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


Disconnect between Wall Street and Main Street Hinders Recovery

Economy improves…incomes don’t – Economy.

I have written about this before and the only reason why I touch this topic so soon again is because the Dow reached 13000 the other day. The Dow and the other market indicators tend to give a somewhat distorted view of the American economy. That is in part because many firms traded are not American and even the stock of American firms may fluctuate due to gains overseas, political news, mergers, decline of competitors, etc. In other words, the gains (or loses) may have absolutely nothing to do with what is happening in the nation.

The lacking elements in this recovery are those which affect aggregate demand. Although there is a school of thought which maintains that supply generates demand, most empirical evidence points to the contrary. Excess in supply can actually lead to deflation and consequently to job erosion. Aggregate demand, as the sum of all demands for goods and services in the economy is tremendously influenced by consumer demand. The U.S. Department of Commerce estimates that 70% of the U.S. economy is internal consumption.

A large majority of American consumers depend primarily on wages to live. Long-term stagnation of real wages is possibly among the greatest threats to the U.S. economy, greater than a break-up of the European Union or a state of general war in the Middle East following a hypothetical attack on Iran.

Since the New Jersey economy is not growing by leaps and bounds, the demand for labor is tepid. We do not have huge gains in productivity which could lead to sizable wage increases, What we have is a lot of competition. We have all the other states around us with more or less similar conditions and in fact, in the competitive ladder, New Jersey is standing on the lowest rung, looking at the backside of New York. And then there is an entire world beyond the two oceans, trying to attract U.S. capital to their shores. Lately, they have been very successful.

Without wage increases, demand remains flat. With low demand, businesses lose traction.

I have a number of proposals to reverse that situation and they are outlined in the Pages of my blog. The tax cuts proposed by both parities have very limited impact on aggregate demand, primarily because they involve too little money spread over a very long period of time. Furthermore, there is no sufficient economic growth to sustain those cuts without leveraging the State even more. The consequence of the latter is that the bill for those tax cuts will come due with accrued interest in a number of years,. The current politicians are not the first ones using the same trick to seduce the voters. Seduction is the right term.

It is very easy to make a demagogic call like “lower taxes” or “tax the rich”. Their appeal is in their simplicity. But to claim that those are solutions is fraudulent. Those steps may be part of the solution; just a small part if at all. To turn New Jersey around there are no simple solutions. If there were we would not be in trouble in the first place.

To build up a fund from which a significant injection of liquidity goes into the pockets of consumers, we have to reduce size the government the right way: By eliminating  not the teachers, or firemen, or cops, or maintenance workers who perform a real service but the political bureaucracy which feeds voraciously from the system. The best way to do so is to eliminate entire layers of government; We simply have too many government subdivisions.

The second step is to reform our tax code rewarding those who invest in New Jersey. Those who chose to invest elsewhere may continue to do so but will not receive our gratitude at tax time. We must be supportive of the New Jersey employer by eliminating their tax liability. As we support the New Jersey employer, we must support the New Jersey employee as well; that is by means of minimum wage increase – not the miser $1.25 proposed in the N.J. Assembly but up to $15 with benefits or $18 without. Employee and consumer are two words referring to the same people.

The measures above intend to reconnect Wall Street with Main Street. Along these proposals, come the elimination of property taxes for most and the abolition of the sales tax.

Harvard Study Supports Teacher Testing as Partial Tool: My Doubts

Big Study Links Good Teachers to Lasting Gain –

This article of the New York Times appeared in January and I had it saved to write about and then fell down my column of drafts. However it is still very timely. This is the very study debunked by the New York Times when it released the data of 18,000 city teachers a few days ago.

Don’t take me wrong: I also believe that a good teacher is better than a mediocre one. The issue at contention here is the means of measuring. I do not believe in standardized tests. Their usefulness/cost ratio is extremely low in my opinion.

The New Jersey Department of Education has just contracted yesterday with Rutgers University to dissect a new teacher evaluation system being tried out in 10 school districts across the state.

Acting Education Commissioner Chris Cerf says the findings by a review team from the Rutgers Graduate School of Education will be used to guide implementation of the new system in the 2013-14 school year.

Unlike the proposed New Jersey study, the Harvard Study (HS) was carried out by a team of economists; not educators. It encompasses data from a period of over 20 years. It matches data from classrooms to the same students later on in life, through their income tax returns. That raises my first suspicion: The data, by its sheer size and span of time, is unverifiable. The end of the study is abundant in data compilation which has been statistically processed. Overall, I fail to find the rigor expected in a scientific paper. The number of assumptions made and liberties taken with the data throughout the study is astounding. The study is highly manipulative (not in the popular sense but in the scientific sense of molding data to fit a theory). They also revise the work of others. Although the study claims to be empirical, it is in fact highly theoretical and it reveals so much so at the very conclusion – which I copied.

Controlling for numerous factors, including students’ backgrounds, the researchers found that the value-added scores consistently identified some teachers as better than others, even if individual teachers’ value-added scores varied from year to year. Nonetheless, many other factors which occur in classroom are ignored by the researchers.

One sentence: “If you leave a low value-added teacher in your school for 10 years, rather than replacing him with an average teacher, you are hypothetically talking about $2.5 million in lost income,” said Professor Friedman, one of the coauthors.

That “hypothetically” bothers me greatly. The difference between hypothesis and hyperbola is not large. Nonetheless, I am absolutely sure that a good teacher has a positive impact on students. The issue here – I stress again – is whether any model of standard student test can be used, not in theory but in the real classroom, to measure teacher effectiveness and more importantly, whether such testing is worth the cost in both time and money.

After identifying excellent, average and poor teachers, the economists then set out to look at their students over the long term, analyzing information on earnings, college matriculation rates, the age they had children, and where they ended up living.

They found a direct proportionality between good teachers and successful adults. The entire study is below  in PDF:

Here is the fundamental question that the Harvard Study claims to answer:

Does Value-Added Accurately Measure Teacher Quality?
“Recent studies by Kane and Staiger (2008) and Rothstein (2010) among others have reached connecting conclusions about whether VA estimates are biased by student sorting (i.e., whether Assumption 1 in Section 2.2 holds). In this section, we revisit this debate by presenting new tests for bias in VA estimates.”

Another point that the Harvard Study claims to correct:

“This is the reason that Rothstein (2010) …contends that “…fth grade teachers, whose students have had above average
fourth grade gains, have systematically lower estimated value-added scores than teachers whose students underperformed in
the prior year.””

That was another discovery among the 18,000 reports published last Sunday in the NYT. In other words, a teacher who has excellent students in one year, will necessarily under-perform in the next.

BTW, this was page 21 of the HS.

This is a second entry:

“One important caveat to these calculations is that they assume that teacher effectiveness does not vary with classroom characteristics. Our estimates of VA only identify the component of teacher quality that is orthogonal to lagged test scores and the other characteristics that we control for to account for sorting. That is, teachers are evaluated relative to the average quality of teachers with similar students, not relative to the population. Thus, while we can predict the effects of selecting teachers among those assigned to a sub-population of similar students, we cannot predict the impacts of policies that reassign teachers to randomly selected classrooms from the population (Rubin, Stuart, and Zanutto 2004). This is a limitation in all existing value-added measures of teacher quality and could have signi…cant implications for their use if teaching quality interacts heavily with student attributes. Lockwood and McCa¤rey (2009) argue that such interactions are small relative to the overall variation in teacher VA. In addition, our estimates based on teaching staff changes suggest that VA is relatively stable as teachers switch to different grades or schools.”

“Nevertheless, further work is needed on this issue if a policymaker is considering reassigning teachers across classrooms and seeks a global ranking of their relative quality.”

“7 Conclusion
This paper has presented evidence that existing value-added measures are informative about teachers ’long-term impacts. However, two important issues must be resolved before one can determine whether VA should be used to evaluate teachers. First, using VA measures in high-stakes evaluations could induce responses such as teaching to the test or cheating, eroding the signal in VA measures. This question can be addressed by testing whether VA measures from a high stakes testing environment provide as good of a proxy for long-term impacts as they do in our data. If not, one may need to develop metrics that are more robust to such responses, as in Barlevy and Neal (2012). Districts may also be able to use data on the persistence of test score gains to identify test manipulation, as in Jacob and Levitt (2003), and thereby develop a more robust estimate of VA. Second, one must weigh the cost of errors in personnel decisions against the mean of the benefits from improving teacher value-added. We quantifi…ed mean earnings gains from selecting teachers on VA but did not quantify the costs imposed on teachers or schools from the turnover generated by such policies.”

“As we noted above, even in the low-stakes regime we study, some teachers in the upper tail of the VA distribution have test score impacts consistent with test manipulation. If such behavior becomes more prevalent when VA is actually used to evaluate teachers, the predictive content of VA as a measure of true teacher quality could be compromised.”

This ends page 50 of the HS. I suggest you go through the entire study, and form you own conclusions.

Testing in Europe does count for much more than it does in the United States. Students are sent to a variety of schools after taking a test around the end of what would be our middle school grades. Those that aren’t found to have the academic drive and ability are not sent forward to an academic high school. They are sent to trade school or guided to apprenticeships. We may be the only developed nation that strives to place every child in an academic high school. Even some of our former county vocational schools have left their original tracks and become places with medical academies and such.

Do we have a much bigger problem with our education system than the few poor teachers? Trying to educate everyone in higher level math classes holds back those that can excel. State testing costs millions of dollars and only tests two, though critical subjects, language arts and math. A lot of high-power people with vested economic interests and political connections are tied into this and reaping the millions.

Reports of 18,000 NYC Teachers Are Released

City Teacher Data Reports Are Released – SchoolBook.

The study involves almost 18,000 teachers in all 5 boroughs of NYC. To put in in a few words: There was no evident relationship found between teacher “quality” and student achievement. Bad teachers (according to the tests results) were teaching in both high achievement and failing schools. Similarly, good teachers, graded in a similar manner, taught everywhere as well.  The tests used a value added system where previous years data was used as a cumulative baseline to determine the progress. There was a correcting factor for race, poverty, etc.

The margin of error of the ratings is so wide that in any serious scientific research, the data would be discarded as useless and un-supporting of the theory to be proven. Some teachers were evaluated with as few as 10 students. Some teachers only taught the students the subject for a portion of the year. Only 35% of the math and 53% of English findings met confidence limits (that is what percentile means in this case). Nonetheless the teachers’ names have been publicized with tag of value now.

The data is so inundated with randomness that it is essentially useless except for the most biased researcher.

Regardless of such lack of reliability, the report has been made public after the teachers union exhausted all its legal avenues to prevent the disclosure. Despite of the warnings of the Chancellor of Schools of NYC that the results should be taken with a grain of salt, there is no doubt that this will have a devastating effect on teachers, on their morale, and on the inclination of current college students to pursue a career in education. It is also evident that the data will be used to justify further privatization of public education.

Pointing to the latter is the fact that the push to release the individual rankings began in August 2010, when New York City education officials contacted the reporters who most closely cover the city’s public schools and encouraged them to submit Freedom of Information Act requests for the teachers’ rankings.

Of the activities that I contemplated in late 2009 for my post-retirement years, one was to teach chemistry in NYC where the need for math and science teachers is always high, notably outside of Manhattan. The work would involve teaching and at the same time following a fast-track certification process through New York University. With a son living in Manhattan, spending a few days of the week in NYC was not a problem.

With the current rumblings, there is no way I would set a foot in a classroom in NYC or anywhere for that matter.

Nonetheless the NYT writes in Teacher Quality Widely Diffused, NYC Ratings Indicate –  today (page 2) that:  “However, the teacher data reports tended to be highly correlated to the schools’ grades. Last year, 79 percent of high-performing math teachers worked in “A” or “B” schools, according to the Education Department. But there was no relationship between a school’s demographics and its number of high- or low-performing teachers: 26 percent of math teachers serving the poorest of students had high scores, as did 27 percent of teachers of the wealthiest.”

But how were the A’s and B’s determined? Were they determined through the same standardized tests included in the published data? In such a case it is obvious that there would be a correlation of teacher quality and grades because the A’ and B’ were the data used to evaluate the teachers in the first place. It is like if I tell you that X equals Y because Y equals X; I have not proven anything – independently of X and Y.

Or were the A’s and B’s determined through other means, say, the regular final examinations at the end of the academic years, when the exams are not standardized?

The entire enterprise of education reform has such an increasing stench of sham that I can not help but to be more and more suspicious of hidden designs and its ultimate consequences.

New Jersey Must Leave Behind “No Child Left Behind” Law

No Child Left Behind law’s promise falls short after 10 years |

And the same goes for the “education reform” promoted by our current governor and those who are transforming education into a for-profit business.

As New Jersey abandons the NCLB model, we may lose all federal funding for education.

The education program for New Jersey that I will propose is shaping up like this:

1. Full day kindergarten (that is a reversal from my previous beliefs but I have been converted) with the regular school hours and year currently in effect.

2. Beginning with first grade, we will have  longer school days and years; the latter up to 220 days. There will be no graded examinations until 3rd. grade but there will be periodic unannounced student-evaluation examinations. Students who under-perform in those examinations can be submitted to remedial programs in the deficient subject. Up to 3rd grade, all students will pass grade. Graded, passing examinations begin at 3rd grade.

3. A comprehensive placement examination at the end of 9th grade which will determine which students will continue in an academic program geared for college and which will be steered toward polytechnic and trade schools. The criteria for those determinations are to be developed by the New Jersey Board of Education.

4. Full state support for both higher education at university level and the alternative polytechnic and trade schools. In  both cases, the state is to seek the advice and active involvement of corporations.

5. The cases of special education: This is my opinion and is not necessarily what will be done. Experts in special education will have the ultimate say in this issue. But I believe there can not be a one-fits-all rule when we deal with special cases. Some special education students may slow the progress of an entire class and at the same time feel outcast. Special education cases must be decided on a case-by-case basis whether they can attend regular classes or attend classes tailored to their needs and abilities.

6. Standardized examinations geared toward teacher evaluation are out. The primary form of teacher evaluation will be direct class observation.

7. Charter schools, vouchers, and other forms of public financing of for-profit schooling will be gradually phased out. However, state financial aid will be available for qualifying students wishing to attend private universities.

8. At the public university level, academics and research will be the predominant goals and thus will recieve the bulk of resources.

In Row Over Sick Time Payout at Retirement, Governor Christie Zeroes on Teachers Again

Sick pay a windfall for some teachers : page all –

Is this what the governor understands for education reform? The sick time provisions in public employment in the State of New Jersey are quasi standard, modeled after Civil Service which mandates a 15-day yearly allowance. Subdivisions of government that do not belong to Civil Service may have 15, 12, 10 days. Civil Service does not mandate the payout at retirement. That is a negotiable issue. There is no doubt that the huge payouts that take place from time to time are an insult to taxpayers struggling to keep their finances afloat amid very high property taxes. But sick-time payouts have been blown out of proportion by the demagoguery of our governor. Furthermore, the largest payouts are made to politically connected individuals who are typically those making the most money.

Political patronage is by far much more costly than sick time will ever be. Likewise, change-of-orders in public contracts will always cost much more than sick time payouts. The governor has not mentioned either and in fact, during his administration, both lines of spending have increased – all his government reduction push has focused on public workers who actually work; not the parasites.

But sick time is a real issue regardless of the governor; the use and misuse were always  sticky points which I experienced when I was union president. I had to represent union members when they were accused of absenteeism  for abusing sick time. The enticement of being reimbursed for sick time not used at retirement was introduced not to fleece the public but to reduce absenteeism. The caps to sick-time payout conduce workers to use their time, and when they take a sick day, they get paid, so the matter is reduced – even if the governor achieves his goal of lowering payouts – to either pay now or pay later at retirement.

We all agree that sick time is exclusively for when one is sick. But even there, we enter a grey area : Defining sick. How sick one has to be to justify absence? In the end, it is a subjective decision.

The solution which benefits all is to abolish sick time as we know it and replace it with sick events. Events are not limited in length but end when the patient enters short term disability – usually between 21 days and one month. They do not get carried over nor go to a “bank” or build up toward retirement. There are no retirement payouts. The employee uses them when he/she needs it. Like sick time, an event could be for sickness of an immediate dependent although in those instances they are not open ended either and should give way to family leave.

The sick events policy has been in my plans for Civil Service reform for a long time. It is ongoing work and I am sure I will receive intelligent suggestions when the moment comes. In the meantime, let’s just unmask the maneuvering of the current governor who ignores the greatest abuses in our political system while continuing to punish the teaching profession.

Gov. Christie to Push Privatization of Schools

Gov. Christie to push legislature to move ahead on four school reform bills |

This is more and more taking the tone of an ideological crusade rather than an educational initiative .

I urge the legislature the stop these bills on their tracks. With the exception of some tweaking of the tenure process, I would seek to undo the consequences of these bills – if they ever become law.