-business climate has significantly eroded the tax base over years making a major financial shake-up in the state a foregone conclusion.
Christie gets bipartisan plan that he calls ‘more fair than the previous proposals,’ but it offers no constitutional guarantee enforcing payments
After failing to find any common ground for the past several years over the best way to address New Jersey’s grossly underfunded public-employee pension system, state lawmakers reached a rare, bipartisan agreement yesterday, voting in favor of legislation requiring quarterly instead of yearly state pension contributions.
The measure — which legislative leaders say they are confident Gov. Chris Christie will eventually sign — would help the $73 billion pension system by breaking up the annual state pension contribution into smaller installments that the sponsors hope will be easier for the state to afford than the lump sum that administrations typically try to make at the end of each fiscal year.
Depositing the payments on a quarterly basis would also protect more of the pension contribution from end-of-the-year budget cuts and allow the pension system, which is professionally managed, to generate bigger investment returns by getting more money into the system earlier in the fiscal year.
Ridgewood NJ, Most people nearing retirement have had to adapt to a changing world along the way.
At one time, retirement rested on what financial professionals like to refer to as a three-legged stool – Social Security, savings and a pension.
That stool went wobbly, though, when most private-sector pensions began to disappear.
“Years ago, the idea was that your employer and the government would take care of you,” says Chad Slagle, a Registered Investment Advisor and president of Slagle Financial, LLC (www.slaglefinancial.com).
“But those days are gone. Now the burden is on each individual to make sure they’re prepared for their own retirement. That’s why it’s important to have a game plan.”
Don’t despair, though. Slagle suggests there are a few steps anyone can take to survive today’s pension-less retirement, including:
• Map out a retirement strategy. Often, even people who are stashing away money for retirement don’t have a firm handle on what they’re trying to accomplish. Slagle says it brings to mind the old saying: “If you don’t know where you’re going, how will you know when you get there?” Having a strategy helps you know your ultimate goal and what you need to do to accomplish it. Once you develop a strategy, you also need to remember that conditions don’t always remain the same. Changes in your income and expenses, along with fluctuating market conditions, can all have an impact on your plan. Slagle recommends that about every three years you review and, if necessary, update your strategy.
• Live within your means. It’s difficult to save a comfortable retirement nest egg when you’re spending more than you earn and racking up debt. Create a budget and stick to it.
• Don’t ignore the cost of health care in retirement. Perhaps people just assume they will be healthy forever. Or maybe they just don’t think about this subject. Either way, Slagle says, too many of them don’t plan for or underestimate how much health care could end up costing them. It’s been estimated that a 65-year-old couple who retired in 2014 would need about $220,000 to cover health care in retirement. So you need to work it into the equation.
• Remember to account for inflation. Just when you think you’ve saved enough – you haven’t saved enough. At least you didn’t if you failed to take inflation into account. The cost of living is going to go up. That means the value of the dollars you saved is going to go down. “You need to factor that in when you plan for your financial future,” Slagle says.
• Prepare for the possibility of long-term care. This is another cost that many people don’t plan for, but the necessity of long-term care is a reality at some point for 70 percent of people over 65. The average annual cost of a private nursing-home room is $77,000, so it’s unwise to overlook it, Slagle says.
“You need to start thinking about all this now, whether retirement is decades away or a few years away,” Slagle says. “The sooner you begin saving and planning, the greater the odds are that you’ll have a happy and secure retirement.”
About Chad Slagle
Chad Slagle (www.slaglefinancial.com) is president of Slagle Financial, LLC, a Registered Investment Advisor. He and his wife, April, reside in Edwardsville, Ill., with their two sons and two daughters, Grayson, Mabry, Hudson, and Nola.
Pension liabilities and revenue loss from lower taxes are cited
By
KATE KING
Updated Nov. 14, 2016 6:18 p.m. ET
S&P Global Ratings cut its rating for New Jersey’s general-obligation bonds Monday, marking the state’s 10th credit downgrade under Republican Gov. Chris Christie.
The downgrade stemmed from the state’s rising pension liabilities along with an expected drop in revenue as part of a transportation-funding package signed by Mr. Christie, said David Hitchcock, senior director at S&P Global.
The New York ratings, data and index firm lowered New Jersey’s credit rating to “A-” from “A” and assigned a negative outlook.
“Just as the state is pushing off some of their pensions costs into later years, they are also pushing off some of their revenue loss into later years,” Mr. Hitchcock said. “It’s adding incremental pressure.”
Credit ratings help determine the interest rates that states pay when they sell bonds; a lower credit rating means higher borrowing costs.
By Samantha Marcus | NJ Advance Media for NJ.com
on November 02, 2016 at 6:55 PM, updated November 03, 2016 at 7:07 AM
TRENTON — New Jersey’s distressed government worker pension system is now the worst funded in the U.S., according to a report by Bloomberg.
The Garden State’s public pension fund has languished near the bottom, but has now dropped below Kentucky and Illinois for last place, according to the report.
Their analysis compared the states’ funding ratios, or their assets in relation to their pension debt.
As of July 1, 2015, New Jersey’s state and local pension funds have just 37.5 percent of the funding it needs to pay for future benefits. That is based on new reporting standards that require the state to project lower investment returns and had bleak consequences for the state’s estimates.
file photo Sweeney & Prieto
By Samantha Marcus | NJ Advance Media for NJ.com
on August 25, 2016 at 5:11 PM
TRENTON — New Jersey’s public pension fund is shakier than all but two U.S. states also known for their notoriously underfunded retirement systems, according to a new comparison by the Pew Charitable Trusts.
The pension fund was just 42 percent funded in 2014, based on the latest data available for 238 retirement plans in 50 states, Pew said.
Illinois and Kentucky were each only 41 percent funded. Only three states — South Dakota, Oregon and Wisconsin — were more than 100 percent funded.
The state can’t scrape up the money to fix the state’s roads and bridges, fully fund its schools or pay for the pensions of retired state workers. But, somehow, it found a way this week to approve an $800 million bond after previously authorizing $350 million in tax breaks for a $3.1 billion megamall in the Meadowlands.
The state’s Local Finance Board, an arm of the state Department of Community Affairs, this week approved the bond for the massive Meadowland America Dream shopping and entertainment complex, known during a previous incarnation as Xanadu. After two false starts attributable to the project’s inability to get private financing, the project was taken over in 2011 by Triple Five, a Canadian firm, nearly a decade after it was first approved.
Last week’s approval by the Local Finance Board, and the approval of a financing agreement a day earlier by the mall’s landlord, the N.J. Sports & Exposition Authority, came unaccompanied by any outrage from state lawmakers other than Michael Doherty, R-Warren.
Why the silence? Perhaps legislators didn’t want to call further attention to the irony of their providing bonding for a private venture at a time they can’t scrape up enough money for the state’s basic needs, despite having the highest property taxes in the nation.
By Matt Arco | NJ Advance Media for NJ.com
on August 09, 2016 at 7:30 AM, updated August 09, 2016 at 7:56 AM
TRENTON — With a ballot question asking voters to constitutionally guarantee state payments into the public worker pension fund dead on arrival this year, the head of the state’s largest teachers’ union suggested that Senate PresidentStephen Sweeney’s likely 2017 gubernatorial campaign will meet the same fate.
Wendell Steinhauer, president of the New Jersey Education Association, stopped short on Monday of calling Sweeney’s refusal to post the measure for a vote ahead of a Monday’s deadline to get it on the ballot this year a deal breaker.
But he was also clear about the NJEA’s priorities — more specifically, its top agenda item.
“Our No. 1 priority has been passing this constitutional amendment,” Wendell said.
“I’m telling you that we will certainly send out a questionnaire to all of the candidates and we will screen all of them,” he said. “But we are definitely going to get involved in the primaries this year.”
A ballot question to mandate more funding for New Jersey’s troubled pension system – costing an estimated $25 billion over five years – is all but dead this year, Senate President Stephen Sweeney said Thursday. Salvador Rizzo, The Record Read more
On Wednesday, Senate President Stephen Sweeney called union threats to withhold campaign contributions unless the Senate passes pension legislation a “clear cut” case of extortion. Susan K. Livio, NJ.com Read more
The union representing New Jersey teachers has told Democratic Party leaders that it will not make any campaign contributions this year until the Senate votes on a constitutional amendment requiring that the state make quarterly payments to the public employee pension fund, a top Democratic official confirmed Tuesday. John C. Ensslin, The Record Read more
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