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Budget Woes &
Pension Contributions

L. Mason Neely
By L. Mason Neely
Chief Financial Officer
East Brunswick Township

man painting red link with larget brush

Many breathed a sign of relief last year when the Legislature considered S-21 and A-3868, the Pension Deferral Legislation. It was sponsored by Senate President Codey and sponsored in the Assembly by Speaker Roberts. The legislation was to permit municipalities and counties to reduce their 2009 public pension liabilities as a means to temporarily lower property tax payments and defer the required contributions to later years.

Under prior legislation, found in Chapter 108 Public Laws of 2003, there was a five year phase in program with increments of 20 percent each year and 2009 was to be the year pensions obligations were to be paid 100 percent. Not only were pension obligations to be paid at 100 percent but there was no longer a cap exception granted for the local budget. A great deal of media has been published about the requirements to fund pension obligations. These obligations include both the normal employer cost and funding of accrued liabilities (which had increased significantly because of the holidays granted in prior years and the delay phased payment process). No one could deny that public employers all across the nation are under a great deal of stress as they labor to meet and fund retirement obligations.

The purpose of this article is to specifically look at a factor which is linked with the overall pension obligations and suggest local officials pay particular attention to the methodology used by the various Boards of Trustees when determining the normal and accrued liability cost associated with pension obligations.

In March 2009 the firm of Buck Consultants, serving as actuary to the Public Employees Retirement System (PERS), prepared their 54th Annual Valuation of the assets and liabilities. The Valuation was to show the financial condition of the System as of July 1, 2008 and provide the basis for determining the appropriation payable by employers for the fiscal year beginning July 1, 2009. It is this Valuation which will determine the bills local governments must pay as of April 1, 2010. The Valuation report as produced did not take into account the broad decline in the U.S. financial industry as a result of lost equities, bond price decline and the collapse of real estate, in both commercial and residential markets. Subsequent to the March issuance of the report the Board of Trustees for PERS adopted the report as submitted. It will be used by the Division of Pensions to produce the statements for payments by municipalities due in 2010.

My review of the report raised a real question how is investment income or losses to be apportioned between the State of New Jersey and “other than state” locals which are part of PERS? This is particularly important for next year as the past Valuation did not take into account the decline in U.S. equities, bonds and real estate holdings. To place this into some organized fashion the following table compares the income earnings or loss and said distribution between the state and local PERS.

                                Income Distribution
Actuarial
Valuation     State          Percent        Local                   Percent        Total
2006     $857,109,556     38.8%   $1,348,209,731             61.2%       $2,205,319,287
2007     $865,562,399     38.7%   $1,373,521,019             61.3%       $2,239,084,418
2008     $(68,484,123)    17.5%   $(323,224,565)              82.5%       $(391,708.688)

As the above table shows, during two years the distribution of investment earnings on pension assets was distributed 38.8 percent to the state and 61.2 percent to local governments. In the most recent Valuation where investment income was reported as a loss of $391,708,688 the distribution was 17.5 percent for the state and 82.5 percent for local governments. The obviously question is: why, in good times, did the state receive 38 percent of the earnings and when there was a downturn in the economy only receive 17.5 percent of the loss? Maybe the answer is found in the active membership. The contributions are based upon active membership compensation for both state and local PERS. The following table is a comparison of active membership during the same period as reported for investment earnings or loss.

Number of PERS Active Membership
Year        State         Percent        Local       Percent          Total
2006        96,469        30%            221,271       70%           317,740
2007        95,750        30%            223,503       70%           319,253
2008        95,331        29.8%         223,851       70.2%         319,182

As reported by the Valuation, the state represents 30 percent of the total PERS membership. One would assume the salaries paid by the state are comparable to those paid by local governments. Therefore system funding would be similar based upon the reported membership. If membership were the criteria then investment earnings or losses would be divided on a 30/70 basis. If this was the case, local governments have under received during the good years and are being over charged with the loss during the most recent valuation.

We recognize completing a thorough Actuarial Valuation of a system is more complicated than simply looking at the ratio of memberships to investment earnings. A major portion of Valuation is the contributory rate paid by the members and when these payments are made. The following table summarizes the ratio at which the state and local Governments have contributed based upon the Statement of Obligations issued by the Division of Pensions.

Contribution Rate
Year                              State                             Local
2006                             44.8%                             80%
2007                             10.2%                            100%*
2008                              2.3%                             100%
*Pension Deferral legislation permitted some to pay only 50 percent

The state continues to contribute less and less of their normal employers costs and funding of accrued liabilities. In fact, for the forthcoming fiscal year they do not even budget sufficient amount to cover the assumed interest earnings (8½ percent). Parallel with the process, local governments have contributed the full amount billed by the Division of Pensions. This table seems to further cloud the issue and compound the question. If local governments are contributing at a higher ratio and making payments in a more timely manner than the state then how does one explain why the state receives a higher distribution of the investment incomes and a lower distribution of the investment loss?

Obviously the answer is found in the actuarial assumptions used to calculate the pension liabilities. Based upon this limited information it does appear these calculations require a significant adjustment. The League Pension Committee will be working on this issue over the course of the next few months prior to the production of the 55th Annual Valuation of Assets and Liabilities of PERS.

 


This article was originally published in New Jersey Municipalities magazine. Vol. 86, No. 7, October 2009

 

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