Actuarial Analysis of N.J. Public Pensions Are Unrealistic

Financial markets are in turmoil. Most world economies are barely growing. Interests rates can not go lower. Real estate is comatose. Public pension funds everywhere are awakening to the fact that their actuarial profiles are way too optimistic and do not reflect the real world. However, the corrections also fall short. To quote the comments of NYC Mayor Bloomberg published in the NYT on Memorial Day: “The actuary is supposedly going to lower the assumed reinvestment rate from an absolutely hysterical, laughable 8 percent to a totally indefensible 7 or 7.5 percent.” New Jersey currently expects 8.25% in its investment returns. It is absurd. But it allows the state government to contribute less, passing the shortfall to future administrations.

With the rosy actuarial projections the Christie administration claims, the funds are some $44 billion short. But here, back on Planet Earth, if we plug in realistic numbers, say 6.0% return, the deficit of the pension systems blows up to over $100 billion – I am being cautious here.

The problem is that government, in New Jersey particularly, can not afford to be realistic, as we saw very well with the projection of growth made by Governor Christie when he launched the “New Jersey Comeback” in January 2012. The economic and fiscal doctrines of the Christie administration resemble voodoo. But they are dictated by politics.

There are seven public pension funds in New Jersey: They cover some 800,000 employees and retirees. Many of these have dependents so we may be talking about as many as 25% of the N.J. population which could be directly affected by pension problems. Then we must add all the businesses which derive income from these people. Even if we leave aside all legal obligations, this is a New Jersey issue.

The seven plans are: Public Employees Retirement System (PERS); Teachers Pension and Annuity Fund (TPAF); Police and Firemen Retirement System (PFRS); State Police Retirement System (SPRS); Judicial Retirement System (JRS); Consolidated Police and Firemen Pension Fund (CPFPF); and Prison Officers Pension Fund (POPF).

The main plans are the first two: PERS and TPAF.

Most if not all the N.J. funds were healthy (PERS and TPAF where actually over-funded in the early 1990’s) when Governor Florio, facing $1 billion shortfall in his budget, changed the plans assets from book value to full market value and increased the assumed rate of investment return from 7% to a whopping 8.75%. A higher nominal return led to lower governmental contributions to the systems. But experience shows that financial markets are too fluid and uncertain. The numbers above were a stretch.

Then came Governor Whitman in 1993. She changed the actuarial valuation method from Entry Age Normal (EAN) to Projected Unit Credit (PUC) which, although acceptable, is like a balloon mortgage: PUC lowers the liabilities at first but then they explode in later years(1).

Whitman, among other damaging measures, also issued Pension Obligation Bonds for a total of $2.7 billion, through the New Jersey Economic Development Authority, NJEDA. She also included the bond returns in the total valuation of the Pension Systems. The bonds returns were the only government contribution to the funds.  But the bonds were offered at a rate of  7.5% and the actuarial expected return of the Pensions was 8.75% at the time. She also allowed  local government to take pension holidays: That is to say: not contributing. Nonetheless, property taxes still skyrocketed during Whitman and the following administrations. Of course those NJEDA bonds will come due at maturity one day if they have not done so already.

The following Governors – Di Francesco, McGreevey, Codey, and to a lesser degree, Corzine – were also reckless and overall disastrous for the N.J. Pensions Systems. What Christie has now done with the Pensions and Benefits Reform Law is to essentially refinance the liability accrued and pass it onto the workers.

In the bigger picture, unless New Jersey experiences significant economic growth, the government will not be able to keep pace with the increasing contributions set by the Pension and Benefits Reform Law of 2011. But in the economic growth area, Christie has failed. Therefore, to achieve that growth, we must have a change not only of government but of the structure of government in New Jersey.

We must also bring the actuarial analysis of the New Jersey Pension System(s) to normalcy. The actuaries should be independent, shielded from political influence.

(1) State and Local Pension Fund Management, Jun Peng, CRC Press, pp 154, 155


Privatization of Police? Blackwater Changes Name Again Vying For Government Contracts

Blackwater Name Change: Private Security Firm Switches Name Again To Academi From Xe.

It is just a matter of time before Blackwater/Xe/Academi attempts to move into the state and municipal law enforcement business, as our foreign wars end and state, local governments continue their efforts to cut costs.

A private security force would represent no cost associated with pensions or health benefits. It would be in the strictest sense a mercenary force; one fixed amount of money and that is it. New Jersey has the ideal multitude of police departments and that invites privatization. It is very easy to privatize a small force.

I believe Camden County already fired numerous cops from several police departments and rehired some of them with lower wages and benefits in a unified force. From that step to hiring a private firm to handle security is just one more step.

A mercenary force for police would also guarantee loyalty in cases of civil disturbances when the local police forces could see themselves torn between conflicting interests. That could be a very important concern behind a potential privatization.

My proposals to create a unified Police of New Jersey would make that transition to private policing the most difficult. It would be almost impossible to privatize the police when we have just one large police force in New Jersey.

Christie Sets Up New Jersey for Pension Debacle as early as 2018

Despite reform, costs of N.J. pension and health care are daunting |

Because the state of New Jersey is not making the necessary matching contributions, the shape of the N.J. Pension system will be back to the precarious condition it was prior to the reforms earlier this year or worse. This could happen as early as 2018.

Christie will be out of office by then, even if he is re-elected in 2013. He is just passing the buck to the next governor.

A sharp decline of the stock market could move the reckoning date forward.

NJ public workers’ pensions still a time bomb

NJ public workers’ pension costs are forecast to balloon by 2018 –

Albeit the recent reform, the state is not contributing what it must – that is how Christie “balanced” two budgets – so the governor is essentially passing the buck to whoever is the next in charge.

By then he will be busy campaigning for some federal office and touting his New Jersey record, with many distortions in the process.

In that regard he is no different from his predecessors. All the bombastic talk about cleaning house and reforming things is BS.

Citigroup “rewarded” by SEC after committing fraud

Citigroup to Pay $285 Million to Settle S.E.C. Complaint –

This is absolutely preposterous. There should be criminal indictments for those involved in the decision-making process that led to the fraud.

The SEC, and therefore the government, continues to encourage that type of criminal activity with the lenient treatment.

It was a similar case in New Jersey when several administrations failed to contribute to the pension funds and lied to private investors about it.

OWS should begin to refocus from the banks to the government because the root of the problem is at the government that condones such actions.