Defining Actuarial Soundness (a/k/a Making Shit Up)

The Pew Center released a report comparing the pension and OPEB funded status of 61 of the nation’s largest cities in which they continue to insist that 80% funding is fine regardless of what the American Academy of Actuaries might put in an issue brief.

However, in doing research on the study’s numbers, I came across what may be the most outrageous definition of actuarial soundness extant.

According to the American Academy of Actuaries’ Code of Professional Conduct:

Laws may also impose obligations upon an Actuary.  Where requirements of Law conflict with the Code, the requirements of Law shall take precedence.

So if some yokels from West Virginia want to define a trust with no money in it as actuarially sound then the actuarial profession must defer to their ‘wisdom’.

I bring up yokels from West Virginia for a reason.  The Pew study listed Charleston, WV with a funded ratio of 24% as the poorest funded big city pension.  I got curious so I found the latest city audit, reviewed the portions having to do with pensions, and found that Pew was wrong.

Charleston has two city plans, one for Police and one for Fire Personnel.  Their funded ratios don’t total 24% combined.  As of 7/1/11 Police was at 8.00% and Fire was at 5.79%.

To try and solve their problem Charleston has instituted an Insurance Premium Surcharge Tax to bring in about $3.3 million that they add to the $8.8 million the city contributes and the $1.4 million public workers contribute to barely cover $12.3 million going out to retirees annually.  It’s classic pay-go with a $20 million buffer but to keep the hoi polloi content in their ignorance they came up with their own definitions of a funding method and actuarial soundness (from the top of the second page of the audit excerpts):

Under the funding methodology for the Conservation Method of financing, the fund’s market value of assets is projected to be greater than zero for all plan years prior to the end of the 15-year projection period.  Accordingly, this contribution methodology satisfies the minimum standard for actuarial soundness.

In whose mind?

8 responses to this post.

  1. Posted by Robert Mitchell on January 16, 2013 at 10:12 pm

    That is the same standard (roughly) as Social Security. PayGo with borrowing backup authority is a method for making projections. But it never comes close to paying for the services when they were rendered. Tough luck for Charleston taxpayers.


    • Posted by Larry Littlefield on January 17, 2013 at 5:03 pm

      Tough luck for FUTURE taxpayers. It appears that past taxpayers got one hell of a great deal.

      And not just in Charleston. And not just with regard to pensions, or even government.


  2. Posted by eatingdogfood on January 17, 2013 at 1:28 pm

    Democratic Hustler Politicians + Corrupt Greedy Unions = BANKRUPTCY BABY!


  3. Posted by My Ignorant Opinion on January 17, 2013 at 1:57 pm

    Charleston, WV is the state capital and home to a bunch of large corporations. West Virginia has coal as its main industry so they have financial reserves in the ground. So pay as you go is a cheaper way to fund a pension scheme for them as it avoids the scams associated with government pension funds and my guess is they pay more attention to what they award as pensions as there is no magic of market gains that will save them.

    I personally think a fully funded pension is impossible due to retroactive increases in benefits. So actually an 80% or less funded pension is fully funded as it makes it hard to demand retroactive increases and the gap can hopefully be made up with tax increases. A zero percent funded pension is just fine as it makes retroactive increases very difficult and it focuses the union members and retirees on the economic viability of the taxpayers they are depending on. New Jersey is the worst situation as the union members see no connection between their benefits, government waste, and the taxpayers and everybody thinks the pension assets and maybe bailouts will save the day somehow.

    As an aside the NY City bus drivers strike might be more about what to do about the pension scheme of Amalgamated Transit Union Local 1181. So a pay as you go system might actually work better as it avoids malfeasance costs. And when the scheme falls apart you end up in the same place, pay as you go.


    • Posted by Tough Love on January 17, 2013 at 4:23 pm

      As an example of why Pay-As-You-Go can be unfair, under pay-as-you-go, I’d love to be a Taxpayer in a newly created city, with mostly very young workers who won’t retire for 20+ years. HERE, I get the benefit of Public Sector services, but pay nothing toward ANY retiree’s pension (even though they have been promised one).

      As an opposite example, under pay-as-you-go, I’d hate to be a Taxpayer during a period of a smaller Public Sector workforce, following a prior much larger generation (now retired and collecting pensions and healthcare). HERE, I get the lesser services associated with the smaller workforce, but pay for the pensions of the larger group of retirees from whom I rec’d no services.

      Think about it……….

      A defined contribution Pension system has the benefits of BOTH worlds … very limited opportunity for self-interested elected officials to collude with the Public Sector Unions to screw the Taxpayers, and you pay the appropriate contribution each payday towards the workers who provide service to YOU.

      The PRIMARY reason the Public Sector Unions/Workers don’t want DC Plans is that the Benefits would be much lower. It’s not that they couldn’t be as rich as their current DB Plans, it’s just that by granting such benefits, it would be eminently obvious that they would be excessive, unaffordable, and unnecessary to attract and retain a qualified workforce.

      P.S. the current DB Plans ARE …” excessive, unaffordable, and unnecessary to attract and retain a qualified workforce” ….. it’s just that the complexities of DB Plans make it less obvious.


      • Posted by muni-man on January 18, 2013 at 9:52 am

        Yesterday’s 4-3 Florida Supreme Court ruling that prospective pension changes are OK is a big union setback in a state soon to be 3rd largest in population replacing NY. With no existing contractual restrictions on pensions or other retirement benefits, NJ has had the freedom to do that all along – they just haven’t had the nads to do it fully, yet! The UNCOLA was a decent start, but as the economic vise continues to tighten, NJ will eventually see the wisdom of substantially reducing the complete gamut of active and retirement benefits for publics, as will a lot of other states. And the massive tax increases associated with a paygo scheme will never happen. Like gun control, it would be met by defiance and noncompliance – the molon labe thing; the pols will back off when they see it’s politically impossible to ever do.


        • Posted by Tough Love on January 18, 2013 at 1:06 pm

          I too see future-service pension accrual reductions for current workers. There certainly is “fairness” justification for that reduction as well as reducing the pensions of those already retired, but the latter is certainly a secondary step and highly dependent on how bad NJ’s (and it’s municipality’s) finances develop over time.


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