Pen Ben Q&A

March 19, 2015
TO:
Joseph Coppola, Jr., President, Bergen County Education Association
FROM:
Wendell Steinhauer, President
Marie Blistan, Vice President
Sean Spiller, Secretary-Treasurer
Edward Richardson, Executive Director
Steven Swetsky, Assistant Executive Director
RE:
Questions You Posed Regarding Pension Reform Concepts
Earlier this month, you sent a memorandum to several leadership groups and the
field representatives in Bergen County, posing a series of questions regarding the
pension reform concepts described in a document known as the “roadmap.” (For
purposes of clarity, we will refer to that document as the “roadmap memo,” since
there is confusion due to the use of the word “roadmap” in the title of the report
issued by the NJ Pension and Benefit Study Commission.) While your memorandum
was not directed to us, we believe it is helpful to provide you with answers to those
questions.
By necessity, most of the answers below are speculative, since no agreement has
been made about any changes to the current pension systems for NJEA
members. The commission’s recommendations represent their starting point for
proposed negotiations. Our starting point, should we ultimately engage in formal
negotiations, would be much different in many instances. We have different, and
higher, requirements in a number of areas, including the funding required of the
state to ensure the solvency of the current plan if it is frozen and the quality of the
successor plan that would be established should that happen, and we strongly
opposed many of the commission’s other recommendations. NJEA has no intention
of agreeing to any changes that fail to provide our members with strong, secure
retirement benefits.
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Furthermore, none of these answers should be construed to imply that NJEA is
pursuing this solution as its primary pension strategy. Our top priority has been,
and remains, compelling the state to fully meet its funding obligations for the
current plan according to the contractual requirements of the current pension
funding law (Ch. 78.) We have a strong legal case that we are aggressively pursuing
without hesitation or reservation.
However, because there is no way to absolutely guarantee that our legal strategy
will succeed in forcing the state to fix the problems it has created, or that, even if we
are successful, adequate funding will be provided in time to prevent irreparable
harm to the current pension system, it would be irresponsible of NJEA not to
explore viable alternatives that ensure members’ pension security.
Because your questions were widely circulated within the county, we respectfully
request that you circulate this document to the same audience. In addition, we do
not object to this document being distributed at BCEA’s Annual Legislative
Conference and Dinner on March 19.
Q.1.
Who will bear the “risk” of the new plan and the frozen TPAF plan?
Both the old and new plans would be shifted to an independent trust, which would
bear the investment risk. For this reason, the new plan would have to be
conservatively constructed and invested. The funding obligation for the old plan
would reside with the state, which would be required under a constitutional
amendment to make payments according a specific payment schedule. The funding
obligation of the new plan would also be committed through a constitutional
amendment as a percentage of salary from the employer.
Q.2. Are there any guarantees that “savings” to the state from freezing the
pension systems will be used to “save” jobs or fund education program or
could the governor use the savings to fund the Transportation Trust Fund or a
tax cut?
There are no savings to the state from freezing the current pension plans – the
payments needed to pay off the unfunded liability following a freeze would exceed
what the state is currently contributing to the plans by a significant amount. The
long-term benefit to the state is that, gradually, its bond rating would improve,
allowing the state to refinance existing state debt obligations at potentially lower
interest rates, freeing up more revenue in the annual state budget.
Q.3.
Will the new plan be a defined benefit plan?
Yes. NJEA would not agree to such changes if members are simply shifted into a
defined contribution plan. The structure of the new plan has not yet been
determined, and is dependent on the level of employer and employee contributions.
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NJEA is currently working with an actuarial consultant that specializes in pension
plan design to explore options for a new plan.
Q.4.
Will it include disability insurance…and group life insurance?
Under the Chapter 78 law enacted in 2011, the state shifted disability retirements
out of the public pension plans and into a private insurance program. There has
been no discussion about changing this under a new plan or changing life insurance
benefits.
Q.5. Will the new plan be mandatory for all members? Will membership in
the new plan be contingent on membership in NJEA? What about
administrators or AFT members?
Broad membership in the new plan is essential to ensuring its long-term health.
Therefore, it should be mandatory for all public school employees. NJEA would
prefer that enrollment in the new plan be open only to NJEA members; however, we
have not determined whether this would be permitted. If so, administrators,
members of other unions, and school employees not represented by a union could
join NJEA as general professional members or in another membership category
established for this purpose.
Q.6. The PERS-Local government component is adequately funded. Will ESP
members have to shift to the new plan or can they remain in PERS?
Local PERS, under state funding assumptions, is 77% funded. That funding ratio
falls to 67% when more conservative assumptions are used. The bigger concern,
however, is that the unfunded liability for Local PERS is currently being charged to
local school districts as a percentage of salary of current employees, even though
that liability includes the accrued pension benefits of those who are no longer
employed by school districts. This creates a dangerous incentive for districts to
privatize their Local PERS employees – our ESP members. For this reason, it would
be advantageous for us to change the mechanism for paying the unfunded liability
and for NJEA members to move from Local PERS to a new plan.
Q.7.
Will the new plan be an ERISA plan?
The answer to this question will be subject to IRS determination if a new plan is
formed. However, there is a precedent for a union-run plan of public employees and
employers to be regulated as a government plan, as provided in guidance issued by
the IRS.
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Q.8. If the “employer” contribution is a fixed percentage of payroll (meaning
the employees bear the investment risk) will the plan be considered a defined
contribution plan or a defined benefit plan?
The new plan would be a defined benefit plan. Its specific structure would depend
on levels of employer and employee contributions. Establishing employer
contributions as a percentage of salary does not mean that employees would bear
the investment risk.
Q.9.
Will the frozen plan be considered an ERISA/PBGC plan?
The answer to this question will be subject to IRS determination when the plan is
frozen and a new trust is established.
Q.10. Why do we need an amendment to the constitution if the new plan is an
ERISA plan?
The new plan may not be qualified as an ERISA plan by the IRS. The constitutional
amendment is vital to ensuring the state’s commitment of paying off the unfunded
liability of the current plan and reliably funding the new plan. Employer funding is
now driven by statute, and the gross underfunding of the pensions has evolved
because the state has either changed or violated those laws over the last 15 years.
Q.11. What are the estimated administrative costs of TPAF versus the costs of
running a new union-run plan?
Currently the NJ Division of Pensions and Benefits administers both TPAF and Local
PERS. Many of its employees are paid out of the state budget and not from the
pension plans themselves. NJEA understands there would be a potential cost
savings for the state, and would pursue recouping these savings to offset costs of
running a new plan. The state also has the database, software and other resources
used to run the current plans, and there would have to be a transition of such
resources should a decision be made to move to a union-administered plan. NJEA
has investigated with several actuarial firms the administrative costs of a frozen and
new plan based on assets, payment schedule, percentage of contribution, and other
factors to try to get a handle on future administration costs.
Q.12. Will the State Division of Investment continue to invest the assets of the
frozen plan and the new plan or will NJEA have to hire private money
managers to invest the assets and, if so, at what cost?
It is assumed that a new trust would be independently governed and the
investments independently managed. This may be best, as there have been serious
questions raised regarding political interference in the selection of investment
managers for the current plans.
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Q.13. What is the estimated employer cost of the new plan?
This has not been determined. The commission has recommended equal employer
and employee contributions of 4% of salary each. NJEA does not believe this is
enough to fund an adequate new retirement benefit.
Q.14. If this cost is shifted to local school districts, what will be the impact on
collective bargaining, salary guides, and the expected growth or expected
future pension of the participants of the new plan?
In the initial years, the shift of employer pension costs to local districts would likely
exert pressure on collective bargaining, as districts attempt to balance these costs
against other employee costs. For this reason, NJEA would insist that these costs be
outside the 2% revenue cap. Following this transition, the new costs would be
incorporated into base budgets – bargaining would occur just as it does now with
municipal and county employees whose pension costs are already funded by local
employers. TPAF is currently the only pension plan in which employer costs for
locally-employed plan members are funded by the state; it also represents the
biggest unfunded pension liability. The plans funded by local employers – Local
PERS and plans serving police officers and firefighters – are all healthier than TPAF.
Clearly, relying on the state for employer contributions has not worked.
Q.15. Under current law, employee contributions to TPAF/PERS are made
with before-tax dollars. Will employee contributions to the new plan be tax
deductible?
This would depend on the qualified status of a new plan, as determined by the IRS.
Q.16. How will current employees, with a combination of new and frozen plan
experience, be eligible to retire, receive retiree medical insurance, etc.?
NJEA would demand that the years in both old and new plans would be combined
for purposes of eligibility for benefits.
Q.17. The state currently uses the assume rate of return (7.9%) to calculate
liabilities. How will freezing the TPAF and/or PERS reduce liabilities in the
long run when a terminated plan has to use PBGC-type assumptions to
calculate liabilities?
This assumes the frozen plan would become an ERISA plan, which has not been
determined. NJEA and its actuaries have used more conservative assumptions to
estimate the payment schedule needed to pay off the unfunded liability of the
current plan.
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Q.18. Does the proposal to shift the cost of TPAF from the state to local school
districts violate state mandate/state pay law?
Approving such a shift through a constitutional amendment would supersede any
statutory restrictions.
Q.19. What is the impact on being able to borrow on one’s pension?
While this has not been addressed in any discussion with NJEA, we believe its is
likely that pension loans would not be permitted any longer. Repayment of existing
loans would have to continue.
Q.20. Since no one who signed the Letter of Intent that presently holds an
elected office will be around when such a plan is implemented, could this lead
to their employment as managers of the new plan?
There is no “Letter of Intent.” There is no agreement. The only document signed
(regretfully) by representatives of NJEA is a cover memo that clearly states that the
contents of the attached ‘roadmap’ are items for “future discussion.” In addition, the
‘roadmap’ itself states, unequivocally, that the signatories of the memo have no
authority to reach any agreements. Finally, because the word “roadmap” was used
in the title of the commission report, members must understand the difference
between the two documents. NJEA does NOT endorse the commission report, and is
strongly opposed to many of its recommendations. The memo outlines the limited
recommendations in the commission report which NJEA is willing to further
explore.