The actuary as fall guy

According to Bloomberg New York City’s  chief actuary is recommending that the city’s $115.2 billion pension plans lower their assumed annual rate of return on assets to 7% from 8%, which would open a funding gap of at least $2 billion next year.  They go on to say that the city has already set aside $1 billion for the fiscal year beginning July 1 to cover an increase in its annual pension contribution.

So this sensible interest rate change will cost $2 billion and the city has $1 billion of that.  What about the other billion?

For that we turn to the New York Post which reports that, in addition to revising the rate of return, North is also recommending a change in key accounting practices which would allow the city to pass some of the costs to Bloomberg’s successors citing sources involved in the pension analysis who said North’s staff was concerned that too big a hit all at once could cause a budget catastrophe at City Hall.  “The impact would be too great,” said one analyst involved in the discussions between the actuary and the administration. “You have to look at the [city’s] ability to pay.”

No you don’t!

The actuary should be able to to determine the cost of a promised defined benefit based on his professional judgment.  If a government is unable or unwilling to make that payment they have options since there is no authority forcing them to put in that money.  The problem with this scenario for a lot of stakeholders in the system is that the government would get the bill for $10.5 billion, put in the $9.5 billion they have, and the deliberate underfunding of the plan would become obvious and might prompt calls to reduce benefits.

However, if they get the actuary to change ‘key accounting practices’* to lower their contribution requirement they can cash in on the good name of the actuarial profession and claim that they met their funding obligations (as determined by their paid flunky).




* I don’t know if it’s the New York Post looking to spare their readers details on whatever these practices might be ( ‘smoothing’ assets by doubling their market value; adding a plague component to the mortality table) but who knew there were key accounting practices out there that would lower contributions for public plans and they weren’t being used yet.

9 responses to this post.

  1. Posted by Javagold on January 12, 2012 at 3:01 pm

    to say nothing that the rate of return everywhere should be no more than 5% !!


  2. Posted by Larry Littlefield on January 12, 2012 at 3:18 pm

    What does it mean that one year ago the Mayor proposed to increase pension contributions by $1 billion, and now he says that is the amount to be increased? It doesn’t sound like independence.

    This is the same guy who signed off on reducing the retirement age of NYC teachers from 62 to 55 with an actual cost of zero — it would save money! — in 2007. The deal passed in early 2008.

    Americans are getting poorer, generation by generation. If people today can’t be expected to pay for the pension enhancements older generations promised themselves, why can younger generations be expected to do it?

    Finally, what about those pension boards? Will any one of them stand up and say no?


  3. Posted by muni-man on January 12, 2012 at 3:54 pm

    City Pension Contributions 2002 – $1.5B (~3% of budget)
    2012 – $8.5B (13% of budget)
    Compounded Increase/Yr. – 18.94% (real toasty, and they’re still short contribution-wise)

    Yeah, this is gonna continue alright – they’re screwed. Been hearing Wall St. bonus payouts are gonna slide a lot this year too, so a big, prime-rib slab available for the city’s usual tax gouge could evaporate too. Gonna be interesting over there in the next few years.


  4. Posted by Tough Love on January 12, 2012 at 4:49 pm

    The decision whether a reduction in pension benefits is appropriate should rarely (only in extreme financial distress) be based on funding issues. It should be based on a comparison of Total Compensation (cash pay + pension accruals + benefit accruals) in comparable Public/Private sector jobs.

    Most studies suggest cash pay in 95+% of Public/Private sector jobs are VERY close. With this as the backdrop, there is no justification for greater Public Sector pensions & benefits. That the problem …. and the PROPER justification for pension reductions.


    • Posted by Larry Littlefield on January 12, 2012 at 7:39 pm

      FYI, in NYC public employees only compare their pay and benefits with Wall Street. Complain about the deals the serfs are getting, and they’ll immediately talk about the rich and their bailouts.

      Or course they were counting on the continued predation of the rich and bailouts to pay for their pensions, which is how they lied and claimed all the retroactive enhancement would cost nothing.


      • Posted by Tough Love on January 12, 2012 at 8:23 pm

        I should have mentioned it above, but the value at retirement of the Taxpayer paid-for share of Public Sector pensions are ROUTINELY 2-4x (6 times for police and paid firemen) greater than that of the pensions afforded comparable Private Sector workers by their employers.

        With no less Public Sector “cash pay”, such grossly excessive pensions are unsustainable, unnecessary to attract and retain a qualified workforce, and patently unfair to taxpayers whose contributions (and the investment earnings thereon) pay for 80-90% of the total cost of Public Sector pensions.


  5. Posted by Larry Littlefield on January 12, 2012 at 9:32 pm

    As for Mr. North being the fall guy, he has been the city actuary since at least the early 1990s.

    Both Mr. Bury and the Center for Retirement Research at Boston College have found that NYC’s pension funds are among the worst off in the entire U.S. One can argue about one methodology or another, but by whatever methodology NYC is among the worst.

    A large number of retroactive pension enhancements have been passed since North became actuary. And the city had two booms with unsustainably large tax revenues, in the late 1990s and early 2000s. Avoiding the pension enhancements and kicking in during the booms would have spared the city this disaster.


  6. Posted by Javagold on January 12, 2012 at 9:59 pm

    watch out for Black Swans


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