Ethical Dilemmas for Public Plan Actuaries

The Enrolled Actuaries meeting is next week and for the first time ever there will be no recording of the proceedings, per the CCA website:

No EA sessions are recorded. As a condition of your attendance at the meeting, you agree not to audio or video record any portion of the educational sessions held at the meeting. Any violation of this condition may result in your ejection from the meeting without a refund of your registration fee. In addition, you agree that the CCA shall be entitled to any costs incurred as a result of any violation of this provision, including payment of CCA’s attorneys’ fees. Violators may be prohibited from attending future meetings/events.

This might speed things up a bit since moderators can replace the ubiquitous opening announcement:

This session is being recorded.  If you have a question please come to the microphone or it will not be on the tape.  Please identify yourself and speak clearly.  Your opinions will considered your own and will not represent the opinions of your employer or the government agency you work for. Recordings of individual sessions can be purchased separately or together after the meeting.

with simply:

Is John Bury in the room?

Among the conveniences that 41 years of holding these meetings has brought is that session handouts are online before the meeting so you can decide which sessions would be best to attend (ie. those least likely to spend their 90 minutes on reading the session handout off a screen).

An interesting one based on its title is Session 406: Ethical Dilemmas Public Plan Actuaries.  I am not sure as to whether handouts are also supposed to be kept secret so I will make a précis of the four dilemmas up for discussion:

  1. Opinion Shopping: one actuary says 10-year asset smoothing is OK (and gets hired) but we all know 5-year smoothing is as far as you can go.
  2. Whistle Blowing and Confidentiality: after a valuation is out (and you happen to move on to another firm) you realize that you made an honest mistake on the valuation (left out a participant or two) and wonder if you have to tell anybody besides the boss at the place you left who doesn’t seem to care.
  3. Control of Work Product: should you do EXACTLY what you are told to do by politicians and the staff of the public system that hired you? (Regarding report wording mostly – of course you have to use the actuarial assumptions they tell you to use.)
  4. Conflict of Who’s Interest?: Your firm has as clients a public plan for a city and a multiemployer (union) plan with employees in that city.

Nothing about politicians picking your assumptions and their contributions.  Apparently that presents no dilemma for public plan actuaries.

26 responses to this post.

  1. Well dammit.

    I wanted to know what was said in a few particular sessions. That being one of them.

    I recognize those names from comment letters sent to the ABCD, btw.

    Reply

  2. Posted by Anonymous on April 8, 2016 at 9:39 pm

    I haven’t read The Great GASB in a while but it’s still a classic!

    Reply

  3. Posted by Anonymous on April 10, 2016 at 8:34 am

    Funny a post on ethics received so few comments. Wonder if ANY actuary or ANYONE for that matter can be impartial when they’re the receipent of governmental $. Guess we know where we stand?

    Reply

  4. Posted by Smooth Moderation Difficult on April 10, 2016 at 4:49 pm

    Fear not. Ethics is still alive and well. It’s like anything else, you can’t take it for granted. You have to work at it.

    I believe I have recommended this book before. Not just on the ethics of actuaries, but that of politicians, unions, and others. And not just the ethics, but the politics, the math, and the mechanics, and history of DB systems. And the future (of DC systems), if he has his way.

    Future Forsaken: PENnscam and the Demise of the Commonwealth. Rep. John McGinnis

    It’s a free downloadable book.

    Notice, I have also recommended strongly (and still do) reading Biggs and Richwine: “Overpaid or Underpaid? A State-by-State Ranking of Public Employee Compensation” 2014

    Doesn’t mean I agree with all their points, but there is really good information in both.

    Reply

  5. Posted by Smooth Moderation Equal on April 10, 2016 at 8:11 pm

    Agreed. I saw that.
    It seems Biggs and McGinnis are in agreement on most of the problems ….and solutions:

    Biggs: “Last year, nearly 60 percent of state and local governments failed to make their full pension contributions.”

    McGinnis said New Jersey and Illinois are the canaries in the coal mine, and to the other 47 states, New Jersey, Illinois, …and Pennsylvania are the canaries.

    They haven’t made full pension contributions, not just last year, but for the last twenty years*

    Like the lady said, “DON’T PAY THE BILLS, THE DEBT GETS LARGER”

    *And McGinnis and Biggs both agree, of course, that what is called “full pension contributions” is woefully inadequate to begin with.

    Reply

    • Posted by Tough Love on April 10, 2016 at 9:24 pm

      SMD,

      How selective your choices are indeed. Surely you didn’t miss these from the SAME article :
      ————————————————
      “Detroit’s public-employee pensions were essentially looted via bonus benefit payments. The city borrowed to fill the gap, then defaulted on the borrowing. Similarly, the bankrupt California cities of Stockton and San Bernardino granted massive, retroactive pension-benefit increases …. ”

      and this one:

      “Senate Finance Committee Chairman Orin Hatch, R.-Utah, want any legislation to require all state and local governments to accurately disclose their pension liabilities. But draft legislation from House Republicans would require this of Puerto Rico alone.”

      and this one:

      “Under current public-pension accounting rules, established by the Governmental Accounting Standards Board, a plan that takes more risk may assume a higher investment return — and then use that higher assumed return to “discount” its liabilities. This accounting trick immediately reduces governments’ contributions, before that riskier portfolio has paid even a penny of higher returns. It’s a gimmick that works only under public pensions’ unique accounting rules, and it explains public plans’ massive shift in recent years toward risky alternative investments such as hedge funds and private equity, a shift that the Society of Actuaries declares “goes against basic risk management principles.” Almost every other pension system in the world operates instead under “fair market” valuation rules, which, the Congressional Budget Office has stated, “provide a more complete and transparent measure of the costs of pension obligations.” To institute these rules, Hatch would draw on the terms of the Public Employee Pension Transparency Act, authored by Rep. Devin Nunes, R.-Calif.”

      and this one:

      “It would also reveal the true size of the pension crisis as a whole: Instead of being underfunded by merely $1 trillion, state and local plans would be shown to face a funding gap of $3 trillion or more.”
      ———————————————

      What you (as a Public Sector retiree riding the Public Sector gravy train) refuse to acknowledge is that the ROOT CAUSE of the problem is grossly excessive Public Sector pension “generosity”, and that the lack of full funding is not the CAUSE of the pension mess, but a CONSEQUENCE of that root cause ….. grossly excessive pension “generosity”.

      Reply

  6. Posted by Smooth Moderation Equal on April 10, 2016 at 11:43 pm

    LOL!!!

    “How selective your choices are indeed.”

    As in “Governments don’t go bankrupt for one reason alone. But every financially troubled government in recent years has had a poorly managed pension plan in the background. …”

    Immediately prior to your quote: “Detroit’s public-employee pensions were essentially looted via bonus benefit…”

    How selective is that?

    I could copy and paste the whole article, but seems like overkill.

    The gist of Biggs article and McGinnis book are primarily two fold.

    1) Pensions are underfunded because government has not been paying the ARCs.

    2) The ARCs themselves are grossly understated due to using the 7.5% discount rate instead of the risk free rate. (Among other things)

    McGinnis:

    Q: Don’t we need to change the design of the retirement plan for future employees first?
    A: Again, while it would be good public policy to change from a defined-benefit plan and
    its inherent political problems to a defined-contribution plan that is affordable,
    sustainable and predictable, it is neither a necessary nor sufficient approach to dealing
    with the problem in place. The problem is the result of a lack of proper funding, and the
    only solution to that is more funding, and sooner not later.

    The McGinnis book is over 200 pages, I might have left something out that you deem important.

    I haven’t read all of McGinnis book yet. I skimmed it several months ago and read more of it today.

    Reply

    • Posted by Tough Love on April 11, 2016 at 2:01 am

      As a Public Sector retiree, McGinnis’s book seem like just the fodder you would look to find ….. just pay for the promised pensions … not matter how unnecessary, unjust, unfair (to Taxpayers) or unaffordable.

      His home Sate of PA wouldn’t be in the mess they are in now had they never promised such absurdly generous Public pensions in the first place.

      Reply

    • Posted by S Moderation Douglas on April 11, 2016 at 2:22 am

      His home Sate of PA wouldn’t be in the mess they are in now had they paid the bills. Eight of the last ten year they didn’t pay even fifty percent of ARC.

      “Fodder”? Did you even glance at the book?

      Reply

      • Posted by Tough Love on April 11, 2016 at 2:36 am

        The promised pensions are …. just like everywhere else ….. AT LEAST double the value of those promised PA’s Private Sector workers, and as such, if the State paid 50% of the ARC, they have paid ALL of what was deserved.

        And you’re correct. It WON’T “get better” until these grossly excessive Public Sector promises are reduced (for the future service of all CURRENT workers) ALL THEY WAY down to the level typically promised Private Sector workers by their employers.
        ———————————————–
        And like I’VE stated many times ……..

        Public Sector workers are NOT “special” and deserving of a better deal ….. on the Taxpayers’ Dime.

        Reply

  7. Posted by Smooth Moderation Equal on April 11, 2016 at 12:03 am

    We have discussed this before.

    There is a difference “unaffordable” and “unfair”.

    This article and the book are …not… about “grossly excessive pension “generosity”.

    They are about “ethics” of government failure to properly fund the existing pensions and, of government understating the true cost.

    Neither the article nor the book claims that public benefits are excessive or unfair. They only discuss the lack of funding.

    Yes, we know Biggs believes …some… public benefits are excessive and both Biggs and McGinnis favor DC plans (with modest employer contributions) but that is not what these articles are about.

     “DON’T PAY THE BILLS, THE DEBT GETS LARGER”

    Reply

    • Posted by Tough Love on April 11, 2016 at 2:08 am

      Quoting SMD ….

      “There is a difference “unaffordable” and “unfair”.”

      Indeed there is, and some misinformed readers only look to the “affordability” of the promised Public Sector pensions …. not realizing that we should indeed be looking at the fairness of those promises.

      Unjust promises (MULTIPLES greater than those granted Private sector workers) made by elected officials BOUGHT with Union money should NOT be kept …. even IF we could scrounge up the money to pay for them.

      Quoting …. “Neither the article nor the book claims that public benefits are excessive or unfair. They only discuss the lack of funding. ”

      Exacty, and THAT ….. ONLY discussing the lack of full funding WITHOUT addressing the unreasonablness of the promised pensions (the grossly excessive “generosity”) ……. IS the book’s biggest flaw.

      Reply

    • Posted by S Moderation Douglas on April 11, 2016 at 2:29 am

      You say grossly excessive “generosity.”

      Moderation says “déjà pooh all over again.”

      Reply

      • Posted by Tough Love on April 11, 2016 at 2:39 am

        Have it your way …………………

        Reply

      • Posted by Smooth Moderation Equal on April 11, 2016 at 2:46 pm

        Have you looked at the book yet, or are you relying on your ass-umptions?
        There’s lots of “fodder” there. I didn’t have room to post it all.

        Still highly recommended: “Future Forsaken: PENnscam and the Demise of the Commonwealth” Rep. John McGinnis

        Reply

  8. Posted by Smooth Moderation Equal on April 11, 2016 at 7:30 pm

    TL “You seem to be a support of Rep. John McGinnis (as well as his book).”

    Where did you get that idea?

    I reiterate, “Notice, I have also recommended strongly (and still do) reading Biggs and Richwine: “Overpaid or Underpaid? A State-by-State Ranking of Public Employee Compensation” 2014

    Doesn’t mean I agree with all their points, but there is really good information in both.”

    Do you not get the difference between recommending a book and agreeing with or “supporting” it?

    Along that line, If I read Greenhut’s book, I might recommend reading it also. Unfortunately, that’s a non-starter, literally. $18.95 at Amazon, and it’s not available at my local library. Catchy title, though. I have read a lot of Greenhut’s articles. What it needs is an even catchier subtitle:

    “Paranoia Strikes Me” (FWIW, Buffalo Springfield, 1967)

    California, has a population of thirty nine million. About nineteen million of those are in the labor force. About fifteen percent of the labor force are state and local workers, and about thirty five percent of those are in unions.

    So public union members are two and one half percent of the population. And you’re telling us they are “Raiding Treasuries, Controlling Our Lives and Bankrupting the Nation”?

    That’s a mighty small tail wagging a very large dog. Not likely

    Reply

    • Posted by Tough Love on April 11, 2016 at 8:18 pm

      Quoting SMD ……

      “Along that line, If I read Greenhut’s book, I might recommend reading it also. Unfortunately, that’s a non-starter, literally. $18.95 at Amazon, and it’s not available at my local library.”

      Oh, can swing that $18.95 from your CA Public Sector pension ? Likely being 3 to 4 times greater in value at retirement than that of a similarly situated (in wages, age at retirement, and years of service) Private Sector retiree, I would have thought otherwise.

      Hmm …………. and only 35% of State and Local workers are in Unions ?

      Sounds WAY too low.

      Ok, maybe management and elected officials aren’t in “Unions” …. but don’t THEY get AT LEAST as grossly excessive pensions & benefits as the rank & file ?

      Excluding Police in “Associations” (vs “Unions”)?

      Excluding Teachers in “Associations” or “Federations” (vs “Unions”)?
      —————————————————

      Sounds like more of attempts to mislead ….. and more “smoothing (move along folks, nothing to see here. We’re not ripping you off …too much).?

      Reply

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