Actuarial Liability Camouflage

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:

AK-AL
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:

  1. value benefits as of the retirement date discounted to the valuation date, and
  2. 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.

 

 

12 responses to this post.

  1. Posted by skip3house on August 6, 2016 at 5:08 pm

    Why has it taken years to say in this one following sentence what was true all along?
    Lied about using 8th grade arithmetic logic so pensions are way underfunded and costs pushed on to future taxpayers instead of current taxpayers who had benefits of the services but their elected reps did not fund the promises made in order to keep taxes artificially low so truth was covered to get voters from both ends to support these elected reps?

    Reply

  2. Posted by skip3house on August 6, 2016 at 5:11 pm

    All pensions should be valued so every pay stub shows current value, along with figures added since last pay stub. I suppose these are audited honestly?

    Reply

    • Posted by Anonymous on August 6, 2016 at 6:33 pm

      Last I heard “State workers” had an annual employee benefit statement which I thought placed a value on their pensions & health benefits. Not sure how it’s calculated or how it compares to the current (or “actual) unfunded liability. Might be an interesting excessive in futility.

      Reply

  3. Posted by Anonymous on August 7, 2016 at 1:34 am

    Christie fixed everything, he said so in 2011, he said it was the law. He honest, I believe him

    Reply

    • Posted by dentss dunnigan on August 7, 2016 at 9:20 pm

      If only the interest rates stayed at 6% …but things change ..as pensions must as well .My grandfather used to collect 5.5% on his bank CD he lived off the interest quite well …now he collects .03…..he no longer can live off his CD …times have changed ,as pensions must as well ….it’s really not rocket sceince to figure it out …

      Reply

  4. Posted by Kenny on August 8, 2016 at 4:21 pm

    John – I will have to disagree 100% with what you have stated. The Total Present Value is Present Value of Future Benefits, which includes all expected future service and pay increases and the AAL is EAN AAL which is almost always larger than Unit Credit AAL as required under PPA which only considers service and pay as of the valuation date (obviously holding all other assumptions and methods constant). You can certainly argue that the discount rate required under PPA would matter, but you can not argue that the EAN cost method is going to result in a smaller AAL than UC.

    Reply

    • Yes the Present Value of Future Benefits would be larger for non-retirees but the point is that the Present Value of Accrued Benefits is nowhere disclosed based on the reports we went through. The implication is that if the PVAB number turned out to be lower than the AL as calculated it would be used. However, what public plan actuaries seem to be universally using is:

      PVFB – PVFNC

      which allows them to inflate the PVFNC amount and develop an understated AL that they pass off as the PVAB (even though they don’t explicitly say it that is want everyone assumes).

      The question then becomes why are they not providing the real PVAB number. Is this something GASB missed?

      Reply

      • Posted by AnonActuary on August 9, 2016 at 10:17 am

        Huge fan of your work and this site, but your reply to Kenny stinks. Kenny is right. The article is bogus.There is no definitive relationship between EAAL and UCAL. You are right to call for UCAL using risk free discount rates but the analysis in the article is doing your arguments a major disservice. I suggest you take it down before you lose credibility. And yes – it’s that bad.

        Reply

        • Thanks for following but I don’t get the criticism. The point I was trying to make in the blog is:

          Public plan actuaries, instead of presenting the PVAB as the sum of liabilities at a certain date that they disclose to the public, do it backwards by taking PVFB – PVFNC because, presumably, that develops a lower liability figure that everyone, including me before, takes to be the PVAB. As far as I could tell, the real PVAB number does not even appear in any public plan valuation which is something I would think GASB would require.

          Reply

          • Posted by Theodore Konshak on August 24, 2016 at 12:48 am

            The pension contribution under the Illinois Pension Code is based on a projection of contributions and liabilities. You can analyze this projection for the Chicago Teachers’ Pension Fund using first order differences that used to taught on Part 3 of the Society of Actuaries examinations. Something isn’t quite right but you can’t figure out exactly why since everything is camouflaged rather than disclosed.

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