The lawsuit filed by New Jersey unions yesterday challenging the state's pension and health care reform legislation was expected. Unions vowed back in June, when the measure was being debated and voted on, that they would ask the courts to block it if it became law. What is different, however, is that since then judges in two other states have ruled against unions who were challenging similar pension reforms. In particular, judges in other states have upheld a key element of pension reform that rests at the center of the Jersey legislation.
The Jersey bill, signed into law at the end of June, requires workers to contribute more to their pensions and health benefits and also suspends cost-of-living adjustments for retirees until the state's pension system regains its fiscal health. Those annual COLA payments are deceptively expensive. In a paper last year, Joshua Rauh and Robert Novy-Marx estimated that every one percent reduction in COLAs would reduce unfunded pension liabilities nationwide in state and local plans by nine percent. In Jersey, the savings are bigger. Rauh estimated that each percentage point cut in COLA payments would reduce unfunded liabilities by 16 percent, and Jersey's move to eliminate them could cut total liabilities by more than half. Rauh has estimated those liabilities at $120 billion.
The unions are arguing that the cuts amount to eliminating benefits that members, including retirees, have already earned. They made the same case in Colorado and Minnesota, where pension reform cut COLA levels. But judges ruled in both cases that COLAs were not protected by contractual language or constitutional provisions. In Minnesota, a judge observed that the state was not trying to raid the pension fund but was actually increasing its own payments into the fund, and that those payments in addition to the benefits cuts were designed to keep the system solvent. Jersey is doing the same thing. We shall see if a Jersey judge agrees.
The unions are arguing that the cuts amount to eliminating benefits that members, including retirees, have already earned. They made the same case in Colorado and Minnesota, where pension reform cut COLA levels. But judges ruled in both cases that COLAs were not protected by contractual language or constitutional provisions. In Minnesota, a judge observed that the state was not trying to raid the pension fund but was actually increasing its own payments into the fund, and that those payments in addition to the benefits cuts were designed to keep the system solvent. Jersey is doing the same thing. We shall see if a Jersey judge agrees.
Hi Steve, the District Judge's ruling in Colorado was deeply flawed and is being appealed. It looks like he simply didn't want to deal with such a momentous issue. I'm certain the Minnesota case will also be appealed. It's a sad commentary on the USA that some seek court rulings to justify outright, unabashed theft of contracted retirement annuities that were earned over many decades. The nation is going to have to buck up and pay its bills. Want to reform pensions? Reform them legally and morally and prospectively. Look at the Utah example from two years ago for guidance. Why is that so difficult to accept? Whether you are in the private or public sectors, if you don't like the terms of a contract, don't become a party to it.
Unfortunately, I believe NJ's Plans include a provision to the effect that the pension payout in any year following retirement cannot be less in purchasing-power dollars, than 80% of the initial payout at retirement. Supposedly, the purpose of this position was to circumvent the 3% COLA cap if inflation remained above 3% for a number of years.
Hopefully, the judges will decide in a way that this 80% is ELIMINATED. There should be no further COLAs. Private Sector Plans NEVER get automatic COLAs, and neither should Public Sector Plans.
Remember, Civil Servant pension contributions (INCLUDING the investment earnings thereon) RARELY pay for more than 10-20% of the full cost of their pensions .... the Taxpayers pay for the balance. We have been hoodwinked long enough.
TL, I know that you are an intelligent person and that you already know this:
The cost off public sector DB plans is typically divided like this: 20% employee, 20% employer, 60% investment earnings.
Embrace the Utah hybrid plan . . . fix pensions right the first time, prospectively, legally. Avoid a decade of litigation that you will lose.
Al
Al, there is not a public union member in America that contrubites 20% to their pensions.
You're a liar.
Most conbtribute nothing, the few that do may contribute at MOST 5-6%, the other 95% coems form the taxpayer.
Allen v City of Long Beach is the Ca. Supreme Court case that said a city could not increase the employee's share of payment for pensions(even prospectively). However,the court noted that the city,in that case, did not make any case for financial hardship and the court made it very clear(said it twice) that if a pension plan needed prospective modification because the pension plan,together with other factors,was creating a financial emergency,then all bets were off.As to Mr. Moncriefs' contract claim,that is a question of fact for each city. Did the council( or charter),in a decision that was subject to the peoples' Referendum power,enact a law that granted workers "vested"pension rights? If the rights are only in a term MOU and not a statute,ordinance or charter,the so called right disappears with expiration of the MOU. In my county 3@50 cities pay 35% and police and fire pay 9%(which is the max. by law except in collective bargaining it can go higher).Cities pay all of the unfunded deficits,in my city 55 million in a 100 million dollar plan. It grows at 7.75% per year,compounded.
RWD, If I have told you once, I have told you a hundred times, that it shouldn't matter, to someone who is not a member of a DB pension plan, how much or how little the employee pays, into the pension. It all enters into, and flows out of, the same pot. The respective split between the employer and the employee, matters only to those two principals. That split is negotiated between the two, in the collective bargaining process.
In my previous post,I made a misstatement: In my city,the city pays 26.6%(not 35%) for 3@50 employees and those employees pay 9%. Plus,my city has been assessed increases of 3% per year for the next two years and we've been warned by Calpers,that because of 15 year smoothing we can expect further increases in the near future.
Rex, I'm referring to the source of accumulated DB pension plan assets, not the actually percent of salary contributed by DB employer and employee members. You really are overly reactive . . . what's up with that? Do something about all of that anger, you'll burst a vessel. I suggest a nice relaxing read of the US Constitution, it will take you an hour or so. I'm particularly fond of these three constititional provisions:
(1) No state shall pass any ex post facto law (retroactive in its operation.)
(2) The judicial power of the US Supreme Court shall extend to all cases in law and equity arising under this constition.
(3) The US Constitution shall be the supreme law of the land and the judges in every state shall be bound thereby, anything in the constititution or laws of any state to the contrary notwithstanding.
Quoting Al Moncrief ..."TL, I know that you are an intelligent person and that you already know this:
The cost off public sector DB plans is typically divided like this: 20% employee, 20% employer, 60% investment earnings. "
First thanks for the compliment. Now you not being a dumbass yourself, knows that "interest" is not a source contributor to pensions. The are only 2 sources, the employee and the employer (meaning Taxpayers). With their respective percentages of cash pay being 5-10 times greater for the Taxpayer than the employee, an equal percentage (80-90%) of total investment income earned by Plan assets is proportionately associated with Taxpayer contributions, and that interest would have stayed in the taxpayers' pockets in the absence of the need for such high contributions .... which itself is caused by the excessively generous Pension Plan granted by politicians more than happy to accept campaign contributions and elections support.
Hi TL Buddy, sorry to disagree, investment earnings on a portfolio are a source contributor. You have a 401K, if you choose to put it in cash, your investment earnings are zero. If you take some risk and put it in a dividend paying stock, your earnings on the portfolio have been higher over time (hopefully). Call any DB plan manager and ask them this question. There are three sources of DB plan assets . . . employer, employee and portfolio earnings.
Al
Sorry Al, but you're the whose incorrect. Look at it this way:
First, the typical split of actual contributions is $5-$7 (so call it $6) for the employer (meaning the Taxpayers) for each $1 from the employee. Research this and you will find that I'm correct.
Second, noting the 6/7 = 86%, since 86% of the cash-in is coming from the Taxpayers, then 86% of all investment income is associated with THEIR contributions.
Third, BY FAR, the primary reason we are in such a financial mess is that these Plans are excessively generous ..... ROUTINELY 2, 4, even 6 times (for safety workers) greater in value at retirement than the Plans afforded comparable Private Sector workers. With roughly equal CASH PAY in the Public and Private Sector, there is ZERO justification for greater pensions (by ANY amount, let alone multiples higher).
Fourth, Hence the contributions are higher than they need to be BECAUSE these Plans are excessive. If they were not, the contributions from Taxpayers could be 1/3 or 1/4 of the current amount and (not only the contributions themselves) but the investment income on these contributions would have stayed in the Taxpayers' pockets.
It is patently absurd to assume that the interest earned from taxpayers' contributions is anything but A PART OF the Plan costs charged to Taxpayers.
Hey, maybe you guys can both be right. Think about when a DB pension was first offered -- nobody was collecting. In theory, the worker is deferring compensation (at least those who contribute to their pension) in order to have income after ability (and desire) to work diminishes. Taxpayer contributions beyond the employees' contributions should not even occur, unless as a compensation necessity (like how private firms match/don't match depending on the need to attract/retain labor), as a offset to keeping below private sector wages, or in the case where the administrators made poor decisions regarding the factors (investment returns, life expectancy, retirement ages, etc.) establishing the liabilities.
The projected liabilities depend on many factors, but in essence, it's "like a 401K" except most of the risk has been transferred to the public entity (ultimately meaning taxpayer or bond holder if the govt issues debt) to achieve an investment return. The employee has some risk (failing to meet minimum service time could result in zero or only return of contributions), including the financial health of the entity. However, unless it was contractual (as opposed to created by legislation), the employee also assumed risk that legislation could change (I agree should not be retroactive, but legislatively adopted COLAs for example are not a "right" for life, only for the time of the legislation). This is more a risk to state as opposed to municipal workers.
In return for (in theory) below private sector compensation, public employees generally got job security (many have seniority systems unlike private companies) and decent perks (generous sick leave, decent vacation time, etc).
As TL notes though, over time unions have done their job well in getting higher pay, getting rules in place that allow some workers to game the system in ways that the actuarial assumptions never considered, adding little/no contribution for health insurance as a retirement benefit, while "management" does not have the same stake in the organization that would exist in a private sector organization. Classic principal-agent problem.
Management is at fault (which is ultimately the taxpaying voter for re-electing the people who agree to these contracts/made these laws), and to a degree, union leaders are for failing to appreciate the structure of the system and thinking about the lifetime retirement security of all its workers, current and future, instead of getting all it can whenever it can.