In 2012 Eileen Norcross wrote two pieces on how public plan actuaries manipulate assets higher and liabilities lower. The first on Asset Smoothing featured New Jersey prominently:
What are the effects of smoothing? It depends on the formula. Roman Hardgrave and I find in our 2011 paper that New Jersey’s smoothing formula allowed the AVA to remain far above the MVA for a decade. During the time, the assets looked larger than they were. Smoothing allowed an unpaid liability to accrue, pushing costs forward.
The second on Normal Cost Methods is an even more pernicious stratagem and, based on our recent review of actuarial valuations, universal.
In the private sector, since PPA, all funding in based on the Present Value of Benefits Accrued which seems logical: this is what the participants have accrued to some valuation date and what they would get (if the money were there) were they to leave. But, for public plans, why do what is logical when a Generally Accepted Actuarial Principle for public plans (not the one about getting paid up front if you do work for Illinois) allows you to low-ball your numbers through reporting the ‘Actuarial Liability’?
None of the valuation reports we reviewed noted the camouflage but the Arkansas Teachers Retirement System conveniently provided an exhibit detailing the method:
For the 40,748 retirees getting $916.62 million annually there is not much to manipulate. The value of their benefits is $9,778,462,281 (PV factor of 10.67).
But, for all those participants who have not retired, rather than calculating the value of their benefits accrued to the valuation date and reporting that number to the public we have a two step process:
- value benefits as of the retirement date discounted to the valuation date, and
- reduce that amount by the present value of what you expect future contributions to be (those expectations being fairly high)
which results in an Actuarial Liability far lower than the Present Value of Accrued Benefits that everybody else believes you are reporting.