September, 2003

Governor signs Early Retirement Legislation

Each local board may opt in, with 100% local financing obligation

On July 15, 2003, Gov. McGreevey signed into law an Early Retirement Incentive bill that would provide additional retirement benefits to TPAF and PERS members in locations where the local governance body opts to participate. The benefits are similar to the ERI offering from 1993-'94, when Perth Amboy's Board of Education opted to participate, with state funding assistance. The current ERI has no state funding; local boards opting in would be responsible for the full cost of additional retirement benefits. A bonding provision was included in the law to permit and enable local financing, through bonded indebtedness. Boards around the state have one year from enactment to decide the question of participation.

Highlights of the current offering:

l Employees who are at least 50 years of age and have at least 25 years of service credit in

TPAF or PERS would receive an additional 3 years of service credit; (Category I)

l A PERS or TPAF member who is under age 55 at the time of retirement would be exempt

from any actuarial reduction in retirement allowance. ( No penalty to the individual, but an

additional cost to be funded by a participating board.)

l Employee (military) veterans who meet the age and service credit requirements and retire on a

special veterans retirement would receive an additional pension in the amount of 3/55 of

the compensation on which the retirement allowance is based.

l Employees who are at least age 60 and have at least 20, but less than 25 years of service

credit, would receive full payment of premiums for coverage under the State Health Benefits

Program, for the retired employee and dependents, but not including survivors. This

would be provided even if the employer wasn't enrolled in SHBP for active employees.

(Category II)

l Employees who are at least age 60, with at least 10, but less than 20 years of service

credit, would receive an additional pension of $ 500. per month for the 24 months

following retirement. (Category III)

l An employer must meet with the employee union representatives, whether or not the

employer adopts a participating resolution, within 1 (one) year of enactment.

The purpose of this advisory is to alert our constituents to the enactment of the ERI and the terms and conditions applying thereto. We suspect there would likely be a substantial number of receptive employees. It has been represented to us by Central Administration that the Board is not inclined to participate, given the obligation to fund the entire program without state assistance and the financial magnitude of that commitment.

As we go to print, we are not aware of any significant groundswell of support for this ERI among the state's 600 or so districts. Rumor has it that one North Jersey district has or is about to commit to participate. We're looking for more defined information on that issue. With the local financing obligation in place, both the Legislature and the Governor can take a stance like, "Don't blame us. We put it in place and signed it into law. Your local officials had the opportunity to bring this benefit to you. If they didn't -- blame them. And don't forget our [show of]support for you when re-election time rolls around again."

Early retirement incentives are controversial:

l There is a basic question of equity when someone offers a benefit to a particular segment of a population but denies that same benefit to everyone else.

l Remember when the pension retirement formula was years of service over 60 x FAS ?

The Legislature got it right in 2001, amending the formula for everyone to years over 55.

Are we likely to see the formula go to years over 50 anytime soon? Given the huge losses

in the state pension coffers, driven by the economic downturn and some questionable

investment strategies, we just don't see it.

l An ERI might have more local and timely appeal if we were about to open new facilities, giving rise to a hiring frenzy. Then you could make a stronger case for savings on payroll costs by enticing senior earners to retire, at about a 2 for 1 replacement advantage. But again, no thanks to the state's school construction foot-dragging, we're not in that position and may not be until well after the current ERI window has closed. And, the shorter term payroll savings would have to be weighed against the additional lifetime pension payouts to those who might elect to access the early retirement option.

l In a somewhat related area, we have engaged the Board in discussions on amending the

reimbursement for accumulated sick leave at retirement. For those of you who were here

last year, you already know the arguments we put forward. In essence, we have perpetuated a system that actually encourages workforce absences when we should be doing more to promote the quality and consistency of district service. We believe that could make a world of difference on many fronts. We're hoping to see those discussions result in some changes in the way we approach productivity issues. We've been making the point that a change in our

approach could have as much or more benefit to the district as it would to employees. We

see it as a Win/Win worth pursuing.

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Thanks to the folks in Central Administration, by way of representatives and actuaries from the Division of Pensions and Benefits, we have some more specific information we can share with you concerning the ERI. Keep in mind that when we refer to the "pension system" it includes the Teachers Pension and Annuity Fund (TPAF) and the Public Employees Retirement System (PERS). If a board opts to participate in the ERI, it must do so for all eligible employees, not just those from one fund ( say PERS) but not the other (TPAF) and it must include all categories of eligibility defined in the legislation.

Some facts and figures generated on Perth Amboy's pension system demographics *:

l There are 165 eligible TPAF employees in Category I.

(Age 50 or more with 25 or more years of pension service credit.)

Actuarial calculations project a cost for this group of $ 33,262,470.

The average additional lifetime benefit is projected at $ 201,591. per person.

l There are 8 eligible TPAF employees in Category II.

( Age 60 or more with 20 to 24 years of pension service credit.)

Actuarial calculations project a cost for this group of $ 493, 714.

The average additional lifetime benefit is projected at $ 61,714. per person.

l There are 10 eligible TPAF employees in Category III.

( Age 60 or more with 10 to 19 years of pension service credit.)

Actuarial calculations project a cost for this group of $ 464,615.

The average additional lifetime benefit is projected at $ 46,461. per person.

l There are 25 eligible PERS employees in Category I.

(Age 50 or more with 25 or more years of pension service credit.)

Actuarial calculations project a cost for this group of $ 1,932,246.

The average additional lifetime benefit is projected at $ 77,289. per person.

* We have presented the actuarial projections generated by the Division of Pensions and Benefits.

We cannot speak to the accuracy of the assumptions or projections they make, but assume them

correct at face value. Likewise, we believe our interpretations to be accurate, based upon the submitted data.

Errors, though unintended, are always possible.

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l There are 16 eligible PERS employees in Category II.

(Age 60 with 20 to 24 years of pension service credit.)

Actuarial calculations project a cost for this group of $ 422,155.

The average additional lifetime benefit is projected at $ 26,385. per person.

l There are 25 eligible PERS employees in Category III.

(Age 60 with 10 to 19 years of pension service credit.)

Actuarial calculations project a cost for this group of $ 629,683.

The average additional lifetime benefit is projected at $ 25,187. per person.

l Total eligible TPAF = 183

Total eligible PERS = 66

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249 total district eligible ( about 17% of the workforce)

l Total additional liability to provide the benefits described to all eligible employees:

$ 37, 204, 883.

The average additional lifetime benefit is projected at $ 149,417. per person.

l When the Board committed to the administrative VSP last winter, they faced a total

additional liability of about $ 2.5 million, if all 36 eligible had retired. Eleven (11) did retire,

generating a cost of $ 954,100., an average payout of $ 86,736. spread over a 3-year

schedule.

It's our hope that you found this presentation informative if not encouraging. We invite your questions, comments and suggestions. As developments warrant, we'll be in touch.

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