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March 31, 2008

2009 Pension Obligations



Dear Mayor:

The Division of Pensions has received and made public the Annual Valuation Report for the various pension systems impacting Local Government.  The reports are dated as of July 1, 2007 and project required payments which will be demanded from Local Government in April 2009.

The major cost elements will again be the Police and Fire Retirement System (PFRS) which will have a total billing in 2009 of $1,058,308,280.  This billing is up by $85 million over the current bills being paid in 2008.  To determine the liability for your municipality, one should multiply the ratio of 25.117 times the salaries and wages reported for year 2005.  This ratio of 25.117 includes both the normal costs and unfunded accrued liabilities which represent the “catch up” developed during the phase- in process.  By applying this ratio, one can develop a reasonably good estimate as to the liability confronting your particular municipality.

The Public Employees Retirement System (PERS) shows a total billing for Local Government to be $575,035,367 which is $42.3 million more than last year.  Again, to estimate the liability for your particular town, one will apply a ratio of 9.27 times the base salaries and wages as reported in the 2005 Base Salaries and Wage Report. 

Under the phase- in legislation adopted in 2003, both systems, PERS and PFRS, are to be funded at 100% of normal costs plus proration of accrued liability reported by actuarial valuation.  In 2009, a portion of the PERS will be an exemption to the 4% levy cap but the larger payment for PFRS, according to current state law, will not be an exemption.  The League will be working with various Legislators and the Administration to correct this issue relative to the levy cap because the unfunded accrued liabilities for the PFRS grew at 11.83% based on the latest valuation.  It will be a number of years before we see a turn around in this system.  The level of benefits provided under PFRS are significant and the ratio of active to retired employees continues to grow. 

There has been a great deal of public reporting about the pension liability.  To help you place this obligation in perspective, I am providing you with a couple of general statistics.  In 2009 the local employer on average will be funding PERS at a rate of $2,572 per employee.  For PFRS the average cost per employee is $23,450.  If you are in contract negotiations with a collective bargaining unit, be sure to have your Finance Officer calculate the roll up costs associated with providing pension benefits.  As you can see from the valuation information reported by the Division of Pension, for every dollar you pay a member of PFRS costs an additional .25 cents or more and growing. 

For a member of the PERS, the dollar cost is an additional .09 cents.

Also, one should recognize the health benefit cost beyond the current pay as you go budget appropriation.  It is important to know the accrued liabilities the municipality will be accepting at the time of retirement.  The GASB 45 regulations issued by the Department of Community Affairs through Local Finance Notice 2007-15 will soon require all municipalities to report the Other Post Employee Benefits (OPEB) as part of the Annual Financial Statement.

In the near future, the Division of Pensions, will post on their web site the bills by system (PERS and PFRS) and municipality for 2009.

I hope this information has been helpful.


                                                                        Very truly yours,


                                                                        William G. Dressel, Jr.
                                                                        Executive Director





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