Tag Archives: OPEB

Unions sue New Jersey over pension changes (and a Judge files a separate lawsuit)

In response to the New Jersey legislature’s June pension reforms, New Jersey’s unions have sued the state. The move is not unexpected. Similar actions were taken by unions in Minnesota, Colorado and North Dakota over proposed COLA reductions.

Unfortunately, New Jersey’s pension system is in seriously bad shape and slated to run out of assets to pay out pension promises by the end of the decade. The reasons for this have been discussed many times before. First, is the fundamental misvaluation of pension liabilities, the systematic under-contribution that flows from that and policy choices such as pension holidays, skipped payments and benefit enhancements. To fund pensions according to Joshua Rauh, New Jersey would require the largest per household increase in contributions at $2,475 per household, per year.

In a new paper to be posted soon, my co-author Roman Hardgrave and I take a deeper look at New Jersey’s public employee benefit bill on a local basis. When fully accounting for pension promises, OPEB and other benefits the cost of compensation on the local level is far greater than is recognized.

In the case of Colorado and Minnesota the unions’ suit was thrown out on the grounds that there is no specific right to the COLA. How will the NJ court decide on formula changes and the COLA freeze? Interestingly, a N.J. Superior Court judge has also filed a lawsuit against the state. He says the new law should not apply to judges since the N.J. Constitution says judges’ pay, “shall not be diminished during their term of appointment.”

 

Rhode Island’s plethora of pensions

The Providence Journal has a database of Rhode Island’s 150 pension plans. Most of these plans are part of Rhode Island’s state plans which cover local employees. In addition there are about two dozen locally-operated plans. Rhode Island’s state operated plan faces an unfunded liability of $6.8 billion (using a discount rate of 7.5%) or 45 percent funded. State Treasurer Gina Raimondo is proposing some significant reforms including moving to a hybrid defined contribution/defined benefit system. Her report, “Truth in Numbers”, puts the blame for large unfunded liabilities on unrealistic accounting.

One proposal the state is considering is setting up a fund – named MAST or the Municipal Accountability Stability and Transparency Fund – to encourage local governments to more accurately account for their pensions and OPEB liabilities and make their full annual pension contribution in order to receive additional state aid. Moody’s likes the plan.

The good news here is that Treasurer Raimondo has properly diagnosed the core problem: faulty accounting assumptions. While she stops short of endorsing the risk-free discount rate and provides an alternative estimate of liabilities based on the corporate bond rate she surmises the problem correctly. What languishing towns must consider is that their pension problems took decades to build by reference to inaccurate numbers. The strategy laid out here is a good one: first accurately calculate the bill and then proceed with structural reforms.