September 27, 2010
Re: Proper Perspective on Pension Problems
There has been extensive criticism of the New Jersey public pension systems and particularly the impact said systems are having on the budgets of the states as well as local government. There are many who have claimed that employees should pay their fair share of the cost. To that extent I would like to offer a perspective from the local government point of view which has not been expressed in the news media or recognized by some State policy makers.
The two major pensions systems which effect local government are the Police and Fire Retirement System (PFRS) and Public Employees Retirement Systems (PERS). These systems, by state law, mandate that local government employees participate in one or the other system depending upon their qualifications.
When the systems were originally designed they were to constitute a balanced approach. The employee would contribute five percent of his or her earnings to the system and the employer would match that contribution. The combination of annual contributions over time, coupled with investment opportunities would result in adequate funding of the pensions as delineated by the defined benefit system.
Modifications have taken place over time and the balanced approach has become skewed. Also, the employers have not made contributions at various times, pursuant to state legislation. Subsequently, state legislators and governors were declaring the “holiday from pensions payments” as a form of property tax relief. We all know it was not relief, it was simply postponement and compounding of the problem.
The defined benefit system is divided, basically, into two parts. There is the normal funding requirements which, as I indicated, started off with a balanced approach many years ago. This normal funding, if followed, does provide adequate retirement assets for the individual members. The normal funding costs for the PFRS requires employees to contribute 8.5%. They increased the amount from 5% to 8.5% when the unions lobbied to enhance their pension to 25 years of service and retirement, regardless of age, or 20 years of service and 50% pay regardless of age. The unions freely agreed to increase their contribution. But that increase did not equate to the normal cost required by the employer. In the latest pension valuation the normal cost for employers to fund PFRS is 15.874%. Clearly one can agree with the concept that there should be a balance between employee and employer costs. And just as clearly, that is not the case with the PFRS. The employers are required to pay almost double the amount of the employees. All of this results from mandated state legislation which the League of Municipalities lobbied against. State mandates cost property tax dollars.
In addition to the normal funding cost there is the cost to retire the unfunded accrued liabilities. This is solely an employer cost. The amount the employers pay, in the latest valuation, to retire the unfunded liability is an additional 14.580% of salary. Thus, it is costing the local employer 30 cents for every dollar of salary or a 30% funding requirement to maintain the current PFRS system. Yes, it is out of balance and there is legislative action required to bring it back into balance. A major part of this will be the elimination of binding arbitration and changing of criteria for when police and fire may retirement, and under what conditions.
The second system is PERS. Again, this system was designed to be a balanced system where there was 5% by employee and employer. Based upon the latest valuation the employer is paying 3.96% to fund the normal cost and the employees are paying 5.5%. Yes, the local PERS employees are the only group in the state significantly paying more for their pension benefits than was originally designed many years ago. Local employees are paying 38% more for the funding of their normal pension requirements than the employer. Thus, when someone makes the statement that local public employees need to pay their fair share they should add the phrase that, in fact, local government employees are currently paying more than their fair share based upon the original design of the system. They are paying 38% more than the original design and 38% more than the employer.
The local contributions, which are a combination of employee and employer payments, for both PFRS and PERS are greater than the outflow of expenses for retirement costs. The local funded defined benefit systems are, in fact, improving, based upon the fact that both employees and employers are making required contributions. The same can not be said about the state’s responsibility and the state administered systems. Under the state portion of PFRS, PERS and the other state obligations, the outflow of assets is greater than the inflow of payments because the state has not made budgetary commitments to their obligations.
The League of Municipalities, for years, have lobbied against pension enhancements, provided logical recommendations for pension reform and supported proper budget accounting. When local governments make payments, coupled with employee contributions, one can see the beneficial effect on those systems which primarily impact local government. We urge you to look at reform in light of the primary problem which confronts local governments. That is the PFRS system and the need for binding arbitration and pension reform.
We have brought these matters to the attention of the Governor and the State Treasurer. We have, also, sent a version of this letter to all members of the Legislature. You might want to share your thoughts with those State level policy makers.
For more information, contact Lori Buckelew at email@example.com
Very truly yours,
William Dressel, Jr.