“Sore Loser” With “Limited Credibility”

That’s what a group of 70 Public Plan actuaries* at this month’s EA meeting view was of Moody’s and their revised rating methodology for US states as it relates to valuing unfunded pension liabilities:

Appendix A – Using Moody’s pension adjustments to derive Moody’s adjusted net pension liability. The steps we take to adjust reported pension liabilities are:
» Allocating cost-sharing plan liabilities. We will allocate to state and rated local governments their proportionate shares of CSP liabilities based on the share of total plan contributions represented by each participating government’s reported contribution. In cases where there is a known actuarially required contribution (ARC) that is greater than the actual contribution, the entity’s proportional share will be calculated using the employer ARC relative to the plan ARC.
» Discounting accrued liabilities using a market discount rate. We will use Citibank’s Pension Liability Index (“Index”) and a common duration of 13 years to adjust each plan’s reported actuarial accrued liabilities (AAL). The Index is composed of high credit quality (Aa rated or higher) taxable bonds and is duration-weighted by Citibank for purposes of creating a discount rate for a typical pension plan in the private sector. The reported AAL is projected forward for 13 years at the plan’s reported discount rate and then discounted to the present using the Index’s value as of the valuation date. This calculation results in an increase in AAL of between 13% and 14% for each one percentage point difference between the Index and the plan’s reported discount rate.
» Determining the value of plan assets. We will value plan assets at the reported market or fair value as of the valuation date.
» Calculating adjusted net pension liability. The difference between the adjusted liabilities and the market or fair value of assets is the adjusted net pension liability. This is the number that Moody’s will use to calculate the pension liability ratio incorporated in the state GO scorecard, as per our rating methodology. It is also a key number for Moody’s pension analysis under our local government rating methodology
» Amortizing adjusted net pension liability. The adjusted net pension liability will be amortized over a 20-year period on a level dollar basis, using the interest rate provided by the Index. This measure will be considered by rating committees along with other supplementary information about a government’s pension obligations.

In New Jersey’s situation, using market value of assets and the Citibank interest rate, which I have essentially been using in my updates, results in a reduction in the funded ratio from 65% to 35% and an increase in the unfunded liability from $45 billion to $130 billion.

So why would public plan actuaries view Moody’s as a ‘sore loser’?  Because they’re late to the dance.  Not only have I been using these factors but Joshua Rauh’s riskless-rate theory and GASB’s disclosure suggestions incorporate this logic.  Seeing official liabilities increase and funded ratios decrease annually have been blamed on a variety of factors but these public plan actuaries refuse to see that maybe it’s their own actuarial assumptions that have been flawed.

Who’s the real sore loser with limited credibility here?




* Though it was one actuary who articulated it the rest of room seemed to be on board.  Unfortunately my notes are sketchy as taping did not seem to be allowed and there was no press coverage though the moderator did inquire if there were any press people in the room (no) and then if there were any bloggers (only me).  Apparently there had been an incident of a reporter covering a prior Public Plan session getting caught.  What happened to them was murky and it could have been as little as having to make a nominal donation to the Actuarial Foundation though as I was leaving the conference I did make a point of driving past Rock Creek Park to check if there were park police sealing off any perimeters.

26 responses to this post.

  1. Posted by Anonymous on April 18, 2013 at 2:07 pm

    I am only receiving 16k per year pension. I was counting on the COLA since I was forced to retire early due to chronic pain. I dont want to go on disability. Is it possible to have partial COLA reinstatement for those in need. Or is that totally out of the question. I noticed there is a bill introduced by Shirley Turner which speaks of reinstating COLA. Thanks for your input.


    • Here is the bill:

      It was originally introduced 2/13/12 and I couldn’t even find an executive summary so it’s probably dead. The problem is that it would be very difficult to weed out all the spiked and overblown pensions provided to political hacks. It’s far easier to go across the board (except if a cap were put on) and politicians view that as fair. However they forget that many of these pensions weren’t earned fairly.

      I would be all for terminating the plan, paying back the employees’ contributions, and then distributing the rest of the money to participants on the basis of need. It’s a lot of work and retirees will need to reapply for their pensions and there is a dwindling amount to distribute but it’s a lot fairer than the ponzi scheme being run now.


      • Posted by Tough Love on April 18, 2013 at 2:51 pm

        I’d love to see the current Plans retired with a distribution of assets. With virtually all Private Sector workers getting DC Plans and Public Sector workers earning no less in “cash pay”, that’s what they should get … DC Plans with a modest taxpayer “match” comparable to what Private Sector workers get from their employers.

        And for those who would scream foul …. I say tough, it’s called “fair”. You’re entitled to EQUAL, but NOT greater total compensation.


      • Your solution here is still the best, been the best for a few years!


      • Posted by muni-man on April 18, 2013 at 4:33 pm

        Very nice job, JB, with your estimates over the years. I wonder when they’re gonna finally admit the NJ plans are in hopeless shape and throw in the towel. I’m sure they’ll try a squeal for relief of some kind from the Feds before the final act plays out though.


        • I’m constantly amazed that no one else has blown the whistle on these actuaries from a practical standpoint. They’re coming up with numbers that are supposed to cover the Normal Cost for the year plus an amortization of the prior unfunded (albeit over 30 years) so the funded ratio is supposed to be going up in theory. Then when funded ratios continue to decline they come up with all these explanations though leaving out the obvious one: we messed up.


  2. Posted by Javagold on April 18, 2013 at 5:54 pm

    the collapse is just about here !!!!!!


  3. Posted by Tough Love on April 18, 2013 at 10:54 pm

    John, Off topic (sorry, I couldn’t resist) … I know NJ has been heavily moving into alternative investments. Maybe they should consider something akin to what this firm in Ireland is doing (quoting):

    Former milkmen and workers at Cathedral City maker Dairy Crest are to see their pensions backed with £60 million worth of maturing cheddar cheese under innovative plans to bolster the scheme. The group has agreed to offer nearly half of its valuable cheese stock as security for the pension fund.


  4. Posted by Eric on April 19, 2013 at 2:45 am

    Tough Love:
    Cheddar cheese is a valuable commodity in a world of insane money printing engineered to keep interest rates low to save too big to fail Wall Street banks by making their assets appear to have value.
    NJ would rather place its money with Lehman Brothers and Revel.


    • Posted by Tough Love on April 19, 2013 at 2:03 pm

      Well then ………..we should also invest in some vineyards so if we ever need to seize that security, we can at least have some wine with our cheese.


  5. Posted by Eric on April 19, 2013 at 6:42 pm



  6. Posted by Al Moncrief on April 19, 2013 at 8:07 pm


    “The Florida Retirement System (FRS) is not in a position to take on new expenses and there are other challenges. According to the Florida Chamber Foundation, the FRS is only about 87 percent funded. That means, unless something changes, approximately 13 out of 100 government employees will not be able to rely on receiving their pensions.”

    “Mark Wilson is the president and CEO of the Florida Chamber of Commerce.”

    (As I read this, I could actually feel my IQ dropping.)




    • Posted by Tough Love on April 19, 2013 at 10:30 pm

      Al, That quote DOES sound quite “dumb”, but with the “official” funding ratio at 87%, when re-stated by Moodys, using less aggressive (i.e., more appropriate) valuation assumptions, the 87% is likely more like 70% ….. pretty crappy.

      Two quotes (below) from that article in your link seem right on the money:

      (1) For decades, government entitlements such as defined benefit retirement plans for government employees have grown far beyond benefits for the private sector.

      (2) For many years, Florida was the only state where taxpayers paid 100 percent of state employee pensions. Opponents of free enterprise fight to keep it that way, but that simply is not sustainable.

      And from the following quote, they still don’t understand that changing pensions ONLY for new employees saves next to nothing for 20+years:

      ” HB 7011 does not impact current participants in the FRS, but it will offer new employees security for retirement while reducing future burdens on taxpayers. “


      • Posted by Al Moncrief on April 20, 2013 at 11:04 pm

        Hey TL, a 70 percent funded ratio is “adequately funded” according to Fitch. 80 percent is “well-funded.” Like a mortgage, the debt doesn’t come due for decades to come, up to 70 years. The fact that a person has 80 percent of their mortgage paid off should be celebrated rather than labeled a “crisis.”


        • Posted by Tough Love on April 20, 2013 at 11:43 pm

          Al, You are incorrect. The MOST authoritative source on this controversial issue is the American Academy of Actuaries. An article with the following title:

          “Actuaries Debunk Myth that 80% Pension Funded Ratio Alone Constitutes ‘Actuarially Sound;’ Recommend Comprehensive Criteria to Judge Pension Fund Health”

          can be found at this link:

          And your mortgage analogy is ludicrous. Since “funding” relates to the discounted value of future expected payouts for service ALREADY RENDERED, the discounted cost (and discounted only because it is payable in the future) of that service should ALREADY be FULLY paid for (no different than a weekly paycheck). A better mortgage analogy would be that you only paid 80% of the mortgage payment due LAST MONTH.


          • Posted by muni-man on April 21, 2013 at 9:27 am

            Under Al’s logic, then I guess NJ’s surreptitiously taken out a reverse mortgage on its plans since they’re now down to about a 35% funding level. Who knew??? Jersey – pension strong!!

            He’s yet to rebut his state Treasurer’s comment that the Colorado plans are unsustainable. He’s still laser-focused on justice for Justus – that will help the Co. plans immeasurably if it succeeds.

          • Posted by Tough Love on April 21, 2013 at 10:56 am

            Mini-man, It’s not easy to teaching an old dog new tricks. Given the unjustified generosity in these Plans, Al should be pleased that’s all they took away.

            And as to my MY mortgage analogy to an 80% pension Plan funding ratio, it didn’t go far enough. I should have said ……..

            A better mortgage analogy would be that you have only paid 80% of ALL mortgage payments with due dates in the PAST.

          • Posted by muni-man on April 21, 2013 at 11:10 am

            Like almost all publics, Al suffers from ‘advanced cocoon syndrome’. Now that the ultra-safe, always increasing package of goodies he and millions of others have feasted on for years is facing the certainty of being seriously scaled back, they’re getting scared and befuddled. Damn, I don’t know what to do – this stuff definitely wasn’t supposed to happen to me because I’m a public. Hell, I had a employment contract that absolutely, positively GUARANTEED all this abundance forever, regardless of any circumstances. Well, that simply ain’t the way the world works, except in the minds of publics. Well before this decade’s out, economics is GUARANTEED to largely correct the abuses the political vermin and public union hacks collaborated on for years at the private sector’s expense, and they’ll be powerless to stop most of the benefit reductions that are coming. Economic forces are just a tad more potent than contracts as they’ll be finding out bigtime in the not too distant future. The pressure on them continues to build every day. Big rollbacks are coming regardless of what they try to do to stave them off.

          • Posted by Tough Love on April 21, 2013 at 11:51 am

            Mini-man, Nice on-the-money statement …”the abuses the political vermin and public union hacks collaborated on for years at the private sector’s expense”.

            Hope you don’t mind if I use that occasionally

            That quote IS the point …that “collaboration” resulted in the grossly excessive pension promises (excessive … by ANY reasonable measure) we have today. And “funding” FOLLOWS generosity. We don’t have a “funding” problem, we have a “generosity” problem, and that problem must be addressed via reductions in the promised pensions not just for new employees, but for CURRENT employees …. and in cities where there is little option, for those already retired as well.

          • Posted by Al Moncrief on April 22, 2013 at 7:07 pm

            A 2012 Fitch Ratings report includes the following statement:

            “Fitch generally considers pensions with funded ratios 80% and above to be well-funded.”

            Another Fitch Ratings paper specifically addresses the evaluation of public defined benefit pension obligations. In this 2011 Fitch Ratings report, Fitch notes that a 70% actuarial funded ratio for public defined benefit pensions is considered an “adequate” actuarial funded ratio.

            Here’s a link to the report:


        • Posted by muni-man on April 21, 2013 at 12:22 pm

          Benefit levels are the problem; funding never was the problem. Trying to keep fully funding them is like trying to square a circle – impossible. If benefit levels were comparable in the private sector, then you’d be paying $9.50 for a loaf of bread, $89.00 for a snow shovel and $5,600.00 for recliner. So much for bringing the private sector up to public sector benefit level standards as they frequently tout should happen. They’re just an out-of-control bunch of crony cartels that use monopoly powers to bleed the private sector dry. But, economics is finally gonna rewrite the playbook.


          • Posted by Al Moncrief on April 23, 2013 at 3:26 pm

            Public pension under-funding is most certainly the problem . . . when one enters into a contract, one is expected (by the courts) to perform under that contract (meet actuarially required pension contributions.)

          • Posted by skip3house on April 23, 2013 at 3:49 pm

            NJ has not complied, not even 50%. What is your solution?
            Must I sell my kitchen and car?

          • Posted by Tough Love on April 23, 2013 at 4:49 pm

            Al, Hogwash. “Funding” is ONLY a problem BECAUSE the promised pensions are grossly excessive (by any and every reasonable measure) and THEREFORE require enormous TAXPAYERS funds (above the pittance typically contributed by the workers) to fully fund these pensions.

            “Funding” FOLLOWS “generosity”.

            REVERSE the generosity (for CURRENT workers) and the funding becomes manageable. Ending COLAs is just a start. Next up, reducing the basic formula benefits.

          • Posted by muni-man on April 24, 2013 at 8:44 am

            Quit orbiting financial Uranus will ya! These ‘contracts’ you endlessly babble about are fundamentally defective and hopelessly one-sided since taxpayer interests are never properly represented, if at all. Of course, courts will never rule against them for obvious self-serving reasons. Underfunding is simply common sense and the antidote to collective gouging and union-pol collusion that created this ridiculous benefits’ bonanza in the first place. And what underfunding itself doesn’t accomplish, other economic forces like lousy plan returns will, until some semblance of fairness and balance is eventually restored. There’s no contract on the planet that is going to trump economic realities. So start thinking an a la carte future – maybe keep a COLA-lite in exchange for skimpier healthcare benefits, stuff like that. It’s just the rigors of being a public in this brave, new world.

            Fortunately, here in NJ there are no contractual protections for pensions so the UNCOLA was easily implemented. NJ can unilaterally reduce or eliminate future pension benefits as it sees fit as well. Unlike Co. and other states that have stupidly strangled themselves with ill-conceived contract malarkey that limits their every move, NJ has great flexibility to change the rules of the road which is both necessary and very beneficial to have.

          • Will it help if we can completely drop NJ Retiree Medical?
            Even the regular Medicare premium, deducted from Social Security for the rest of us older people, is refunded to NJ Retirees by NJ..
            I seem to recall this ‘free’ NJ retiree medical costs NJ about $6 Billion/year, much to under age 65 retirees?

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