The $86 billion system that funds pensions for public workers, state troopers, local police and firefighters, and teachers lost ground in the first year public workers were required to pay more toward their retirements, according to reports released Monday.This is just another example of the pathetic state of state pension funds. And New Jersey is far from being the worse state pension fund. A recent summit on Illinois pension woes ended with no new plan:
Actuarial reports show the funds had significantly lower-than-expected investment returns, and lost additional ground because the state paid one-seventh of its contribution to the system for the fiscal year that ended June 30, 2012. As a result, the gap between the system's assets and eventual liabilities grew by $5.5 billion, or 3 percent.
Gov. Chris Christie said he wasn't surprised by the reports, but public employee unions said they were disappointed.
"We're falling behind by a heck of a lot less than we were in the years before I got here when they were making no pension payments," Christie said after an event in Jersey City. "The unfunded liabilities will continue to increase somewhat, but significantly less than they did under previous administrations, so we're making progress. But you can't expect that I'm going to come in here to a $60-plus billion dollar under-funded pension and fix it overnight."
Christie championed pension changes enacted in 2011 that required public workers to contribute at least 1 percent more of their pay toward retirement benefits and raised the retirement age from 62 to 65 for new hires. Public employee unions fought the changes, which they said passed the burden onto workers after years of missed payments by the state. The 2011 law allowed the state to phase in its pension contribution over seven years in one-seventh increments. Christie has proposed a $1.67 billion contribution for the fiscal year that begins July 1, which represents three-sevenths of the state's share for the year.
"Today's announcement by the actuary for the Police and Firemen's Retirement System (PFRS) that the value of the pension fund had dropped in 2012 is a cause for serious frustration by the members of the New Jersey State PBA," said its president, Anthony Wieners. "Police officers, both active and retired, made a commitment to ensure our pensions were secure under the guise of shared sacrifice, but politicians have again shortchanged the retirement system."
Janet Cranna of Buck Consultants, one of two actuaries to present their review of pension funds Monday, said the PFRS' funding ratio fell below the target rate of 76.4 percent because of a drag by the state. Local employers are funding PFRS at a rate of 78 percent, while the state's funding level is at 53 percent.
The retirement fund for state police also saw an increase in its unfunded liability, which Cranna attributed to the state falling shy of its funding obligation, low investment returns and more retirees.
"The state made a commitment to fund their part of the pension, and we're going to hold them to it," said Christopher Burgos, president of the state trooper union.
Pension changes enacted in 2011 required workers to pay more to shore up the system, which was in danger of becoming insolvent without significant changes. Automatic cost-of-living increases, or COLAs, were suspended until the funds rebound. Administrators cannot consider reinstating the COLAs until funds hit their targets and can show sustainability at that level.
Treasury Department spokesman Bill Quinn said the pension system shortfall would be worse if reforms had not been enacted. For example, the unfunded actuarial accrued liability for state and local pension funds was a combined $53.8 billion before the reforms were enacted and $36.3 billion after, an improvement of $17.5 billion, he said.
Pension fund investments saw a 2.52 rate of return for the fiscal year, far below the 7.95 percent return rate that was assumed.
But Quinn said other large state pension systems fared worse: The return rate for California's system was 1 percent and Florida's was .29 percent for the same period.
The summit, organized by a coalition of unions that represents public workers, drew Democrat and Republican state lawmakers to an AFL-CIO office in Burr Ridge, Illinois, but ended after three hours without a statement of consensus or a commitment to meet again.In the United States, a lot of people are talking but few are addressing their state pension shortfall. Meanwhile, in Canada, Adam Radwanski and Tara Perkins of the Globe and Mail report, Ontario nearing deal with teachers on pension-spending restraint:
Daniel Biss, a Democratic state senator from Chicago's northern suburbs who as a state representative co-authored a plan to address the state's pension mess, said "no substantive breakthrough" was made during the meeting.
In Illinois, five state pensions are in the red by a staggering $97 billion - or more than $20,000 for every household in the state. Inaction by lawmakers has prompted rating agencies to downgrade the state's credit rating and raised fears of service cuts, tax increases and other hardships for the residents.
"I'm glad that everyone was in the same room," Biss said. "But at some point, you have to stop talking about talking and start crafting a solution. That didn't happen."
Ontario is closing in on a deal with teachers to overhaul their pension plan, in what would be a landmark agreement for governments struggling to contain the costs of public-sector pensions.If this deal is ratified, it will be a monumental step forward for the province of Ontario which is already struggling with explosive healthcare costs. But I understand the angst of younger teachers who fear they will not be as fortunate as their predecessors in terms of enjoying a retirement with equally decent benefits.
The agreement would freeze pension contributions for five years, sources told The Globe and Mail – meaning a greater proportion of pension-fund shortfalls would come out of teachers’ future benefits instead of provincial coffers.
If finalized, the agreement with one of Canada’s largest funds would be a significant development in the battle to limit government exposure as the country confronts a looming pension crisis, which is being accelerated by an aging population and sluggish investment returns.
Governments at all levels are trying to reduce the cost of public-sector retirement plans that are ultimately paid for by taxpayers – many of whom have less generous employer-backed pensions or none at all.
Sources on both sides of the table said a deal has not been signed, but they confirmed that negotiators have been in advanced discussions, having recently returned to the table. Talks had fallen apart at the height of labour unrest between Ontario and its teachers’ unions.
For Ontario, in particular, limiting how much it spends on pensions is especially urgent in light of its $12-billion deficit. Similar deals to freeze contributions were reached in late 2012 with Ontario unions representing health-care workers, civil servants and community-college employees, but the $117-billion Ontario Teachers’ Pension Plan – which covers about 300,000 current and former teachers – represents much greater cost pressures.
Last year’s Ontario budget allocated $1.46-billion to match teachers’ contributions to their plan in 2012-13 – a number that has risen steadily in recent years because of funding shortfalls. Since 2006, both government and employee contributions have gone from 8.9 per cent of teachers’ annual income (above maximum pensionable earnings under the Canada Pension Plan) to 12.75 per cent; that percentage will rise to 13.1 per cent by next year, under an agreement reached prior to the current negotiations.
The province and the unions said a recent agreement to stop guaranteeing that benefits will receive some inflation protection has eliminated the $9.6-billion unfunded liability as of Jan. 1, 2012.
But Ontario Teachers’ Pension Plan CEO Jim Leech has said he expects the plan to show a deficit, albeit a much smaller and more manageable one, when it next reports its results for the latest year – and bigger shortfalls could arise again in the future.
If so, the effect of the deal in the works would likely be to further reduce benefits, rather than asking either the province or teachers to pay more.
If the deal mirrored the agreements with smaller unions last fall, future benefits that plan members would receive could be cut by as much as 20 per cent before contributions were put back on the table.
Such an arrangement would more or less follow the recommendations of last year’s government-commissioned report by economist Don Drummond, who singled out the teachers’ pension as unsustainable.
“Further increases in contribution rates would affect both parties’ ability to pay,” Mr. Drummond cautioned. “For the province, it would mean fewer financial resources to fund other programs. For individual teachers, it would mean lower disposable income and more personal financial resources to fund current benefits.”
Some teachers would welcome restrictions to further contribution increases, because the amounts coming off their paycheques are already unusually high. But the fact that benefits already earned would not be affected could contribute to worries among younger teachers that they are paying for generous pensions they themselves won’t be able to enjoy.
As a result, there is no guarantee that union members will ratify the deal likely to be sent to them soon. But their leadership appears to be counting on an awareness that too much push-back could lead to future governments taking a harder line.
Seeking to capitalize on the perception that the public sector has been shielded from economic realities facing other Ontarians, Progressive Conservative Leader Tim Hudak has proposed that employees be moved from defined benefit to defined contribution plans, and that the retirement age be raised.
While Kathleen Wynne’s governing Liberals have stopped well short of those sorts of changes, sources familiar with the negotiations suggested that the prospect of Mr. Hudak’s party winning office may have helped bring the teachers back to the table to strike a deal now. And even the Liberals hinted in last year’s budget that they might legislate pension-spending restraint if unions did not co-operate – another prospect that might have weighed on negotiators’ minds.
Governments in Canada have adopted various measures aimed at limiting public-sector pension costs. New Brunswick has perhaps gone the furthest, moving toward a hybrid system in which base benefits are protected but additional ones are subject to market forces; others have settled for pooling plans in hopes of finding efficiencies. All concerned will likely be monitoring the impact of deals struck in Ontario.
A lot of people are completely ignorant about how much money comes off the paycheck of public sector workers to fund their retirement plan. When it comes to defined-benefit plans, there is no free lunch. And as the first article above notes, it's typically the state and local governments that shirk their responsibility of topping out these public pensions. This is why so many US public plans are underfunded.
As far as Progressive Conservative Leader Tim Hudak's solution to move everyone to a defined-contribution plan, this is just more shortsighted nonsense. Instead of bolstering defined-benefit plans to bring everyone up to a level where they can retire in dignity, he wants to sink everyone to pension poverty, leaving workers totally vulnerable to the whims of the market.
Don't get me wrong, defined-benefit plans are also vulnerable to the whims of the market but they are able to deal with this volatility a lot better by pooling resources, lowering costs, and investing directly and indirectly across public and private markets. And the very best pensions, like Ontario Teachers', know how to do this using the best internal and external managers.
Also worth noting that Ontario Teachers' recently struck a deal to absorb more risk in its portfolio to address its pension shortfall. More risk can lead to bigger losses but the key difference is that the Oracle of Ontario has the right governance to oversee these risks and confront the challenges that lie ahead.
Below, Illinois lawmakers recently unveiled a plan they believe can fix the state's huge pension crisis, but labor unions blasted the proposal and vowed to sue to protect their benefits. Expect more pension tension ahead as states and unions grapple with ways to address ballooning pension shortfalls.