Better Data – Worse Results

Minneapolis was ranked by US News as the tenth most dangerous city in America.  Minneapolis? Really? More dangerous than Newark, NJ?

Then earlier this month I was reading a book* that made the point that a major reason Minneapolis appeared so dangerous in the rankings was because they kept better crime statistics while other large cities were so out of control that many of their crimes went unreported.

So it seems with valuing liabilities for public pensions where a plan can have a low funded ratio in part because they are valuing their liabilities honestly while other plans look better because their liability numbers are understated. Has anyone ever questioned whether benefits are being costed properly for public plans? In the private sector it seems like PBGC checks every benefit calculation for every plan they cover but for public plans whatever the computer spits out is accepted as gospel.

But, since we went to the trouble of pulling off valuation data for 154 state plans, let’s take a stab at it.

Assuming government plans have roughly the same ratio of retirees to actives of about the same ages then dividing the total reported Accrued Liability by the Payouts gives us a very rough idea of the underlying factors used in the valuations. The average AL Factor comes to 18.1 which is what you might expect.  A plan with only retirees would come up with a factor of about 10 but when you add on the liabilities for the actives and vested terminees without any adjustment to the denominator it bumps up that factor.

Looking at data by plan (ordered alphabetically and by factor) what strikes me is the low AL Factor for some plans who have a good number of active participants that you would expect to pump up the numerator and inflate that AL factor:

• Ohio Schools – 12.14
• Georgia ERS – 12.74
• New Jersey Teachers – 14.12

Are these plans better funded or better manipulated?

Another interesting spreadsheet is the average annual retiree benefit calculated by dividing total payouts by the number of retirees.  Judicial plans top the list with Illinois judges getting the most ($112,935) while the average annual payout for all plans comes to $26,673.

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* returned the book to the library and forgot to take notes so I can’t cite it but will revisit (and possibly revise) this example if it comes to me.