Political vs. Fewl Numbers

When Citrus Pest Control District No. 2 decided last year to leave the California Pubic Employee Retirement System (Calpers) they got a sour surprise.

It turns out that Calpers, which managed the little pension plan, keeps two sets of books: the officially stated numbers, and another set that reflects the “market value” of the pensions that people have earned. The second number is not publicly disclosed. And it typically paints a much more troubling picture, according to people who follow the money.


The two competing ways of valuing a pension fund are often called the actuarial approach (which is geared toward helping employers plan stable annual budgets, as opposed to measuring assets and liabilities), and the market approach, which reflects more hard-nosed math.

For those involved  with multemployer (union) plans this is nothing new since when a participating employer looks to leave a union plan they have to cope with another surprise – withdrawal liability – which is calculated using actuarial assumptions that inflate benefit values (rather than those used for funding which are designed to accommodate what is available to deposit) so as to squeeze as much money as possible from those leaving.

However it is the naming of these two methods that is confusing.  Both are ‘actuarial’ as they involve interest rates and mortality tables and both involve ‘market’ principles as it suits their purposes.

So I propose more appropriate names for low-ball and high-ball estimates of pension liabilities…..

Political: as in politicians who always want lower liability values that generate lower contributions so they can promise phantom benefits without fully funding them and divert that tax money for purposes more in line with their immediate objectives.

Fewl: A new word combining the principal uses of this approach – Financial Economics and Withdrawal Liability – though there may be a more memorable mnemonic device* for this acronym.

The real liability value falls between the Political and Fewl numbers, as experience will bear out, depending on the funded status of the particular plan. But these days there is not much of a constituency for accuracy when your client has their mind made up about what number they expect to see and it is the actuary’s job to provide it.




* Fuck ‘Em When [they] Leave comes to mind.

12 responses to this post.

  1. Posted by Anonymous on September 17, 2016 at 10:09 pm

    Maybe we need Federal legislation mandating more “reliable and honest” reporting requirements but I guess the Feds won’t follow their own mandate and put over 1trillion dollars of liabilities on their books?


  2. Posted by Anonymous on September 18, 2016 at 8:11 am


    Just like a politician I low balled the “over 1 trillion”.


  3. Posted by S Moderation Douglas on September 18, 2016 at 1:02 pm

    This article was subtitled “Two sets of books” which may work to the advantage of pensioners in future bankruptcies, as it apparently did in Detroit. You must admire the irony…

    “The other interesting thing that happened is that Detroit’s unfunded pension liabilities grew—by multiples—from the city’s last actuarial valuation.

    This did not happen because anything changed in reality, but because the emergency manager chose to use different performance and amortization assumptions than the actuary had used. There isn’t much of an explanation as to why these assumptions were changed, except that the changes were “negotiated” with labor representatives.

    The city used a 6.75 percent discount rate for both plans versus the 8.0 percent for the Police and Fire Retirement System (PFRS) and 7.9 percent for the General Retirement System (GRS) used in the last (2011) actuarial report. The city also cut the amortization period from 30 years to 15 years for the PFRS and from 30 to 18 years for the GRS.

    The result of these changes is that the funded ratio for both funds declined substantially. In 2011, PFRS had a funded ratio of 99.9 percent. Under the new assumptions, that declined to 67 percent. In 2011, GRS had a funded ratio of 82.8 percent. Under the new assumptions, that declined to 50.5 percent. The combined funded ratio went from 91.4 percent to 59.0 percent. (Most market participants consider an 80 percent funded ratio to be adequate.)

    The aggregate unfunded liability for the plans went from $643.8 million in 2011 to $3.47 billion in 2013.

    Why is all of this significant? Creating phantom liabilities distorts recovery percentages. From an economic perspective, taking a cut on an exaggerated liability means that the pension funds actually come out ahead of where they were going into the bankruptcy. This seems to have fooled most of those reporting on Detroit’s bankruptcy, as most reported in surprise that retirees voted to support cutting their benefits. It also seems to have fooled the charitable foundations and policymakers that have been trying to raise money to offset phantom liabilities.

    The pension funds come out in an even more advantageous position when one considers that most of the settlements in the bankruptcy involve additional contingent recoveries for pensions.

    “How Detroit’s Pensions Will Profit From the City’s Bankruptcy
    Kristi Culpepper, Medium.com

    Note to Mary Pat Campbell… You may be fighting a losing battle…

    ” (Most market participants consider an 80 percent funded ratio to be adequate.)”


      • Mary Pat Campbell (@meepbobeep) you have one of the BEST websites out there for public pension shenanigans, and you’re commentary is always spot-on, like how you called out Yves Smith today:
        “Here’s my terse reply:


        The NYT owes apologies to nobody (in this case. I will not address any other issues the NYT may have.)
        Keep up the good work and never ever be afraid to speak the truth, no matter what the cost.


  4. Posted by S Moderation Douglas on September 18, 2016 at 1:36 pm

    When the pest control district was still in the system, CalPERS used a 7.5% discount rate. When they bought out, CalPERS used a 2.56% rate to calculate the bill.* If Detroit had used 2.56% instead of 6.75%, their unfunded liabilities would have been much greater. Maybe all the pensioners could have got a RAISE!

    *No, wait. It gets better.
    CalPERS used 2.56% to calculate the bill.


    “CalPERS added a final twist. It took so long to calculate the final payment that the bill arrived four months after the district’s withdrawal date – and then it charged four months interest, at 7.5 percent, (not 2.56%) on the late payment.”

    As TL might say, “Heads we win, tails, you lose.”


    • Posted by Anonymous on September 18, 2016 at 2:07 pm

      Not surprising that two artists painting the same picture produce a masterpiece and a piece of junk. I always said the truth is somewhere in between the extremes.


  5. Posted by S Moderation Douglas on September 18, 2016 at 2:45 pm

    More “Sour surprise for pensions:two sets of books”

    Stephen Eide, Public Sector Inc. June 4, 2014

    “Detroit’s retirement systems objected strenuously when Orr revaluated their liabilities, because though in bankruptcy, a lower rate inflates the size of their claim, outside of bankruptcy, it makes the systems look weaker and guiltier of mismanagement (which, by the way, they were guilty of, particularly the GRS trustees). That’s how bankruptcy turns the discount rate debate on its head: the worse the system looks, the larger the claim, and the larger the claim, the smaller the haircut, in absolute terms. But if Orr and the systems have all along been in cahoots, they’ve done a great job of hiding it.”

    “bankruptcy turns the discount rate debate on its head”


    • Posted by Anonymous on September 18, 2016 at 6:15 pm

      Sounds worse than sour milk….
      Wonder if “base allowance” would be cut before elimination of now suspended COLA amounts pre July 2011 reforms (NJ specific but probably not unique, especially going forward)?


  6. Posted by boscoe on September 19, 2016 at 3:53 pm

    Speaking of CALPERS, this story has a familiar ring to it:

    File under: NOT TOO BIG TO FAIL


  7. […] interest rates for public plans is as simple as it gets. Actuaries are told what rates to go with it and it is up to them to justify the use of those rates […]


  8. […] that is dictating the rate but, in this case, the actuary which is coming up with their own fewl numbers. Just Born has a valid point […]


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